For some commentators, 2023 was the year in which woke capitalism faced a reckoning at the hands of a global backlash against environmental, social and governance-centred investing (ESG). Criticism of woke capitalism characterised two US Republican Party presidential primary campaigns.
It is seen in a slew of anti-ESG bills moved by state legislatures. Money is starting to trickle away from ESG-marked exchange-traded funds, and major asset managers are concerned about the label’s public relations value. The latest academic research has also found that firms with high ESG ratings are significantly more likely to be financially distressed than firms which do not have high ESG scores.
While recognising the progress that has been made, this report argues that several crucial areas of the problem of woke capitalism remain unresolved. It also takes pains to distinguish the situation in Britain from America, which has a significantly different cultural and legal context. It counsels caution in relation to claims that the ESG industry is dying or was inevitably doomed from its inception. In particular, it warns against the apparent enthusiasm for embedding the ideas behind woke capitalism into law, just as the market suggests that ESG is not the economic goldmine its supporters suggested.
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The paper examines the philosophical development of woke capitalism, and how it took root in both the public and private sectors in a mutually self-reinforcing way. It highlights how a culture of political risk-management has developed hand in hand with ESG-driven regulations and rules around diversity and inclusion. This has created a situation where “debanking”, the restriction of funding to businesses with poor ESG scores, and shareholder activism, drives woke capitalism in the private sector, and laws and regulations like the Equality Act 2010, duties in the Companies Act 2006, and actions of regulators and government departments entrench it in the state.
Particular attention is given to the actions of the UK’s financial regulators, which have served as a motor of progressive change. This poses a great danger to British prosperity, as while there has been a backlash against ESG policies in the United States, Britain’s regulators are still committed to them, and are facing little scrutiny from Parliament.
As well as the financial regulators, woke capitalism is also driven by the Competition and Markets Authority, and compliance codes published by organisations like the Financial Reporting Council. It is evident that once businesses reach a certain size, they must grapple with a huge swathe of regulations designed to increase diversity and achieve Net Zero. This is inimical to economic growth and prosperity, and creates an economy made up of large incumbents and uncompetitive small businesses.
The effects are not just limited to businesses. They damage society in a number of ways. This includes spreading polarising identitarian rhetoric and exposing children to adult sexual behaviour and gender theory, as well as the dissipation of funds to parasitic bureaucracies and uneconomic enterprises, at the expense of British defence companies, for example. This is not a recipe for a prosperous or happy society.
The conclusion draws attention to the state-like power of global megacorporations and the concentration of power within twenty-first-century finance. It closes by proposing a series of targeted policy solutions. Some aspects of the ESG problem are best addressed in the United States, yet significant work could be done to address the specific regulatory issues in the UK.
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DOWNLOADAbout the author
Fred de Fossard: Director of Strategy
Fred leads the Institute’s parliamentary and legislative work. He is responsible for research on British prosperity, encompassing Brexit opportunities, regulatory and government reform, and economic growth. This includes a long-term legislative agenda required to return the United Kingdom to growth, aided by his expertise in parliamentary and constitutional affairs.
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