In the past four years, there has been a sudden adoption of the Environmental, Social, and Governance (ESG) framework in financial analysis, corporate reporting, and investment firms. Its presence has increased several times over in almost every metric, from the number of ESG funds and the assets that are in them, to the ubiquitous job postings that reference it.

For liberal reformers, this is the latest attempt to affix a human face to capitalism; for financial market purists, it is a serious breach of fiduciary duty. This combination of sudden adoption and partisan ideological interpretations has led to ESG becoming a serious political issue. Both these narratives fundamentally misunderstand the role of the finance industry in production, and what little power it actually has to direct such goals at all.

For decades, the question of externalities plagued institutional investors and threatened the ideological line that maximizing value for shareholders produces the greatest social good. For years, the intellectual and legal networks around academia, supranational working groups, state regulators, and the investors themselves struggled to reconcile fiduciary responsibility with other ideological commitments like environmentalism and funding “civil society” groups. It was in 2004 that the UN and major global financial institutions first created the ESG framework to serve this purpose.

Implicit in the ESG framework is the idea that investors can discipline firms and whole economies to be more aligned with social and political goals. But the finance industry does not possess the ability to discipline firms in this way. In practice, ESG funds do not move financial capital towards different goals: not only do these funds underperform on the market, but the amount of capital they are able to raise already appears to be slowing after the initial period of excitement.

Theoretically, the primary mechanism to discipline business decisions would be the voting power of shareholders, especially in replacing board members and executives. But shareholders rarely exercise such disciplining power: in the most recent voting data, Blackrock supported 90 percent of directors standing for election, and Vanguard supported 91 percent. In other words, institutional investors tend to go with the flow of company leadership decisions.

Even in high-profile exceptions, such as the time Exxon lost three of its board members to shareholder activism in 2021 due to environmental concerns, the actual impact is muted. Despite long-term pledges to get to net zero greenhouse gas emissions by 2050, Exxon plans to continue expanding oil production for the next decade and has been rewarded by stock price growth that’s beaten the market and the oil industry as a whole since 2021.

Despite this ineffectiveness in reaching its stated goals, the world’s largest investors continue to institutionalize ESG in both business practice and ideological marketing. Its rise does not mark a departure from the finance industry’s interest in the maximization of value extraction, nor does it represent a serious attempt to deal with any of society’s supposed ills. ESG should instead be understood as a pure and simple luxury commodity for those who need ownership of financial assets to maintain their position in society, with a new language of justification for the same decisions. Central to it is the conspicuous consumption of the bourgeoisie—owners, investors, and shareholders—as well as high-earning professionals.

This means that ESG is neither an improved concept of fiduciary duty nor a veiled attempt to impose a planned economy. Rather, it is yet another symptom of an ossified society that is primarily centered around conspicuous consumption. Capitalism may still be dominant, but the individual capitalists have become averse to direct action. In reality, desirable social outcomes are achieved by taking on risks to build organizations and mobilize people and resources toward them. ESG is the perfect luxury financial good for those who fear taking on the challenge of acting on the world directly.

Financial Institutions Don’t Plan Production

At its most basic, the finance industry circulates funds to facilitate production and consumption. Businesses and households receive money and put it toward their own ends: an IOU or loan, an ownership stake in a company, or purchases of hard assets whose value may increase, such as land or metals. Transferred from financial institutions outwards, this money is exchanged for promises of future cash flows. Finance capitalists must therefore make their money in one of two ways: either by ownership of claims to future income, such as bonds and stocks, or through fees on financial services. In short, the finance industry spends money to make money. This usually comes in the form of a percent of returns on financial assets, but not always. ESG activities are funded in the same way.

But making money has a cost of its own. It is not the social cost of increasing the money supply—whether that be inflation, financial market bubbles, or people literally toiling in a mine in the days of the gold standard. Instead, it is the cost of doing business in the finance industry: the labor of analysts and general managers, as well as the specific labor of risk managers who ensure that a lack of cash doesn’t result in bank runs and defaults. Analysts, including those who are dedicated to ESG-related activities, estimate the value of investments to provide useful information for market participants. The financial industry does not produce goods in its own right. Instead, its output is the market activity itself: buying, selling, underwriting, and even shareholder voting all fall into this category.

The nature of the finance industry creates two basic limitations with regard to the power of ESG: a limitation of knowledge and ability, and a limitation of desire and interest. Apart from certain hands-on private equity firms, the vast majority of the finance industry does not carry out the actual planning and undertaking of production. Analysts may worry about supply chains and production techniques, but they do so as outsiders judging where to put their money. Ultimately these parts of the economy exist outside of the finance industry’s direct control. The productive role of finance is to assess whether a particular plan can make money and then provide the liquidity necessary for someone else to make the relevant decisions.

Unlike states or firms with sophisticated logistical operations, this means that banks and fund managers lack the direct capabilities to deliberately alter the material economy. This is even true in areas in which many people would expect finance to have an important impact, such as fixed investments. In fact, bonds and loans more often make up for the loss of funds from servicing equities: paying out dividends and owner withdrawals.

Since the 1980s, these equity outflows have greatly outnumbered inflows from owner capital contributions or selling shares. The really important liquidity source for most companies comes from retained earnings, and firms rely on this to create the internal funds that drive most fixed investments. This means that the individual holder of a bond—or of an ESG stock ETF—is often not contributing to production but rather offsetting the payouts of other investors. While extracting value from a company is the whole point of investment in general, servicing this turnover is a priority that many companies now have without any benefit to their actual investments in production.

In order for financial goods to provide cash flow to investors, firms must have an operating surplus on their income statement; they must be making more money than they are spending on costs of production. One thing which does not go towards that operating surplus is depreciation, the method for accounting for the cost of replenishing the firm’s capital stock. The more that firms invest in fixed capital, the larger the capital stock they must maintain, and the less money is available for dividends and owner withdrawals. From a cash-spending perspective rather than an accounting one, gross investment is usually a direct tradeoff with the profits which are extracted financially and are available to be consumed by investors.

By being in control of their retained earnings, however, firms also keep the freedom to make decisions about their production techniques and internal investments. They have the ability to do so based on objective estimates of profitability as well as subjective decisions about hiring, production techniques, and strategy. For enterprises with complex logistical operations, this internal knowledge and infrastructure for coordinating decisions can be quite sophisticated. This is where the real freedom to act on the world lies and is where the actual decisions on what goals matter take place, even when investors are involved in the company too.

A similar dynamic occurs with states, which often have to make decisions about the material economy. While governments tend to be behind the curve in adopting the best practices for coordinating and planning, their logistical tools have to grapple with the same issues as productive enterprises, whether it be in managing contractors, the inputs of military preparedness, or carrying out industrial policy. Governments also explicitly share some of the goals held by the ESG framework regarding the environment and society. For example, the 2016 Paris Climate Accords required big investments in renewable energy and associated infrastructure by signatory states. In the U.S., a wide variety of subsidies and incentives for this purpose were signed into law with the Inflation Reduction Act of 2022.

The method of applying these subsidies varies widely—federal tax credits, contracts, grants, and so on—but what is important is that the state’s role here is to directly intervene in the economy to make investments and alter production. Sometimes, governments use regulations to mandate that companies change their practices, such as with car fuel efficiency standards. Government contracting officers, commerce department officials, and other policymakers grapple with the practical problems of how to materially change the economy, even if they don’t always have the same expertise as the private sector.

If someone with a large amount of money truly wished to make a difference in the stated goals of ESG investing, they wouldn’t turn to financial markets. They would start a company or some other kind of organization—theoretically, even a state—and base it entirely around working directly towards those goals, instead of trying to push things indirectly on the margin. But this would require financial sacrifices and a high degree of creativity and effort, which are precisely the kinds of discomforts that large investment funds are supposed to help their clients avoid.

There is nothing abnormal about this. An investor who takes a bet on an entrepreneur is attempting to create value even if their role is limited to the judgment that this project is worth giving money to. But ultimately, ESG even outsources the need to form personal beliefs on what goals are worth pursuing. For this reason, critiques of ESG on the basis of its goals—say, that efficacy rather than diversity should be the goal of a workforce—focus too far downstream even when they are correct in essence. The broad goals of ESG are not novel ideas coming from the minds of ESG analysts.

Consider the question of investing in Russian oil companies: once, this was often a preferable option to investing in a more polluting industry like coal. After the invasion of Ukraine, ESG funds scrambled to divest from Russian companies but also faced heavy criticism for not having done so years earlier, after the annexation of Crimea. Divesting at this earlier period would have been a more contrarian move, and thus one that would have violated the logic that ESG metrics themselves held at the time. The invasion also saw a total reversal of the previous trend of excluding the defense industry from European ESG standards.

In practice, ESG priorities reflect the net consensus an industry shares at any given time, which itself reflects the general ideological consensus of bourgeois society. Insofar as conflicts occur about the particulars of ESG goals, these reflect the conflicts happening within the class ESG primarily serves. Internal updates might help entrench one set of ideas within that consensus, as when divesting from Russia financially suddenly outstripped clean energy in importance. But departing from that consensus entirely cannot occur within the ESG framework at all.

Luxury Consumption Does Not Change the World

As ESG changes the concept of fiduciary duty to include explicit value judgments on desirable outcomes, opponents of ESG tend to see it as opening the door to a planned economy oriented around progressive political goals. Ironically, this critique makes exactly the same false assumption as the ESG narrative itself: that it is able to set novel goals or alter investment at all.

The reality is that ESG finance does something much more basic: it produces commodities. Financial instruments are just as much commodities as the cans of fruit you can pick up in the grocery store. Instead of feeding you to reproduce your ability to thrive in society, financial instruments serve to reproduce the position of the capital-owning class. Ownership of financial assets is what grants the right to claim the income—the relationship to wealth that defines the capitalist class position.

But the buying of access to future cash flows, much like the experience of buying calories from a grocery store, is not a purely emotionless, calculating affair. People experience the world through their own frameworks of understanding—that is, through ideology. For people shopping for food, a label that says something about how it’s made with renewable energy or produced locally might influence their decision to buy the product.

Investors also have ideologies, and when they go shopping they are not just trying to make more money. Instead, an investor looks to satisfy the things their ideology says they should do. They have heard all the debates about externalities, global warming, and diversity in the workplace. Buying into ESG funds serves those ideological needs, even if, like products advertised as “plant-based” or “naturally flavored,” there is little material substance to the claims.

This desire allows the finance industry to sell the extra services like special fund management, analysis, and reporting that go into making ESG investing possible. Such activity breaches fiduciary duty only in the most mundane sense that managed funds have been breaching it for many years: by soaking up more of the returns made by the finance industry itself. They do not, however, make intentionally bad or misleading investments. The finance industry can never be truly opposed to the creation of more profit in the overall economy. It is from the operating surpluses of ordinary companies and households that it gets its income, and that is something that it would not intentionally put in jeopardy.

While financial institutions have not tended to discipline companies to conform specifically to ESG goals, this does not make them incapable of such measures. Financial markets do react, and rather quickly, to new information about companies. A company’s stock and bond prices will change almost instantaneously in response to an alarming earnings call, for example. Such discipline exists, but it is reserved entirely for ensuring the creation of surplus value.

When it comes to the stated goals of ESG, even judging whether action would be warranted is a more difficult job. Because ESG is a purely marketing and ideological phenomenon, it can be used to justify a wide umbrella of otherwise contradictory positions. The holdings of major ESG funds do not differ much from generic ETFs. When asked about including companies like Exxon in such a fund, Invesco made vague noises about the benefits of wielding investor influence before bluntly admitting Exxon ensured the fund’s position in the top 75 percent of the S&P 500.

Similarly, China’s sovereign wealth funds and state-owned enterprises have publicly embraced ESG, despite concerns about human rights and increasingly opaque financial reporting. The Chinese government previously used environmental concerns about meeting its Paris Climate Accords commitments to justify the industrial shutdowns in mid-2021; the reality was that it was forced to do so by international shortages and skyrocketing energy prices. ESG operates as a similar measure: a way to put a spin on things that are already happening.

Beyond what ESG means to the finance industry and investors as market participants, there is a broader historical significance to its rise to prominence. The investors—that is, the bourgeoisie—were once a class that revolutionized the social relations and instruments of production of the entire globe. The industrial revolution and the rise of bourgeois states were matters of world-historical heroism. But having accomplished a total victory over their enemies, doing things that might revolutionize the way we handle production is no longer desirable.

With the ebbing of communism, the largest geopolitical threat to Western capitalism was gone, and the entrenchment of neoliberalism rolled back the domestic power of organized labor. Without these combined pressures, the intense capital development these forces spurred went into decline. New nonresidential fixed investment has been a decreasing share of surplus for the past 40 years. After hitting a peak of 25 percent in 1979, it hit lows unseen since the Second World War in 2009 at four percent. It should be no surprise that capital intensity in the U.S.—particularly in manufacturing—began to stagnate after 2008, and the country experienced its first sustained decline in manufacturing labor productivity on record. Industrialization and economic development has largely stalled outside of East Asia.

These trends are linked to the structural role of finance in providing the goods which reproduce the capitalist class. If ordinary financial assets are what reproduce the position of the capitalist class in the modern economy, then ESG finance is effectively a luxury consumption good. It comes about after the necessities of reproducing the class have already been met.

With new investment hovering around an average of 17 percent of surplus since 2009, and real surplus at all-time highs, there is plenty to go around for those whose living depends on financial assets. The share of wealth of the one percent is also a good indication of this abundance, reaching record levels at 32 percent of all wealth. This is what financial markets really discipline firms for: homogenization for the sake of maximizing the potential consumption of the investor class. When the wealth to fulfill physical desires is secure, the obvious next step is purchasing a new symbolic world as well.

The financial innovation of ESG incorporates the ideological desires of investors into the very same financial assets which sustain them. Actually achieving these goals would require taking the risk of building the organizations to carry them out, and evaluating whether they are worth pursuing at all demands independent judgment. Purchasing the commodified feeling of doing good for society demands neither. ESG mollifies investors into believing they are changing the world while making money at the same time. All they are buying, in reality, are various claims to future cash flows with feel-good marketing attached, eliminating the need to actively take steps to directly achieve their goals.

Ironically, the theory that ESG is a gateway to a planned economy assumes that the will to mobilize national wealth and labor power toward well-defined goals of production still exists in an organized, large-scale way. But the ephemerality of ESG would make it a completely useless tool for such a project. Vague metrics do not work on the level of planned economies for the same reason they do not work in individual businesses: clear goals and clear procedures for getting there are how you actually get things done. They do, however, make perfect sense for a luxury financial instrument whose primary purpose is vicarious philanthropy.

Karl Marx once called religion the “opium of the people,” a numbing agent that brings a semblance of joy in an otherwise desolate world but prevents serious attempts to change one’s circumstances. ESG finance operates as opium for the bourgeoisie: the ultimate symbol of their degradation from historical agents into passive consumers. The existence of ESG signals the final exhaustion of this class. In changing the finance industry so dramatically, nothing has changed in the real world at all. The future of the environment and of society will be decided without input from ESG funds and their investors, even as they continue to seek out the streams of money which insist on their importance.