Every decade or so, a new business model or investment theory with a catchy acronym emerges which purports to help financial institutions to pursue directly several non-economic goals with the same intensity that they seek profit. Such theories and models invariably insist that realizing these goals is compatible with market liberties and may even boost long-term profit. But whether it is triple bottom-line strategies, socially responsible investing, or stakeholder capitalism, the truth is usually far murkier.

In The Race to Zero: How ESG Investing Will Crater the Global Financial System, Wall Street veteran Paul H. Tice argues that the truth about the most prominent of such ideas today—Environmental, Social, and Governance (ESG) investing—is even more troubling than most people realize.

ESG, Tice maintains, is not just market-unfriendly in its essence; its end goal is to effectively re-engineer financial markets from top to bottom in ways that subordinate their functioning to the realization of progressive causes. In doing so, ESG will, if left unchecked, severely compromise the ability of financial actors to perform their indispensable function of pricing risk and efficiently allocating capital throughout the economy. And if economic history teaches us anything, it is that when financial markets go seriously awry, so too does everything else.

An Upside-Down World

Tice begins by exploring ESG’s origins and shows how powerful grand narratives surrounding sustainability and climate change have provided ESG with its core intellectual commitments. These have been embraced and promoted by public and private international actors ranging from the United Nations to the World Economic Forum (WEF) and the International Panel on Climate Change (IPCC).

Others have documented ESG’s connections to these and other entities. Tice’s particular contribution is to show how capital markets have been a number one target of ESG from the beginning. In Chapter 3, pithily titled “The UN Wants to Be Your Investor Advisor,” Tice directs attention to the UN’s establishment in 2006 of its own sustainable investment group, Principles for Responsible Investment (PRI), as a crucial moment in sparking ESG’s march through global financial markets.

Now embracing hundreds of major financial firms throughout the world, the PRI has been, Tice illustrates, a primary vehicle for UN-affiliated groups like the United Nations Environment Program Finance Initiative (UNEP FI) and the United Nations Global Compact (UNGC) to force environmental and sustainability agendas as well as a plethora of conventionally left-leaning ideological causes (often given the innocuous label of “social values”) upon financial markets.

Part of the strategy underlying this process, Tice points out, has involved the PRI presenting itself “as a voluntary initiative with a neutral agenda built around aspirational goals.” While that sounds benign, Tice notes that investment funds and private financial institutions that sign on to the PRI quickly discover that “they have made an open-ended commitment to an ever-changing progressive agenda.” Indeed, the PRI pressures signatories to behave in certain ways, whether it is through incorporating ESG-priority issues into their own management policies or pushing those companies in which they have invested to adopt ESG disclosure protocols. We see such pressures, for example, at work with efforts to push investment funds to avoid fossil-fuel industries that generally generate considerable returns for shareholders but which are the number one target of climate change activists.

There is an anti-competitive dimension to this insofar as the PRI encourages its members to collaborate by way of pooling resources, sharing information, and supporting, in Tice’s words, “any financial regulation or government policy that facilitated the implementation of the PRI’s agenda.” These measures cannot help, Tice comments, but undermine “the legendary competitive dynamic of Wall Street, with sell-side firms obsessed with league table rankings, buy-side accounts keenly focused on portfolio performance versus peers, and everyone scrambling to win new business and outhustle the other guy.”

Marginalizing competition, however, is entirely consistent with the ESG agenda insofar as it 1) views economic growth as simply one of many goals for financial markets and 2) prioritizes ideological ends over the economic dynamism associated with competition. It also means, Tice states, deconstructing the idea of fiduciary responsibility via attempts “to revise fiduciary codes for investment managers and asset owners … to incorporate ESG and mandate sustainability as a positive fiduciary duty.”

Then there is the penchant for trying to plan its members’ operations that permeates the PRI’s way of proceeding. From its beginning, the PRI has generated 10-year blueprints, all-encompassing strategic plans, annual work programs, etc. But the most dangerous dimension of all this planning is the PRI’s end goal: what Tice calls the desire to “change the pricing function of the financial markets to make sure that ESG risk is the main discriminant factor in determining the cost and availability of capital for specific industries and issuers” by 2027.

Any effort to push the financial market’s pricing function through such an ESG filter, however, is bound to produce major misallocations of capital away from its most productive uses. Over time, this will store up major problems for the future in the form of systematic capital malinvestments throughout the economy that weaken innovation, diminish competition, and facilitate the type of widespread business failures that generate above-average unemployment levels. Therein lies the systematic risk that ESG threatens to generate throughout entire economies, should it ever achieve the ascendancy in financial markets desired by its most outspoken advocates.

A Compromised Wall Street

This brings us to how ESG has exercised a nefarious effect on America’s financial sector. According to Tice, the event that opened the door to ESG’s proliferation on Wall Street was the 2008 Financial Crisis.

Tice underscores the role of the Federal Reserve and various government policies in generating the crisis. That, however, was not the dominant story that emerged to explain the events of 2008. Even today, despite plenty of solid empirical work showing, for example, how housing policies engineered by government entities like Freddie Mac and Fannie Mae helped create the crisis, the popular narrative continues to be that the 2008 financial markets meltdown resulted from greed run amuck and insufficient regulation.

In that context, ESG offered a way of redemption for those involved in risk management and capital investment by providing them with an alternative ethos to the “greed-is-good” motivation with which financial markets are regularly tarred. But ESG also provided a new rationale for regulators to widen their interventions in post-2008 capital markets which they have used to try and impose an ever-expanding list of progressive political and social priorities upon private financial actors and institutions.

This, Tice contends, has led to the emergence of an investment culture that, until recently, made it highly unfashionable and potentially risky for people’s careers for Wall Street analysts to point out uncomfortable facts about ESG. Such facts range from the tendency of ESG funds to underperform vis-à-vis non-ESG alternatives to the vast inconsistencies and contradictions that mark the ESG performance indicators used throughout the finance industry.

The extent to which planet ESG is buttressed by various forms of social control, Tice illustrates, may be difficult for non-Wall Streeters to appreciate. But “ESG Enablers,” as Tice calls them, are legion and have worked hard to discourage and even punish critical analysis of ESG in theory and practice. Business professors, management consultants, professional certification associations, philanthropic groups, and activist NGOs have successfully immersed much of America’s financial sector in a type of ESG echo chamber that disincentivizes anyone from openly questioning ESG orthodoxies. The sheer prevalence of ESG language, priorities, funds, and ratings agencies, combined with the stigmatizing of anyone who questions the worth of such things, has made it harder for financial analysts to do their job.

This is the most depressing aspect of ESG’s grip on so many people who work in the financial sector. Wall Streeters are often viewed as blunt-spoken individuals and hard-nosed operators who are famously unimpressed by fads and fashions. By Tice’s account, however, the prevalence of ESG-speak in the financial sector—plus the social penalties meted out to anyone who suggests that ESG is in fact, to use Elon Musk’s famous expression, “a scam”—indicates something else: that many active participants in America’s financial markets are highly susceptible to social and political influence from those who do not and never will have much interest in promoting dynamic capital-intensive economies. As a general disposition, that cannot be good for America’s future economic well-being.

Escaping ESG Prison

Withstanding social pressures is hard at the best of times for even the most independent-minded of individuals. But when regulation is added to the mix, resistance becomes extremely difficult.

In the case of ESG, Tice illustrates, the European Union is well-down the path to using regulation to push entire economic sectors into the ESG sandbox. A series of EU directives forcing large and medium-sized companies to meet numerous ESG goals and provide various ESG disclosure statements have been steadily rolled out over the past ten years. This has been complemented, Tice observes, by EU nation-state governments pushing their own ESG compliance schemes. In other words, any European business involved in risk and capital management that entertains serious doubts about ESG increasingly has nowhere to hide.

That is the future that faces America’s financial markets, despite recent qualified disavowals of ESG by figures like BlackRock’s Larry Fink. Regulatory pressures, Tice worries, will increasingly make refusal to play the ESG game “not optional.” This will undermine optimal allocations of risk and capital, as well as accelerate, Tice stresses, the growing bureaucratization of America’s already hyper-regulated financial sector as everyone seeks to ensure that “all the sustainability boxes are being checked” on a more-or-less constant basis.

Tice, however, does not leave his readers in despair. There is still time and ways for Wall Street to escape the ESG trap. Broader situational awareness on the part of those working in financial markets of the deeper agenda driving ESG and the methods by which ESG priorities are forced upon financial actors would, Tice argues, be a good start. But at least equally important is the courage to critique openly core ESG ideas as well as the government institutions, regulators, management consultants, academics, and activist NGOs responsible for propagating them. That would be one way of moving from defense to offense. In legal terms, Tice lays out a series of options for challenging the legality and constitutionality of efforts by federal agencies to force ESG upon Wall Street and corporate America more generally. These have, Tice believes, real potential to bring ESG seriously undone.

All such measures, however, are premised upon something else: that those working in finance be far more confident about the rightness of what finance markets do qua financial markets. Like all the preceding schemes for re-orientating the financial sector away from creating value, leveraging risk, efficiently allocating capital, and making profit, ESG plays upon the lingering sense inside and outside the financial sector that those working in capital markets are doing something mildly useful but not especially reputable.

This has long been a burden carried by those who work in finance. Every generation of such individuals struggles to overcome it. Until, however, financial actors do a much better job of explaining the great economic and non-economic goods that flow directly from their work in capital markets, we will struggle to exorcize the ESG demon that is corrupting America’s capital markets from within.