Right-wing populists and industry sceptics are mounting a backlash against a vision for business that looks beyond profits. This week's World Economic Forum meeting in Davos should have been a triumphant one for its host, Klaus Schwab.
Nearly half a century after the economist launched his Swiss gatherings for world leaders, executives and financiers, his belief that businesses should serve all their constituents equally seemed to have prevailed over the old notion that companies exist only to make profits for their owners.
In a book offered free on stands around the event, Schwab and a co-author expressed their certainty that his vision of "stakeholder capitalism" had finally been "vindicated".
Yet many Davos delegates seemed less sure, even as they shuttled between panels announcing commitments to cut carbon emissions and cocktail parties rallying support for the UN sustainable development goals.
Increasingly, they fretted, the tenets of stakeholder capitalism — and the Environmental, Social and Governance-themed investing trend that has risen with it — are under attack from populist politicians, finance industry contrarians and a different band of activists from the ones Schwab imagined.
One trigger for their concerns was a speech made the previous week at a Financial Times conference in London. In it, Stuart Kirk, head of responsible investing at HSBC Asset Management, had rubbished the consensus that investors should try to encourage a more environmentally responsible capitalism by factoring climate risks into their calculations.
Climate change, he declared, was simply "not a financial risk that we need to worry about". The argument jarred so much with the public positions that HSBC and other banks have adopted that Kirk was quickly suspended. But it reflected a growing willingness to question the prevailing wisdom in Davos and other bastions of the new capitalism.
Kirk's critique of one of the foundational beliefs of the near $3tn sustainable funds industry is not an isolated one. Elon Musk, arguably this era's most prominent capitalist, last week labelled ESG a "scam" after Tesla, his pioneering electric carmaker, was removed from S&P's ESG index. Such indices' scores depended on how compliant a business was with "the leftist agenda", he claimed in a meme shared on Twitter.
Even some former industry insiders have broken ranks to paint ESG as mere "greenwashing". Tariq Fancy, BlackRock's former chief investment officer for sustainable investing, now calls sustainable investing "a dangerous placebo". Desiree Fixler, former head of ESG for the Deutsche Bank-backed asset manager DWS, says the acronym has become meaningless.
Such scepticism has prompted officials to impose more demanding regulations. The Securities and Exchange Commission is preparing rules to crack down on ESG credentials in investment products and the EU's "sustainable finance taxonomy" now defines what counts as green.
The other person haunting delegates at Davos was Ron DeSantis, the Republican governor of Florida who is battling Disney over a bill to limit the teaching of sexuality and gender identity in the state's public elementary schools. The populist governor's appetite for a fight with Disney chief executive Bob Chapek has sent a shiver down many executive spines, in part because DeSantis is not an outlier in a party that still attracts a majority of US corporate political donations.
In recent weeks, Florida senator Marco Rubio has introduced legislation to let investors sue companies that stray from maximising shareholder returns; former presidential nominee Mitt Romney has signed a letter saying ESG scores are "politicising" S&P's credit ratings; and former US vice-president Mike Pence has attacked ESG principles as "pernicious".
They, and the conservative activists who are rallying protest votes in record numbers at annual meetings, are now coalescing around a rebranding of ESG and stakeholder capitalism as something more hollow, hypocritical and even harmful: "woke capitalism".
For Vivek Ramaswamy, a conservative entrepreneur and author, this backlash is an overdue reaction to elite over-reach. This month, he raised more than $20mn from libertarian tech investor Peter Thiel and others for an anti-ESG investment group, declaring that it would happily invest in the oil and gas stocks that big asset managers increasingly shun.
"I've been working on this for over two years and it felt like I was pushing uphill for much of [that time]," he says. Now, though, "the tides have changed".
Turning the tide
After the 2008 financial crisis, the leaders of business and high finance found themselves looked upon as "the bad guys of American society", Ramaswamy says, and their desire to restore their reputations coincided with younger employees' hunger to find a higher purpose in their workplaces.
"Companies . . . seized on that opportunity to teach this generation that the way to fill that hunger is to go to Ben & Jerry's and order a cup of ice-cream with a cup of morality on the side," he argues, referring to the Unilever-owned brand that has supported Black Lives Matter and opposed Israeli settlements in the Palestinian territories.
The danger with this kind of activism, he argues, is that as corporate voices become louder, "a small group of effective corporate elites" begins to "decide what's right for society at large".
Ramaswamy argues that the defining cultural and political struggle of our time is not between left and right, but "between the managerial class and the modern citizen . . . It's the reincarnation of what happened in 1776 in America."
As polls show sharp falls in Republicans' trust in big companies, right-wing activists are working to reverse many of the changes made under the banners of ESG and stakeholder capitalism.
In the past two months, a conservative advocacy group has persuaded a California court to strike down two state laws that would have imposed diversity quotas on company boards. At their annual meetings, chief executives from Goldman Sachs to Meta have been pressed by conservative shareholder groups over their charitable donations or racial equity policies. One such group, the Free Enterprise Project, says it is trying to save corporate America from "the socialist foundations of woke".
For several years, executives have felt emboldened by pressure from their staff and customers (and by polling that shows business is more trusted than governments, non-profit groups or the media) to take public stances on subjects they might once have avoided.
Again this year, Davos-goers heard from Edelman, a US public relations company that conducts one such survey, that most people believe chief executives have a responsibility to speak out on such issues as climate change and discrimination.
Yet recent academic studies show that the calculus behind taking the kind of socially liberal positions that could label a capitalist as "woke" is more complex.
"My research suggests the backlash is greater than the benefit," says Vanessa Burbano, a Columbia Business School professor who studied employees' reactions in companies that took positions on 2017's "bathroom bills", which were designed to dictate which toilets transgender people could use.
CEOs who took a stance on the issue left employees who disagreed with them feeling demotivated, she found, while not meaningfully motivating employees who agreed with them. Weighing in on politically divisive issues, she concludes, is in fact "a riskier proposition than a lot of people realise".
Some companies already appear to be considering such risks when deciding on their own political interventions. Swarnodeep Homroy, associate professor of finance at the University of Groningen, found that companies were more likely to suspend donations to Republicans aligned with the effort to deny Joe Biden's 2020 election victory if they were based in states with highly polarised electorates. They were less likely to do so if they faced political risks such as the chance of losing government contracts. "They tend to [take political positions] when there is no shareholder/stakeholder trade-off," Homroy says.
'The knives are out'
At Davos, American chief executives spoke of wanting to encourage pragmatic "problem solvers" in Congress, but one complained privately that he now saw "no one in the centre" of an increasingly divided political landscape.
That polarisation is likely to turn more CEOs into proxies in the social battles their employees feel most passionate about, says Burbano. The prospect of the US Supreme Court ending federal abortion rights, the renewed debate about gun control after the mass shooting at a school this week in Uvalde, Texas, and politicians' desire to animate voters in the run-up to November's midterm elections all signal that the political heat will intensify.
"Employees are realising that their leaders are facing a choice over what to say and what to do, and they can potentially influence that in a way they didn't five years ago," Burbano says.
Paul Polman, the former Unilever chief, echoed that view in a recent LinkedIn post. "Many have lost faith in politics to represent their views and secure their futures. They are turning to corporate power instead," he observed. By doing so they have left business leaders "increasingly stuck between employees and politicians", Polman warned. And while he was in no doubt that executives should side with their people, he added that this time the "woke" insults from Republicans felt different. "The knives are out," he wrote.
For all their suspicions about their critics' motivations, several advocates of more sustainable ways of doing business acknowledge the limitations of ESG, which is as ambitious in scope as it is ambiguously defined.
"Criticism of weak or inconsistent implementation is fair game," Richard Samans of the International Labour Organisation and Jane Nelson at Harvard's Kennedy School of Government, wrote on the WEF website this week.
"I'm really afraid that too much of it is lip service . . . ESG has become too much of a check-the-box asset class," says Lady Lynn Forester de Rothschild, whose Coalition for Inclusive Capitalism convenes an influential group of stakeholder-focused chief executives.
Homroy, for his part, suspects companies will have no choice but to become more environmentally responsible, but he also suspects their commitment to the kind of social activism that could expose them to attacks may be peaking.
Most Davos delegates are still persuaded by the commercial opportunity represented by at least the "E" in ESG. The need to finance the transition to low-emissions technologies heralds what McKinsey consultants have dubbed "the largest reallocation of capital in human history". Several also believe their new social positioning helps attract and retain talent.
For now, says de Rothschild, many executives feel baffled by the attacks on their experiments with a different kind of capitalism, and unsure when they might be assailed next.
As she puts it: "You never know when the piano's going to fall on your head when you're walking down the street." Nor who will push it.
© 2022 The Financial Times Ltd