Don't Let Culture Wars Weaken the Financial System

In California, officials are pushing pension funds to divest from fossil fuels, firearms manufacturers, and tobacco companies. Red states are retaliating. This is madness.

At the retail level, the culture wars have taken a particularly silly turn as conservatives celebrate Anheuser-Busch's falling stock prices following a widespread boycott of Bud Light after it partnered with a transgender social-media influencer to promote the beer. The Mexican beer Modelo has soared into the top spot in U.S. beer sales as a result.

But who is going to break the news to the culture warriors? Modelo's parent company, Constellation Brands, boasts that its "diversity, equity, and inclusion (DEI) goals…are critical components to our future success." Trying to one-up always-agitated left-wing social-justice warriors, right-wingers also are angry about Target's LGBQT displays—and have turned on religiously conservative Chik-Fil-A after learning it has a DEI officer.

The good news, I suppose, is America must be such a prosperous and problem-free land that its citizens have nothing better to do than argue about the politics of the corporate behemoths that sell them food and Chinese-made clothing. It reminds me of the chorus from a Cake song about consumerism: "You're drinkin' what they're selling now. Your self-destruction doesn't hurt them."

Watching people self-destruct on social media over piffle has a certain entertainment value, but politicians on the right and left are taking these battles onto a broader stage where the economic damage could be more lasting. The latest alphabet soup battle involves something known as ESG. It stands for Environmental, Social, and Governance and points to a set of socially conscious governance criteria.

As TechTarget explains, ESG is a "framework used to assess an organization's business practices and performance on various sustainability and ethical issues" and "provides a way to measure business risks and opportunities." It's a way for corporations to evaluate their policies. Are they investing in things that help the environment, instituting fair employment policies, and embracing corporate transparency?

As with all such corporate diversions, it combines sensible strategies and best practices with political correctness and busy work. It reminds me of the time decades ago when I worked on an Air Force base and the managers embraced TQM (Total Quality Management). It was a clever idea designed to empower workers at every level but ended up mainly as a box-checking exercise and excuse for long meetings and boring seminars.

As I see it, companies can manage themselves as they choose and—as Anheuser-Busch, Target, and Starbucks are learning—decide whether their social policies risk alienating more customers than they lure. Personally, I wish they'd just provide the best products and services as possible, but large organizations can't help but wrestle as best as they can with complex strategies involving investments, workplaces, and marketing.

At the political level, however, ESG—and the reaction against it—has become a means for elected officials to use their respective governments' massive financial clout to achieve desired cultural aims. That's where this latest cultural battlefront is becoming dangerous. In blue states, such as California, elected officials are pushing pension funds to divest from their holdings in fossil fuels, firearms manufacturers, and tobacco companies.

They're also directing vast government investments into companies that match their political aims (alternative energy, recycling, etc.) but might not yield the best bang for the buck. The California Public Employees' Retirement System (CalPERS) has a whopping $440-billion in assets, so the temptation is strong to starve capital from "bad" industries and energize "good" ones.

This has triggered a backlash in Red states, which have passed laws that forbid state business with investment firms that divest in the ways that Democratic states prefer. Texas has taken that approach and, according to one study, could cost the state billions of dollars in higher borrowing costs. Both sides are putting cultural preferences above their fiduciary responsibilities.

CalPERS and the California State Teachers' Retirement System (CalSTRS) are hardly conservative organizations, but they have opposed legislative efforts to mandate various divestments for the obvious reason that it ties their hands. Their goal is to maximize investment returns to prop up their outsized pension payouts and keep taxpayers from having to fund a bailout. In contrast, lawmakers want to use any tool at their disposal to promote their climate-change agenda.

The answer is to call a truce. States should enact "clear fiduciary duty laws that define who is responsible for state investment" and allow them to use ESG factors only if they promise to yield better financial results, according to a Harvard Law School Forum piece by Oxford University business professor Robert Eccles and Eli Lehrer, president of the R Street Institute (the think tank where I work).

The obvious and important goal is "to insulate pension funds, other investments and public contracts…from political concerns." Of course, trying to convince politicians to limit their political influence in financial decisions is no easy feat, but there's too much financial risk to let these bitter cultural battles spread from the grocery-store shelves to Wall Street.

This column was first published in The Orange County Register.