The move toward ESG investing is not the free market at work

Government tilts the scale toward the alternative approach toward investing

Advocates of environmental, social, and governance investing — typically shortened to ESG — may say it is simply a reasonable response to market demands. Hughey Newsome, chief financial officer of Wayne County, recently wrote in Forbes, says, “Bureaucrats are not primarily demanding these mandates, but instead mainstream institutional investors are.” But an alternate view is that ESG is becoming a dominant force because competition in the investment-ratings business is limited by selective government accreditations and other barriers to entry.

Standard and Poor’s Financial Services, BlackRock, and Moody’s are private companies that operate in the free market, and they have increasingly taken ESG goals into account. Does this give an opening for someone who prefers more traditional investments to start competing businesses in the financial services industry?

Would that it were so easy.

Credit rating agencies such as S&P let investors know whether a business is a worthwhile investment by assigning it a credit rating. ESG is one of many rating metrics. Institutional investors, such as asset management firms or banks, use these credit ratings to determine how they will invest their shareholders’ money.

ESG has become a dominant metric for investments due in no small part to the shielding from competition its promoters enjoy.

The first layer insulating ESG-leaning firms from competitors is the federal government’s special accreditation of credit rating agencies, including the Big Three: Standard & Poor’s, Moody’s, and Fitch Ratings.

Set apart by the Securities and Exchange Commission as Nationally Recognized Statistical Ratings Organizations, these three, and six other selected enterprises, enjoy legally sanctioned dominance and a significant competitive advantage in their industry.

Only one NRSRO refrains from wholeheartedly pushing ESG: Kroll Bond Rating Agency. Kroll says that it prefer “fundamental, bottom-up credit-by-credit risk analysis, rather than through the collection of often irrelevant ESG data and/or the creation of ESG scores that are burdensome to analysts and issuers.”

Kroll, however, retains ESG as one of its metrics for consideration, and it handles less than 1% of total outstanding ratings of the accredited rating agencies.

These nine organizations are unlikely to give up their SEC-granted domininant position any time soon.

Asset management firms, too, are riding the ESG train. Just like credit rating agencies, they are difficult to unseat or to compete against.

Take, for instance, BlackRock. The world’s largest asset management corporation is a prominent advocate for ESG, and a government favorite when it comes to managing crises.

BlackRock CEO Larry Fink’s personal relationship with former Treasury Secretary Timothy Geithner helped to secure BlackRock a key stake in using tax dollars to purchase toxic assets from U.S. banks during the 2008 financial crisis.

More recently the firm was chosen to assist the Federal Reserve’s 2020 coronavirus bond sales. Multiple former BlackRock executives serve in President Joe Biden’s cabinet. Several former Obama administration regulators occupy influential seats at BlackRock.

Banks also play a key role.

JPMorgan Chase and Wells Fargo have both donated over $1 million to Biden throughout his political career. Bank of America received billions in aid from the Bush and Obama administrations.

Goldman Sachs alumni have filled federal offices for years, including Hank Paulson and Steve Mnuchin, secretaries of the Treasury Department under George W. Bush and Donald Trump, respectively. More recently, Goldman executives served in the Biden administration’s 2020 transition team. Morgan Stanley executives have filled seats in the Bush, Obama and Biden administrations.

Even if ESG were benign as a preference for the color purple, its institutional entrenchment would still be an issue. If investors want to invest in companies that don’t care about being purple, but credit rating agencies and institutional investors are prioritizing purple investments, there would be limited methods of recourse for the non-purple investor to take.

The non-purple investor would soon learn that federally approved credit rating organizations, as well as most major banks and asset managers, all favor being, selling, or trading purple. Pro-purple metrics would be ingrained among the nation’s most powerful, whether by special accreditation or softer, subtler influence. These barriers to entry would stifle non-purple investment and opportunities.

Every link in the investment chain is made up by behemoth corporations accredited by or working closely with the federal government, and all shielded from competition. Ratings agencies (the NRSROs) base their ratings on ESG metrics. Major institutional investors, whether asset management firms like BlackRock or commercial banks, overwhelmingly demand ESG-based investments.

How can ESG be a tool of the free market when so many barriers prevent opt-outs and competition?

Josh Antonini is an environmental policy intern with the Mackinac Center for Public Policy. Email him at

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.