When Corporations Distort the Market, It Doesn’t Hurt Them: It Hurts You

April 12, 2021

America’s biggest banks have not been shy about their commitment to what they call “sustainable investing.” Wells Fargo, Bank of America, and others have made Environmental, Social, and Governance (ESG) metrics key to their business models. That includes a commitment to analyzing how well potential recipients of their loans adhere to ESG metrics.

What does that mean in practice? Imagine it. You need $2 million in capital from Wells Fargo to build the first bagel shop in your suburban town. You estimate it will eventually employ 35 people and serve hundreds of hungry customers weekly. “Your business model looks great,” they write in their decision letter. “We have no doubt you’ll be able to pay back this loan on the scheduled timeline. But we noticed you plan to use carbon-burning cars in your delivery services. So it’s going to be a ‘no’ from us.”

Wells Fargo has lost out on an investment opportunity. You’ve lost out on the opportunity to own the small business you’ve always dreamed of opening. Thirty-five people won’t be employed by a new shop in your area. And the market has lost out on a bagel shop in a town without one.

The Unnecessary Consequences of ESG Market Distortion

The example is perhaps exaggerated, but it illustrates the point. When big banks put their thumb on the scale based on arbitrary metrics, it manipulates the market. The banks aren’t basing their decisions on whether customers are likely to buy the product or service. Whether the company has a plan for turning revenue into profit is, astonishingly, a back-burner concern. Instead, banks are promising to make financial decisions based on politically-driven ESG guidelines. In the end, that will create holes in the market, and customers will face fewer, and therefore more expensive, options.

When it comes to environmentalism and “green energy,” this market distortion by big banks does more harm than good. The market around green energy is expanding on its own, without the influence of these large players. The demand for solar is so high that the International Energy Agency (IEA) projects over 50% growth in renewable energy through 2024. Electric cars are booming in popularity, and luxury options top $80,000. Clearly, there’s a market for going green, and people are willing to pay to get into it. In that context, the influence of banks’ top-down push for “sustainable investing” is superfluous.

The Ultimate Marketing Ploy?

Moreover, some experts doubt the banks’ focus will really be effective – or even how effective they intend to be. Former BlackRock executive Tariq Fancy, who oversaw the massive asset manager’s first foray into “going green” back in 2018, told The Guardian, “I have looked inside the machine and I can tell you… this is not going to work.” He said there’s more of an appetite among banks for marketing themselves for their environmentalism than there is for actual sustainability – which requires losing out on profit in the short-term.

In other words, financial institutions are willing to take a loss on profits by sacrificing companies that don’t fit in the ESG framework if it means they can more easily market themselves as “green.” There are real-world consequences to that cost-benefit analysis, but banks don’t pay the price. Instead, people do – people whose retirement accounts or kids’ college savings are in the stock market, who benefit most when financial institutions consider business models and profit margins, not arbitrary ESG metrics.

Large corporations should not reap the benefits of good marketing if they’re making decisions that ultimately harm individual prosperity. That’s especially true because the market for green energy is expanding without their influence. Big banks putting their thumb on the market for their own gain – being able to brand themselves “green” – undercuts natural market movements and causes investors to miss out on profit. In the end, to keep customers happy and brand themselves as honest investment stewards, banks should trust the market to play out naturally. That will ultimately create the most good for the most people.