ESG Busters Need a New Playbook

Good news is brewing in finance. The public backlash against ESG—environmental, social and governance investing—has grown, shedding light on the left’s ideological takeover of Wall Street. The bad news is that the anti-ESG coalition isn’t prepared to defeat a global “sustainability” campaign. The movement needs a makeover and should begin by following a few guiding principles:

• Virtue signaling isn’t the only problem. The current bout of woke capitalism in corporate boardrooms is merely a symptom of the underlying malady. Through its pervasive asset integration and overriding focus on nonfinancial factors, ESG is slowly changing the pecuniary purpose of investing. Waging public spats with management over critical race theory and gender ideology distracts from how ESG investing is re-engineering global financial markets. No matter how many brands go broke from misplaced trust in sustainable policies or social-justice activism, it won’t slow ESG’s market momentum.

• Focus on climate. This is ESG’s crown jewel, as evidenced by the countless net-zero initiatives that have been adopted since 2015. Other factors, such as “diversity, equity and inclusion,” are secondary—if not superfluous—to the movement’s priority of using private capital to fund a global energy transition.

• ESG isn’t caused by lack of competition. The movement is the product of progressive activists seeking to impose their will through a combination of moral coercion and government pressure. Giving investors the choice of non-ESG funds won’t address ESG’s systemic threat. Creating a safe space for nonbelievers while ceding the public square of global financial markets to sustainability zealots isn’t the answer.

Strive Asset Management—the investment firm co-founded last year by presidential candidate Vivek Ramaswamy—is a case in point. The company says it emphasizes “the pursuit of excellence over politics in boardrooms across corporate America.” That sounds attractive, yet like many other anti-ESG firms Strive has struggled to attract capital. As of March 31, 27 prominent anti-ESG funds tracked by Morningstar had only about $2 billion in assets under management—a rounding error compared with the roughly $100 trillion in assets under management in the global asset-management industry. Aggregate net inflows to these funds have slowed markedly since the launch of Strive’s first energy fund in August 2022.

Part of the problem may be that these anti-ESG firms are employing the same tactics as the ESG movement. They actively engage with company management to push their own particular investment agenda—while functioning as passive fund managers with no real vote and as de minimis institutional shareholders.

Aside from their ideological aims, there isn’t much daylight between Strive and BlackRock, Vanguard and State Street—the Big Three index-fund managers. Strive also bears a striking resemblance to Engine No. 1, the little investment fund that waged a high-profile climate proxy battle against ExxonMobil in 2021 by using its 0.02% company stake as leverage.

While Strive and its counterparts are a testament to capitalism’s organizational capacity, the fight against ESG shouldn’t be viewed mainly as a business opportunity. It was this kind of shortsighted money-chasing instinct that suckered many Wall Street firms into initially supporting ESG’s empty promises of doing well by doing good—a position from which they can’t easily extricate themselves.

• ESG thrives on a lack of transparency. The anti-ESG coalition has primarily focused on annual shareholder meetings to generate public press for the cause. Yet the main battle will transpire in the less-transparent credit markets—not public equity markets—given that bank loans and institutional bonds are the main source of liquidity for most companies. As the cheapest source of capital to fund operations and acquisition-related growth, debt-market access represents the kill switch for ESG activists looking to defund fossil fuels and other maligned industries.

• The courts are necessary in this fight. Owing to increasing regulatory disclosure rules and sustainable-finance mandates, the financial industry won’t be able to solve the ESG problem on its own. Reversing the sustainability tide will require aggressive legal action. Rather than hold fruitless congressional hearings, strategists should push back against regulatory overreach through the courts. The Supreme Court’s decision in West Virginia v. Environmental Protection Agency (2022), striking down the agency’s 2015 Clean Power Plan, offers a useful template.

In West Virginia, the justices held that the EPA had exceeded its congressionally delegated authority in violation of the “major questions doctrine.” The agency couldn’t enact regulations on matters of vast political or economic significance without Congress’s clear assent. The same legal argument should be used to challenge the sweeping ESG-related mandates promulgated by the Securities and Exchange Commission, the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Labor Department.

The time clock for mitigating climate change by 2030 through ESG and sustainable development began ticking in 2015. We’ve now crossed the halfway point. To stave off the left’s strategy of climate doomsaying and financial re-engineering, the anti-ESG squad needs a stronger game plan for the second half.

Mr. Tice is a former Wall Street energy research analyst, an adjunct professor of finance at New York University’s Stern School of Business, and author of “The Race to Zero: How ESG Investing Will Crater the Global Financial System” (Encounter Books), forthcoming in January.