A growing number of red-state lawmakers have sought to prohibit public-sector entities from conducting business with financial firms that engage in environmental, social, and governance (ESG) investing. This summer, for instance, the treasurer of West Virginia banned his state from working with five firms that had “published written environmental or social policies categorically limiting commercial relations with energy companies engaged in certain coal mining, extraction or utilization activities.” Are such actions anti-capitalist? That’s what Michael Bloomberg argued in a recent Bloomberg Opinion article. But while the former New York City mayor seeks to advance a logically consistent argument for why ESG is sound economics, his points are as confused as the principles upon which the ESG movement is grounded.

This intellectual muddle reveals itself early. Bloomberg writes that “anti-ESG crusaders position themselves as defenders of the free market” yet actually intend “to use government to block private firms from acting in the best interest of their clients, including retired police officers, teachers and many others who depend upon public pensions.” He characterizes money managers’ responsibility to consider relevant risks and broader trends when making investment decisions as “Investing 101.” He then accuses Republican critics of ESG of not understanding that fiduciary duty or of prioritizing the interests of fossil-fuel companies over pension beneficiaries.

In the process, Bloomberg conflates fiduciary duty with public policy. Opposition to ESG, he writes, “stand[s] in the way of the most powerful force we can muster in the fight against climate change: the private sector.” This turns the notion of fiduciary duty on its head: after rightly citing public pension trustees’ charge to serve the interests of plan beneficiaries—long established in law and jurisprudence as the maximization of plan benefits, in the form of risk-adjusted financial returns—he then enlists the private sector in efforts against climate change. Whatever the merits of this fight, it has nothing to do with fiduciary duty.

The ongoing debate over climate-related financial disclosures, particularly those pertaining to so-called Scope 3 emissions, helps cut through this conceptual fog. The Environmental Protection Agency (EPA) defines an organization’s Scope 3 emissions as those resulting from the activities of assets that it neither owns nor controls but “indirectly impacts in its value chain.” In plain English, these “value chain emissions” are not risks to the company disclosing them—and therefore factors a fiduciary might consider—but broader emissions-related information. They provide no value to the prudent investor making an investment decision.

An actual Investing 101 course would make this distinction. It might note that, whatever legitimate concerns one may have about climate change, these concerns are not applicable to an objective assessment of the prospects, risks, and opportunities associated with a given investment. Disclosure of a company’s “value chain emissions” is no more relevant in evaluating its business and financial profile than is the risk of a mass extinction event from an asteroid strike: it may be likely, remote, or somewhere in between, but it is a non-specific risk factor largely irrelevant to a given company’s prospects.

Bloomberg’s discussion of corporate climate disclosures elides the difference between risks to a company from foreseeable events, on the one hand, and data either irrelevant to assessing the investment merits of a given company or general enough to count as a broader public-policy concern, on the other. A company with assets in low-lying areas at heightened risk of flooding in warming climate conditions should certainly disclose this risk. Another company with polluting assets in an activist regulatory jurisdiction should address the risk of prospective taxes, fines, regulation, or closure. But Microsoft’s disclosure that its employees’ meal orders from Seamless and Uber Eats result in Scope 3 emissions—while perhaps useful to the EPA in assessing aggregate emission activity—will be of dubious utility to a sober fiduciary.

Bloomberg never concedes that diagnosing a problem doesn’t determine how to solve it. Motivating his support for ESG is a belief that an “energy transition” abetted by regulations is the best way to minimize climate risks. But he demonstrates a lack of principle, celebrating the sort of voluntary emissions declarations championed by the Task Force on Climate-Related Financial Disclosures while tacitly endorsing the Securities and Exchange Commission’s attempt to make them mandatory. And he concludes by begging the question of what is to be done: climate change is a crisis, a shift to clean energy is a foregone conclusion, and companies and institutional investors simply need to get on board. “The private sector must act on climate change,” he writes.

What gives the game away is Bloomberg’s emphasis on democracy. He notes with satisfaction a poll showing that three-quarters of Republican voters under the age of 40 support efforts to prioritize clean energy, including a carbon tax. Yes: governments should make policy, and use their taxing and regulatory authorities, in a manner that not only serves the public interest but also is accountable to the electorate. By contrast, asking companies to pursue one’s favored policies without voter or shareholder consent outsources policymaking to private firms, epitomizes plutocratic corporatism, and obscures the legitimate functions of the public and private sectors.

Bloomberg’s conflation of private and public interests proves fatal to his argument. The former mayor should brush up on the workings of free markets and the public sector, which work best when they’re accountable to their respective constituents.

Photo by Monica Schipper/Getty Images for Bloomberg Philanthropies


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