This week’s World Economic Forum meeting in Davos should have been a triumphant
one for its host, Klaus Schwab. Nearly half a century after the economist launched his
Swiss gatherings for world leaders, executives and financiers, his belief that businesses
should serve all their constituents equally seemed to have prevailed over the old notion
that companies exist only to make profits for their owners. In a book offered free on
stands around the event, Schwab and a co-author expressed their certainty that his
vision of “stakeholder capitalism” had finally been “vindicated”. Yet many Davos
delegates seemed less sure, even as they shuttled between panels announcing
commitments to cut carbon emissions and cocktail parties rallying support for the UN
sustainable development goals.

Increasingly, they fretted, the tenets of stakeholder capitalism — and the environmental,
social and governance-themed investing trend that has risen with it — are under attack
from populist politicians, finance industry contrarians and a different band of activists
from the ones Schwab imagined. One trigger for their concerns was a speech made the
previous week at a Financial Times conference in London. In it, Stuart Kirk, head of
responsible investing at HSBC Asset Management, had rubbished the consensus that
investors should try to encourage a more environmentally responsible capitalism by
factoring climate risks into their calculations. Climate change, he declared, was simply
“not a financial risk that we need to worry about”. The argument jarred so much with the
public positions that HSBC and other banks have adopted that Kirk was quickly
suspended. But it reflected a growing willingness to question the prevailing wisdom in
Davos and other bastions of the new capitalism.

The sceptics
Kirk’s critique of one of the foundational beliefs of the near $3tn sustainable funds
industry is not an isolated one. Elon Musk, arguably this era’s most prominent capitalist,
last week labelled ESG a “scam” after Tesla, his pioneering electric carmaker, was
removed from S&P’s ESG index. Such indices’ scores depended on how compliant a
business was with “the leftist agenda”, he claimed in a meme shared on Twitter.

Even some former industry insiders have broken ranks to paint ESG as mere
“greenwashing”. Tariq Fancy, BlackRock’s former chief investment officer for
sustainable investing, now calls sustainable investing “a dangerous placebo”. Desiree
Fixler, former head of ESG for the Deutsche Bank-backed asset manager DWS, says
the acronym has become meaningless. Such scepticism has prompted officials to
impose more demanding regulations. The Securities and Exchange Commission is
preparing rules to crack down on ESG credentials in investment products and the EU’s
“sustainable finance taxonomy” now defines what counts as green. The other person
haunting delegates at Davos was Ron DeSantis, the Republican governor of Florida
who is battling Disney over a bill to limit the teaching of sexuality and gender identity in
the state’s public elementary schools. The populist governor’s appetite for a fight with
Disney chief executive Bob Chapek has sent a shiver down many executive spines, in
part because DeSantis is not an outlier in a party that still attracts a majority of US
corporate political donations.

In recent weeks, Florida senator Marco Rubio has introduced legislation to let investors
sue companies that stray from maximising shareholder returns; former presidential
nominee Mitt Romney has signed a letter saying ESG scores are “politicising” S&P’s
credit ratings; and former US vice-president Mike Pence has attacked ESG principles as
“pernicious”. They, and the conservative activists who are rallying protest votes in
record numbers at annual meetings, are now coalescing around a rebranding of ESG
and stakeholder capitalism as something more hollow, hypocritical and even harmful:
“woke capitalism”.

For Vivek Ramaswamy, a conservative entrepreneur and author, this backlash is an
overdue reaction to elite over-reach. This month, he raised more than $20mn from
libertarian tech investor Peter Thiel and others for an anti-ESG investment group,
declaring that it would happily invest in the oil and gas stocks that big asset managers
increasingly shun. “I’ve been working on this for over two years and it felt like I was
pushing uphill for much of [that time],” he says. Now, though, “the tides have changed”.

Turning the tide
After the 2008 financial crisis, the leaders of business and high finance found
themselves looked upon as “the bad guys of American society”, Ramaswamy says, and
their desire to restore their reputations coincided with younger employees’ hunger to find
a higher purpose in their workplaces. “Companies seized on that oppportunity to teach this
generation that the way to fill that hunger is to go to Ben & Jerry’s and order a cup of ice-
cream with a cup of morality on the side,” he argues, referring to the Unilever-owned brand
that has supported Black Lives Matter and opposed Israeli settlements in the Palestinian
territories. The danger with this kind of activism, he argues, is that as corporate voices
become louder, “a small group of effective corporate elites” begins to “decide what’s right
for society at large”. Ramaswamy argues that the defining cultural and political struggle of
our time is not between left and right, but “between the managerial class and the modern
citizen . . . It’s the reincarnation of what happened in 1776 in America.” As polls show sharp
falls in Republicans’ trust in big companies, rightwing activists are working to reverse many
of the changes made under the banners of ESG and stakeholder capitalism.

In the past two months, a conservative advocacy group has persuaded a California
court to strike down two state laws that would have imposed diversity quotas on
company boards. At their annual meetings, chief executives from Goldman Sachs to
Meta have been pressed by conservative shareholder groups over their charitable
donations or racial equity policies. One such group, the Free Enterprise Project, says it
is trying to save corporate America from “the socialist foundations of woke”.

For several years, executives have felt emboldened by pressure from their staff and
customers (and by polling that shows business is more trusted than governments, non-
profit groups or the media) to take public stances on subjects they might once have
avoided.

Again this year Davos-goers heard from Edelman a US public relations company that
conducts one such survey, that most people believe chief executives have a
responsibility to speak out on such issues as climate change and discrimination.

Yet recent academic studies show that the calculus behind taking the kind of socially
liberal positions that could label a capitalist as “woke” is more complex.

“My research suggests the backlash is greater than the benefit,” says Vanessa
Burbano, a Columbia Business School professor who studied employees’ reactions in
companies that took positions on 2017’s “bathroom bills”, which were designed to
dictate which toilets transgender people could use.

CEOs who took a stance on the issue left employees who disagreed with them feeling
demotivated, she found, while not meaningfully motivating employees who agreed with
them. Weighing in on politically divisive issues, she concludes, is in fact “a riskier
proposition than a lot of people realise”.

Some companies already appear to be considering such risks when deciding on their
own political interventions. Swarnodeep Homroy, associate professor of finance at the
University of Groningen, found that companies were more likely to suspend donations to
Republicans aligned with the effort to deny Joe Biden’s 2020 election victory if they
were based in states with highly polarised electorates. They were less likely to do so if they
faced political risks such as the chance of losing government contracts. “They tend
to [take political positions] when there is no shareholder/stakeholder trade-off,” Homroy
says. 

‘The knives are out’
At Davos, American chief executives spoke of wanting to encourage pragmatic
“problem solvers” in Congress, but one complained privately that he now saw “no one in
the centre” of an increasingly divided political landscape.

That polarisation is likely to turn more CEOs into proxies in the social battles their
employees feel most passionate about, says Burbano. The prospect of the US Supreme
Court ending federal abortion rights, the renewed debate about gun control after the
mass shooting at a school this week in Uvalde, Texas, and politicians’ desire to animate
voters in the run-up to November’s midterm elections all signal that the political heat will
intensify.

“Employees are realising that their leaders are facing a choice over what to say and
what to do, and they can potentially influence that in a way they didn’t five years ago,”
Burbano says.

Paul Polman, the former Unilever chief, echoed that view in a recent LinkedIn post.
“Many have lost faith in politics to represent their views and secure their futures. They
are turning to corporate power instead,” he observed. By doing so they have left
business leaders “increasingly stuck between employees and politicians”, Polman
warned. And while he was in no doubt that executives should side with their people, he
added that this time the “woke” insults from Republicans felt different. “The knives are
out,” he wrote.

For all their suspicions about their critics’ motivations, several advocates of more
sustainable ways of doing business acknowledge the limitations of ESG, which is as
ambitious in scope as it is ambiguously defined.

“Criticism of weak or inconsistent implementation is fair game,” Richard Samans of the
International Labour Organization and Jane Nelson at Harvard’s Kennedy School of
Government, wrote on the WEF website this week.

“I’m really afraid that too much of it is lip service . . . ESG has become too much of a
check-the-box asset class,” says Lady Lynn Forester de Rothschild, whose Coalition for
Inclusive Capitalism convenes an influential group of stakeholder-focused chief
executives.

Homroy, for his part, suspects companies will have no choice but to become more
environmentally responsible, but he also suspects their commitment to the kind of social
activism that could expose them to attacks may be peaking.

Most Davos delegates are still persuaded by the commercial opportunity represented by
at least the “E” in ESG. The need to finance the transition to low-emissions technologies
heralds what McKinsey consultants have dubbed “the largest reallocation of capital in
human history”. Several also believe their new social positioning helps attract and retain
talent.

For now, says de Rothschild, many executives feel baffled by the attacks on their
experiments with a different kind of capitalism, and unsure when they might be assailed
next.

As she puts it: “You never know when the piano’s going to fall on your head when
you’re walking down the street.” Nor who will push it.