Recently I mentioned the many executive orders (EOs) issued by President Trump since his inauguration. He’s on a record-setting pace! Of course, he pushes the envelope because he’s serious about his agenda, Congress is often paralyzed, and because he can. As one X poster puts it, Trump “swings for the fences”. The system allows him to take shots as chief executive, and if you don’t like it you’ll have to wait for the courts to rule on challenges. So far, in cases that have been decided, the Administration’s court record in defending Trump’s EOs would be good for an MLB batting average.

The Circle of Rent Seeking

Like his overall record as president, Trump’s EOs cover the spectrum from very good policy to just horrible. I tend to favor deregulatory actions, but a recent Trump EO bearing on corporate Environmental, Social, and Governance (ESG) scores and DEI practices is a pro-market exception to typical regulatory actions. That’s basically the view expressed by Phil Gramm and Jeb Hensarling of the American Enterprise Institute. The ESG EO addresses potential fraud and conflicts of interest in the promotion of “socially responsible” shareholder initiatives and investing.

I’ve expressed my distain for corporate ESG initiatives in the past (see here and here). The quest to earn a high ESG score is a distraction from a firm’s core mission and often a misuse of resources. Higher ESGs are associated with government subsidies, which closes the circle on the politicization of “sustainable” investing. Plumping up ESG helps firms garner more subsidies and greater subsidies help firms boost their ESG scores. These victories might be more pyrrhic for shareholders as management enlists the firm’s assets into service for government industrial policies that are often misguided.

Seedbed For Fraud

As for protecting investors from the fallout, one can argue that abuses related to ESGs belong to a class of problems best left to the market via caveat emptor. Investors might wish to earn pecuniary returns or they might wish to earn non-pecuniary returns. However, they might not always recognize the possibility of tradeoffs between the two, or the possibility that they are being scammed outright.

Unfortunately, financial decisions involve complexities that are often beyond the ken of the investing public. Their dealings with financial advisors obviously involve information and knowledge asymmetries, which underly the need for fiduciary laws and standards. ESG investing has constituted a kind of fad that has both attracted the naive and was always ripe for abuse by overeager or unethical advisors and other industry players.

Proxy advisors have been heavily involved in counseling public companies on ESG proposals brought before shareholders for votes. At the same time, these proxy advisors often engage in selling ESG metrics, which can create conflicts of interest. In particular, the EO in question seems to target two foreign-owned proxy advisors, who effectively dominate the space.

Investor Protection

The EO in question seeks protect American investors from politicized investment advice and shareholder proposals. That might sound like standard Trumpese for “I want to make my opposition illegal along with anything I don’t like”. However, there are good reasons to support this EO. I’ll get to those below, but first some quick details.

The EO instructs the SEC to review and consider revising rules, guidance and other materials relating to ESG and DEI. Scrutiny of shareholder proxy advisor recommendations is given particular emphasis. There are provisions targeting potential antitrust violations in collaborations between investment and proxy advisors. Also, there are provisions aimed at protecting pension and retirement plans from violations of fiduciary duties and obligations.

It’s hard to argue against standards of fiduciary duty. They ought to be politically neutral by their very nature. Unfortunately, the fascination with ESG metrics has made it easier to dispense poor investment advice, even for those purported to have expertise in the area. This is of greater import given that a significant share of investors have been led to believe that signals of corporate virtue are associated with superior pecuniary returns. It should be obvious that diversion of corporate resources to “social” pursuits must be scrutinized by shareholders and stock analysts. Even more troublesome are efforts that undermine productivity in the name of broad political or social objectives.

Not Objective Measures

ESG’s are by no means standardized. There are a great many vendors of ESG metrics, and they frequently disagree as to the merit of particular companies in terms of social responsibility.

Measuring the social value of particular initiatives or policies can be highly subjective, and weighted aggregations of those measurements into E, S, and G components, and combined ESG metrics, can be highly arbitrary. It’s not an exaggeration to say that the social value of certain key elements are sometimes fictitious, such as the carbon credits so often used as “offsets” by firms whose pollution is unavoidable to one extent or another. The purchase of those credits is a performative exercise that has earned the name “greenwashing”. But it’s seldom a wash. This kind of activity is a wasteful distraction and sometimes downright harmful: so-called deforestation credits might just as well be assigned a negative social value.

ESGs have also tended to reward firms adhering to DEI hiring and promotion policies. Merit takes a back seat. While diverse perspectives can add value in business contexts, HR decisions based on race, gender, or other superficial classifications are unlikely to serve shareholder pecuniary interests.

ESG Performance

Evidence on the performance of ESG funds is checkered at best. This is noted by Gramm and Hensarling, who reference an article by Sanjai Bhagat’s in the Harvard Business Review (also see this study). Bhagat reported that not only are returns on ESG funds inferior, but they fail to deliver enhanced non-pecuniary outcomes. Moreover, ESG funds often carry higher fees to investors. One study found that the willingness to pay these higher fees is driven by financial illiteracy.

A few studies seem to contradict Bhagat’s assertions, but at best the evidence is mixed. An April 2025 paper by two Dutch authors found that only changes in the E component (environmental), as opposed to changes in S and G, were positively correlated with stock returns. Those positive abnormal returns were driven by institutional investors who, despite their presumptive expertise, might be just as cowed as certain individual investors by the appearance of social virtue.

As a reality check, note that one can pick and choose among ESG vendor scores, the stock “universe”, sample periods, and estimation techniques to find positive or negative correlations between ESGs and stock returns.

As I mentioned above, the process of assigning ESG values is highly arbitrary in any case. It’s possible to engineer ESG scores in ways that essentially reward firms with high earnings for minor gestures of ostensible social value, even while ignoring less convenient consequences of a firm’s activity. Thus, the scores can be used to buttress valuations associated with high earnings while maintaining the pretense that the score is strictly about social virtue.

Conclusion

I’d be the first to defend the right of consumers to deploy their savings to political, social, or economic purposes of their choosing. However, they should do so with their eyes wide open. It would be of great benefit if the ESG community would agree to a set of measurement standards. When seeking advice from an advisor or in reading analyst reports, investors should have confidence that the information comes from sources who respect the duties of a fiduciary. In the case of ESG funds or in selecting stocks based on ESGs, investors should be aware that their pecuniary interests might be compromised.

Furthermore, analysts and firms who are in the business of selling ESG ratings should be wholly independent of proxy advisors, investment advisors, and ESG funds to avoid conflicts of interest. Unfortunately, these simple, common-sense guidelines have been neglected. As a result, I support the thrust of Trump’s EO on ESGs to reinforce the fiduciary duties of investment and proxy advisors. It would be even better if Congress could meet this challenge via legislation.