Enlightened economics seeks optimal consumer welfare.
Consumers characteristically place different values on identical goods or services.
Designer clothes or goods are exemplary. Some consumers would eagerly pay a huge premium to buy clothes designed by a famous designer or a basketball signed by a marquee player like LeBron James. The premium represents the psychological pleasure or satisfaction that consumer receives by association with a name beyond the strictly utilitarian value of the clothes or goods. The value of an item is what a consumer is freely willing to pay for it. (Karl Marx’s labor theory of value is sheer nonsense).
ESG investing is similar to designer clothes. It seeks to optimize consumer welfare by investing in enterprises that provide psychological satisfaction—even if it means lesser monetary returns or a loss of investment funds—to investors sensitive to environmental protection, social equity, and good governance however subjectively defined. For politicians to scorn ESG investing is a form of ill-conceived industrial policy by a different name.
Free enterprise means private persons are free to choose any yardstick by which to measure the welfare they receive for each dollar invested—which includes both psychological, emotional, and utilitarian values. Everyone is different on that score, which explains why government should keep hands off.
Investors in ESG enterprises bet what they bargained for. To the extent ESG investing diverges from maximizing ROI, to that extent its investors find satisfaction in at least thinking they are pursuing non-utilitarian objectives equivalent to the delta, if any, between ESG and ROI playbooks for investment. Neither model is inherently superior to the other. Neither model should be backstopped by government bailouts of investors who lose money.
Every government official should be required to master Adam Smith’s The Theory of Moral Sentiments: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.”