Sir Isaac Newton posited that in physics, for every action there is an equal and opposite reaction. Nowhere is that principle more visible today than in the world of investing.
As ESG frameworks gained traction in global finance, a counter-movement was perhaps inevitable. The political polarization that has divided public life into conservative and progressive camps has now arrived in the investment arena, and both sides are fighting for control of how capital is deployed.
At the center of the conflict is a single word: woke.
The word "woke" originated loosely in discussions around race and economic inequality. Over time it evolved into something broader, a shorthand for progressive values applied to social and economic life. Depending on your vantage point, it is either a mark of social awareness or a political pejorative. In either case, it is now ubiquitous.
As corporate boardrooms began adopting ESG criteria, diversity initiatives, and climate commitments, critics began labeling that shift "woke capitalism." The backlash that followed was organized, well-funded, and politically motivated.
One of the most visible challengers to ESG is Strive Asset Management. According to Tumelo, a British information services company, Strive entered the market with an explicit anti-ESG investment strategy. Its position: that BlackRock, Vanguard, and State Street, the three largest asset managers in the world by assets under management, are using client capital to advocate for ESG positions that most of those clients do not support, effectively breaching their fiduciary duties.
Strive's approach centers on shareholder engagement over divestment, using proxy voting to push a non-ESG policy on companies and advocate for fossil fuel outcomes that align with its strategy, according to Tumelo author Charlie Barlow.
Strive was co-founded by Vivek Ramaswamy, a former Republican presidential candidate, in 2022 as a direct response to what he described as ESG-focused overreach by major fund managers. The firm now manages more than $1 billion in assets.
The anti-ESG movement has moved well beyond individual fund managers. Twenty Republican-controlled state legislatures have passed anti-ESG legislation targeting public funds, including pension investments. State treasurers in several red states have pulled public money from firms associated with ESG, including BlackRock and State Street.
For Republicans, ESG funds represent what James Surowiecki of The Atlantic describes as "a Trojan horse, designed to smuggle progressive attitudes toward climate change, and diversity and inclusion, into executive suites and corporate boardrooms, all under the guise of supposedly improving investment returns."
The political conviction behind anti-ESG legislation, however, does not appear to be translating into stronger financial outcomes. Writing in The Atlantic, Surowiecki argues that the Republican war on woke capital is backfiring, noting that states pulling public funds from ESG-aligned managers are likely to see lower returns as a result.
Surowiecki also raises a pointed question about ideological consistency: the Republican Party, long identified as the champion of free markets and deregulation, is now adopting pro-regulatory, anti-corporate rhetoric to restrict how public capital can be invested. He characterizes the anti-ESG investing trend as "faddish" and warns it has the potential to do genuine financial damage to states and the investors whose retirement funds are at stake.
The debate over woke investing is unlikely to resolve on political terms. Politicians can pass legislation, and fund managers can build counter-strategies, but capital ultimately flows toward performance. If ESG-aligned portfolios continue to attract institutional investors, international capital, and the growing segment of purpose-driven consumers, market forces will carry more weight than any state treasurer's proclamation.
The equal and opposite reaction Newton described plays out in physics in an instant. In markets, it tends to take longer. But it arrives.
Monitor how anti-ESG state legislation affects public pension fund performance over the next two to three years. Track proxy voting outcomes at major corporations where Strive and similar funds hold positions. Consider how your own portfolio's ESG alignment may be affected by shifting regulatory and political conditions at the state level.
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References:
Charlie Barlow, Tumelo, website https://www.tumelo.com/insights/anti-woke-etf-launches-with-more-than-250million-of-assets
Joseph Wilkins, 9/6/23, Yahoo Finance, https://finance.yahoo.com/news/vivek-ramaswamys-anti-woke-investment-182718478.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAACpz-HuDpC-DO2dT0bOWoCg4pZItSLCAQssPNlRFEV-tGFDw8rjxxhrdRQBcNJyba6t2elydFYwHKbB_1rHwNwy9xRibpl460N0Iolhi9894MIb18saV-ysYsj6o-Z4XpdvxQFsen7E9BizEKyclyS6BjBAB4Aasm43V2Qf6FsGi
By James Surowiecki, The Atlantic Monthly, 1/31/24 https://www.theatlantic.com/ideas/archive/2024/01/republicans-woke-capital-esg-investment/677294/
Ibid.