The rapid retreat from corporate ESG (Environment, Social, Governance) and DEI (Diversity, Equity, and Inclusion) initiatives—i.e., “woke capitalism”—in response to Trump has been stunning.
The problem with capitalism in the United States is not that exponential growth on a finite planet is impossible, nor that global heating is an obvious symptom of this reality. Nor does the continued pattern of abhorrent, gratuitous police violence against people with dark skin—George Floyd among too many others—suggest that systemic racism did not end with the election of a black president. Nor is it unreasonable to assume that large corporations, with their revocable license to operate in a free enterprise society, have an important leadership role in addressing these challenges. No, the problem with capitalism in the United States, it turns out, is that business leaders like Larry Fink and Jamie Dimon are too “woke.”
Really?
One explanation for the rapid retreat goes like this: Business leaders are cold-blooded, greedy psychopaths who never cared about ESG or DEI. The whole notion of “stakeholder capitalism,” championed on the stages of Davos and by the “sustainable business” community, was always a fraud. The proof? How quickly business rushed for the exits when a few low-life activist investors and cynical political opportunists threatened to legally challenge corporate boards’ adherence to their fiduciary duty.
That duty, the critics incorrectly barked echoing Milton Friedman before he came to his senses in old age, is to serve only the interest of shareholders. Never mind that the actual legal responsibility of a board is determined by the “business judgment rule,” which grants broad discretion over what constitutes shareholder interests. Today’s new breed of free-market zealots sound like adolescents who just discovered Ayn Rand. Regardless of the naivety of the argument, if business had any principles to stand for, “woke” was not one of them.
I don’t buy that argument.
First, “business” is not a monolith—it’s made up of people with diverse values and priorities, operating within constraints they do not control. Second, I believe most—though not all—DEI/ESG initiatives were and remain well-intended. Of course, there was greenwashing that warranted pushback. But that’s different from claiming the entire DEI/ESG movement was fraudulent from the start.
So, What Went Wrong with “Woke”? Two things.
The First Problem
First, business convinced itself that managing ESG risks and championing DEI was simply good business. I agree with this. Since there was a “business case for sustainability” and a “business case for diversity and inclusivity,” then action was justified. Business schools and consultants jumped at the opportunity, which is where the trouble started. Soon it was all about (reductionist) metrics, and metrics would naturally blead into management accountability. Ticking boxes replaced thoughtful inquiry where there are no simple answers. Targets and good intentions began to behave like quotas.
Meanwhile, finance professors churned out endless papers “proving” that ESG investing was just smarter investing, using largely meaningless statistics to “prove” their case. Few recognized the flawed logic of the entire debate: what might be good for an investor portfolio does not equate to the sustainability of an entire economic system. Which was the entire point.
Wall Street jumped on board, declaring ESG (the “S” can be seen to encompass DEI) an “asset class” with visions of trillions of dollars of fee generating assets under management. PowerPoint pitch decks were filled with dumb buzzwords like “ESG space.” Well-meaning institutions, guided by conflicted advisors, took the bait. Assets flowed into ESG, accompanied by a healthy dose of self-satisfaction. Investors divested and preened about their clean portfolios, as if that alone was shifting the system—despite the perfect correlation between rising CO2 levels in the atmosphere and rising ESG assets under management. Fortunes were made, this time by the “good guys” on Wall Street, including our climate champion Al Gore. “Win-win,” right? If only.
Consultants developed frameworks and metrics to measure progress toward ambitious goals. Net zero by 2050—what does that even mean beyond “we’ll figure it out later”? Conferences, industry groups, and metric debates proliferated, all based on the reductionist notion that “we can only manage what we measure” (yes and no—we don’t actually manage complexity, we learn to dance with it). Never mind that we already knew the major actions required; we just lack the political will to demand them.
Most dangerously, the “ESG investing is simply better investing” narrative trivialized the complexity of defining both ESG and “better investing,” leaving a broad target for criticism. Excluding oil and gas (dirty) while overweighting big tech (supposedly clean, but also desirable to own as an investment) logically became the central theme of most ESG investment strategies. When oil prices collapsed due to the (unforeseen) U.S. shale boom, oil stocks went down. The short oil stocks/long tech stocks trade looked brilliant. ESG investing worked we were told, look at the superior financial returns. Yes, win-win.
The truth is more nuanced. Some active and highly engaged ESG managers do the hard work of holding managements’ feet to the fire. Pressure is a strategy. I applaud them. But here’s the thing. The core ESG investment thesis was all wrong. Oil did not fade away and get replaced by cheaper solar, not yet anyway. On the back of the Wall Street financed shale oil boom, the United States became the largest producer in the world which is what pushed oil prices down from over $100 per barrel in 2012 to $44 by 2016. This is the reason being divested form oil stocks “worked” for ESG managers.
Happy to keep gathering assets, I suspect few ESG fund managers told their clients the truth along the way. “Our entire investment thesis was wrong. Oil did not go away. And big oil never needed our capital anyway. But with the shale oil boom, we got real lucky on the short oil/long tech trade.”
Then in early 2022, Russia invaded Ukraine. Oil prices surged and energy stocks surged as well to record highs. The ESG investment thesis unraveled. Suddenly, “woke capitalism” was being blamed for harming pension funds. The partial truth of the argument is what made it stick, giving lawyers plenty to work with while throwing gas on the flames of the culture war.
The Second Problem
The second problem with “woke” is more troubling than the false pretense that ESG/DEI were ever satisfactory responses to our serious societal challenges. The “woke” business response exposed our society’s fundamental values.
The logic of “the business case for ESG/DEI” sounds innocuous, but is the root of our disease. Advocates of “sustainability” (whatever that means) have had to defend their case by showing “the business case” for this and “the business case” for that from the start. Courageous business leaders led from “the business case for” because it was safe with their boards and gave them a pitch to defend their actions to their investors.
What’s wrong with this? The logic of “the business case for” sustainability or DEI assumes that if we cannot quantify an initiative’s net present value or prove it enhances shareholder value with goals and metrics to prove the case, all within a business-relevant timeframe, then it lacks justification.
Translation: Our values consist of one thing at the end of the day. Money.
A genuine response to the polycrisis requires a far deeper reckoning than most ESG or DEI conversations in business have dared to go. And now, as politicians vilify “woke capitalism” and businesses retreat from ESG and DEI initiatives, the picture has grown from bad to worse. Our society was never serious about these commitments if they involved facing hard truths and making hard choices. We were trapped in the left-brained, financial “business case for” logic rooted in failed neoclassical economics.
A Serious Response: Truth and Reconciliation
A serious response to the unprecedented challenges of our time demands first and foremost a truth and reconciliation process. It begins with these truths:
- Exponential material growth on a finite planet contradicts the second law of thermodynamics. The “circular economy” is largely a mirage as recycling company leaders freely acknowledge.
- We are facing the double bind of all time. The viability of our entire economic system is predicated on growth, yet growth is benefiting only a very few while undermining ecosystem function upon which all life depends.
- The rise of authoritarianism is directly tied to our failed neoclassical economics models—used by both the left and right. There is much to love in our free enterprise system, but we must confront its failures with integrity.
- The West’s wealth was initially built on a beginning surplus, not debt. Yet modern development relies on debt, a model destined to fail.
- This original surplus was created from theft and extraction: land stolen from Indigenous peoples, their vital wisdom ignored in the process, resources and entire industries stripped from colonized nations, free labor through the slave trade on an epic scale. The human extraction and ecosystem plundering continues today.
- Trauma—individual and systemic—has predictable and inescapable consequences that affect us all since everything is connected. Healing must begin with the courage to say the truth and a reconciliation process consisting of systemic reparations not simplistic quotas disconnected with the scale of the injustices.
Are we ready to move beyond the “woke business” fiasco and truly wake up to, and speak the truth?
“The sole meaning of life is to serve humanity by progressively realizing the truth.”
— Leo Tolstoy
About Capital Institute
Capital Institute is a 501(c)3 nonprofit non-partisan think tank working to create a more just and sustainable way of life on earth. Together with our collaborative network, we combine modern science, storytelling, and the knowledge of timeless wisdom traditions to illuminate the path from an extractive economy to an emerging regenerative economy that supports the long-term well-being of people, planet and business.
