‘Social Responsibility,’ ESG Scores, and China’s Social Credit System

Corporate Social Responsibility, ESG Scores, and China’s latest foray into totalitarianism via its recently introduced Social Credit System share significant commonality. Each system engenders the same erosion of individual liberty via the propagation of a singular “morality” unilaterally determined by an authoritarian overseer. That the governance structure surrounding the former is made up of economic elites operating from a relatively free society, while the latter is made up of high-ranking governmental officials in a significantly less free society, is immaterial.

Corporate Social Responsibility (CSR) is defined by Investopedia as “a self-regulating business model that helps a company be socially accountable -- to itself, its stakeholders, and the public… to engage in CSR means that, in the ordinary course of business, a company is operating in ways that enhance society and the environment.”

Environmental, Social, and Governance Scores (ESG) are defined as “a set of standards for a company’s operations that socially conscious investors use to screen potential investments.” ESG scores are most commonly used to assess investment risk; a high ESG score is theoretically supposed to indicate a low risk level. However, the score consists of a set of metrics that are highly subjective, and arbitrarily determined by a small group of elites rather than any sort of democratic process.

China’s Social Credit System (SCS) is described as an “important component part of the Socialist market economy system and the social governance system” that hinges upon “establishing the idea of a sincerity culture, and carrying forward sincerity and traditional values” by utilizing “encouragement to keep trust and constraints against breaking trust as incentive mechanisms.” Its ultimate goal is “raising the honest mentality and credit levels of the entire society.”

Milton Friedman was one of the earliest and most vocal critics of businesses embodying a “social conscience.” He famously articulated that businessmen who use company funds to take on social responsibilities such as eliminating discrimination or avoiding pollution are “preaching pure and unadulterated socialism.”

Friedman contends that a corporate executive has one singular responsibility: to be the agent of the company shareholder, whose business interest is to maximize the value of his or her investment.  Any social endeavor by a corporate manager is a tax levied against the shareholders, which decreases their profit margins, and therefore runs contrary to shareholders’ ultimate objectives. If executives (or shareholders) desire to contribute to social objectives that correspond to their individual values, they have the power to do so as private citizens.

Furthermore, it is economically inefficient and socially unproductive for companies to act on social reform.

Economist  Dr. Bill Conerly explains, “The essential task of a company is to convert low-value resources into higher-valued goods and services… after some production activity, the final product has a higher value -- as determined by purchaser’s willingness to pay -- than the resources used -- as valued by the seller’s willingness to accept payment.”

Conerly quotes Sam Walton, the founder of Walmart, “We save people money so they can live better.” This is crucial: the free market creates societal wealth that individuals are able to capitalize upon to improve their lives in whatever manner the individual chooses.

Friedman believed the result of the mass implementation of corporate social responsibility would shift society from being “a collection of individuals and the various groups they voluntarily form” to one in which “the individual must serve more general social interest -- whether that be determined by church or a dictator or a majority.”

This eventuality has already permeated much of the globe via the advent of ESG scores, which have essentially institutionalized Corporate Social Responsibility.

Rupert Darwall of RealClearFoundation published a report in May of 2021 that critically examines ESG. Proponents of ESG often use the already dubious claim that ESG enhances a company’s value as a smokescreen to push political objectives. These objectives are often determined by a “shadow government,” heavily comprised of Wall Street titans whose subjective values and associated decisions cascade to the rest of society.

These Wall Street CEOs have continued to gain power over creating ESG metrics in recent years; one of the more drastic evolutions in the realm of corporate governance has been a shift in power from the shareholder to the “stakeholder.” This was made “official” via a 2019 meeting of the Business Roundtable, in which more than 180 CEOs signed a corporate purpose statement, which directly states, “Companies should serve not only their shareholders, but also deliver value to their customers, invest in employees, deal fairly with suppliers, and support the communities in which they operate.”

In 2020, 120 of the world’s largest corporations congregated in Davos at the Annual Meeting of the World Economic Forum to define stakeholder metrics, or ESG scores.

Their report provides a detailed summary of these metrics, which include everything from objective metrics such as “Total R&D Expenses” to subjective metrics such as “Employee Well-Being” and “Grievance Impact.”

How can a company’s performance be based on subjective metrics?

How can subjective and objective metrics, with completely different basis points and methods of calculation, be combined into an accurate representation of a company’s financial welfare?

Hint: they can’t.

The Competitive Enterprise Institute’s Richard Morrison underscores another issue with CSR and ESG by providing examples of what previous incarnations of ESG focused companies might have looked like:

“A company officially considered ‘socially responsible’ in South Carolina in 1850 would likely have been strictly compliant with the Fugitive Slave Act. In 1917, a printing company that turned anarchist manuscripts over to officials enforcing the Espionage Act might have been given an award by President Woodrow Wilson’s administration. The bus company that drove Japanese-Americans to internment camps pursuant to President Franklin Roosevelt’s executive order 9066 may well have been commended for its contribution to fighting World War II.”

Morrison concludes that a free market is more efficient in setting societal values via the intersection of supply and demand forces.

This arbitrary “value-setting” by a small group of elites is eerily similar to the forced ideological cohesion espoused by single-party governments in socialist and communist states.

Nowhere is this more apparent than China, where President Xi Jinping and the CCP have doubled down on totalitarian control via the Social Credit System.

Social Credit scores are based upon an individual’s financial credit score combined with the level of “Chengxin,” loosely translated as “Morality” or “Integrity.” The mechanisms that determine the scores are data gathering, blacklists based on the gathered data, and sanctions or rewards based upon one’s actions as determined by the CCP. For example, infractions such as bad driving, smoking, buying or playing too many video games, or social media posts will result in one’s score being downgraded.

What are the consequences of a poor score? Travel bans, school bans, reduced employment, business audits, and public shaming, among countless other consequences.

When former vice president Mike Pence described this as Orwellian, he was not wrong.

This system is destroying any semblance of personal autonomy the Chinese people still had available to them -- which was not much to begin with -- and ESG scores operate in a similar way.

Both systems are made up of a combination of objective and subjective metrics used to influence human behavior in a way determined by an authoritarian body. While the overarching authority is governmental for the Chinese and corporate for the West, the end result is thematically analogous: the gradual deterioration of individual rights based on an authority’s subjective determination of what is “best” for society.

I am reminded of a quote by C.S. Lewis:

“Of all the tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive.  It may be better to live under robber barons than under the omnipotent moral busybodies.  The robber baron’s cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end, for they do so with the approval of their own conscience.”

No one is claiming that our individual rights in America are under siege to the same degree as what is occurring in China, in which citizens can be imprisoned and executed without cause.

Yet the thematic equivalency, and the precedent that ESG scores set for further violations of our individual sovereignty, are a significant reason for concern.

Jack McPherrin is an editorial intern at The Heartland Institute.

Image: Sino-Germen Urbanisation Partnership

To comment, you can find the MeWe post for this article here.