BlackRock’s Hypocrisy Highlights ESG’s Shortcomings
They tout their work to save the world while investing in perhaps the worst violator of environmental, social, and corporate-governance standards.
BlackRock CEO Larry Fink wants you to know that investing based on environmental, social, and corporate-governance factors—what is now known as “ESG”—isn’t “woke.” That claim, made in his annual letter to CEOs on January 18, is debatable. What’s not debatable is that the global leader in asset management takes a hypocritical approach to ESG, as do countless similarly minded companies. They tout their work to save the world while investing heavily in perhaps the world’s worst violator of environmental, social, and corporate-governance standards: Communist China.
BlackRock, which manages a staggering $10 trillion in assets, has been extremely bullish on China. Last year it recommended that investors triple their exposure to Chinese assets, a move that is likely driving huge sums of money into the country’s economy. It also recently launched Chinese-based mutual funds, the first of which swiftly raised more than a billion dollars. And BlackRock is hardly alone: From Vanguard to Fidelity to many others, American investment firms are piling into Communist China. Similarly, American companies that profess fealty to ESG ideals, such as Nike and Apple, depend on Chinese factories and supply chains to a dangerous degree.
Given these companies’ stated commitment to ESG, you might think that China is an environmental, social, and corporate-governance paradise. Obviously, it is not.
Start with environmental concerns. How can one claim to be addressing climate change by investing in the world’s worst emitter, by far, of greenhouse gases? How does a country that strip-mines whole regions for rare-earth metals get a massive influx of money from green-conscious investors? Communist China has been called “an environmental catastrophe” for a reason—and one that it is likely to worsen, given the regime’s emphasis on endless economic growth.
The social situation is equally concerning. BlackRock and other American financial institutions are heavily invested in companies that aid and abet China’s domestic oppression, from surveillance-system manufacturers to voice-recognition software providers. They are also in deep with companies tied to the Chinese military, an oppressive force within the country and key, of course, to the increasingly aggressive stance that China is taking internationally. Meanwhile, many American companies depend on parts or goods made with the help of forced labor, especially from Uyghurs in Xinjiang. How can any company claim to support social progress when these are the circumstances?
Finally, corporate governance in China is a sham. The only “standards” spring from the whims of the Chinese Communist Party, which reserves the right to control (directly or indirectly) any company, whether state-owned, private, or foreign. Beijing already exerts influence over the vast majority of businesses: At least 68 percent of domestically owned private firms and 70 percent of foreign-owned firms have party cells. (Those figures date from 2016: The number is probably higher now.) The transparency and accountability that ESG demands is, in the case of China’s business, a mirage; it either doesn’t exist or can be withdrawn at will by Chinese authorities.
Such hypocrisy is stunning. Yet it also points to the profound shortcomings of the current ESG system. For all its attempts to encourage moral action on the part of businesses, ESG currently doesn’t make the most important moral distinctions of all: The difference between liberty and tyranny, between a business operating in a free market and one subject to a high degree of political and economic control. ESG should not stop at the American border, especially when ESG applies to the activities of U.S. companies allegedly committed to its principles.
In its current form, ESG admits no fundamental difference between the United States and China, concerning itself instead with the operations of specific companies. Yet this misses the profound effects that such diametrically opposed governmental and economic systems have on corporate workings. At a superficial level, a U.S. company and a Chinese company may appear similar. More fundamentally, though, they ultimately serve different masters. Issues that are of primary concern to U.S. shareholders are secondary in China, where the communist regime’s political demands will always come first.
To no small extent, ESG operates in a way that either assumes a moral equivalency between free and unfree countries or that, in effect, applies different standards. It has fostered a U.S. corporate culture highly critical of America, which is arguably undermining our free-market system from within. (A new financial scorecard, Insight ESG Energy, ranks U.S. investment firms according to how much they use shareholder money to advance “woke” ideology.) Meanwhile, by failing to recognize the nature of Communist China, it encourages companies and index funds to invest in a regime that is profoundly opposed to free markets. It is impossible to make progress on environmental, social, and corporate-governance issues when economic freedom—and human freedom overall—is nonexistent.
A new and fuller understanding of ESG is needed, one that accounts for the moral distinction between freedom and tyranny. The current version is too limiting and lazy, leading to corporate actions and pronouncements that defy common sense. It should concern all Americans that too many of the titans of American finance and industry invest in Communist China all the while many of them claim to serve a higher purpose. The hypocrisy is bad enough. The inability to recognize it is much worse.
Marion Smith is the president and CEO of the Common Sense Society.
Originally published in National Review‘s Capital Matters