For many on the American right, ESG has become a symbol of everything that is wrong with “woke capitalism”.

Responsible Investor has repeatedly covered the rise of anti-ESG sentiment and legislation in US states over the past year, as well as the response of sustainably minded investors to the onslaught.

To get a perspective from the other side of the divide, RI sat down with one of ESG’s most prominent critics, Utah State Treasurer Marlo Oaks. We started by asking him to explain his opposition to the concept.

Marlo Oaks

“End of the day it is a political agenda. It’s about trying to implement through the capital markets and private sector what could not be implemented through a democratic process. ESG acts like legislation through coercive capitalism. It is crony capitalism 2.0. It undermines the constitutional form of government and destroys economic freedom – it is leading to a lot of pain through the economy and hurting people who can least afford it.”

Oaks is, however, quick to stress that he is a “huge fan” of impact investing, socially responsible investing, and value-based investing – which he defines as strategies that screen out specific industries such as tobacco or firearms, or solely invest in positive impact innovation.

The problem with ESG – which Oaks sees as an outgrowth of this – is that in order for it to be successful, investors have to engage companies and the marketplace to drive a political agenda.

“What I mean by that is if we’re going to get to net zero carbon emissions it’s not enough for me as an investor to not invest in fossil fuel companies. I have to get other people in the marketplace to adopt this and, so it requires that the marketplace be replaced by centralised thinking.”

Transition risks

For Oaks, the adoption of “ESG or net zero” by investors means cutting off capital to fossil fuels “when there isn’t any certainty about the future”.

“Transitioning doesn’t happen if we don’t have an alternative to go to,” he says. “Of course, we don’t want dirty air or water, but nobody is talking about the cost to society. If the goal of net zero is to go to zero carbon emissions, what that looks like is the shutdown of power in my state to everything. We’re talking about hospitals, food production. We’re essentially talking about going to an 1800s Amish lifestyle. But the Amish use wood-burning stoves, and I’m not sure that’s very good for the environment.”

Green energy – like solar and wind – are not an option for Oaks yet as they are intermittent and “we have no baseload”.

“When the market has a viable alternative, the market will go there,” he continues. “Why are we deciding that the markets can’t do that?”

The S in ESG is also problematic for Oaks – in particular, he raised concerns that critical race theory is divisive. He also questions why the E, S and G are “all packaged together.”

When RI suggested that, for most in the industry, ESG investing means integrating financially material risks, Oaks listened, but remained unconvinced.

“That’s fine as long as you look at the risk associated with going to net zero. Nobody is talking about that, and the costs are so much higher. That really needs to be factored in. And that’s why it’s okay for people to have different views of the future and we should not be trying to silence people that say maybe we need to be thinking about this differently.”

Anti-ESG legislation

Oaks has been very public about his views. He was one of 15 US Treasurers to sign a letter to John Kerry in May 2021 announcing their intention to put banks and financial institutions on notice regarding fossil fuels. He also recently wrote to S&P complaining about its new ESG score for US states.

Perhaps surprisingly, however, he is ambivalent about the use of legislation to tackle ESG.

“We’re definitely looking at a lot of different options. We have to be careful about using the law. I believe that a lot of the issues that ESG presents are market-based issues, so it’s not an easy fix. It’s not easy to legislate away. We can’t tell investors to change how they think about this. Investors should have the right to express views and how they invest.”

What Oaks takes issue with is the “aggressive” pursuit of an ESG agenda. “If I invest in Exxon, for example, my investment thesis is likely related to my view that traditional energy is an important part of the market and economy and I want exposure to that. What I’m not expecting is for another investor to come into ExxonMobil and try to change ExxonMobil to be reducing their traditional energy business.

“That’s where it becomes aggressive, as to be successful you have to have a whole bunch of people come together and say, ‘We’re going to put three climate activists on the board of ExxonMobil and try get them to cut energy production’.”

So what does Oaks see as the solution to ESG? What would convince him to view it as less problematic and a valid investment option?

“I see the need for investors to respect the capital markets and put their money toward innovation to find solutions to the problem,” he says. “Not try to create more problems by deciding that they know what’s best.

If people want to implement values-based investing, I think the legitimate way to do that – or the way that respects the capital markets – is not having exposure to the particular industry rather than by trying to change companies based on their political view, because that ultimately affects the market and what other investors believe. What gives them the right to change a company based on their view that impacts other investors that don’t share that view?”