The past decade witnessed a significant spike in virtue-based investments. However, current indicators suggest that this trend is nearing its downfall. In the coming 5 to 10 years, these asset classes are likely to become deeply polarizing and mired in controversy, deterring investors. Likewise, companies that tout ‘value-based’ consumerization will face growth challenges, as consumer interest in such ‘values’ tends to wane over the long term.
A decade ago, the concept of social entrepreneurship gained traction, driven by well-meaning individuals. The early perception was that the company would be a mix of a non profit organization idealism and a for profit value generation. However, as years passed, specific asset classes began to form, gradually morphing into movements akin to liberal activism. A parallel example would be the emergence of communism: some very good people with great intentions saw how the system was not working for the poorest people. They started to advocate for labor, wages and living conditions. Unfortunately, those noble endeavors soon attracted more radical elements. Not long after their inception, these social movements found themselves swayed by increasingly radical ideologies. The original, well-intentioned concepts were gradually usurped by opportunists who steered these ideas towards the creation of socialist and communist doctrines. This shift eventually led to the emergence of militant groups, intent on overthrowing the established societal, systemic, and governmental structures.
With the noble idea of doing something good, many entreprenuers created companies for environmental cleanliness, a universally appreciated aim. People naturally support initiatives for clean streets and water. However, the focus shifted towards ambitious goals like reducing global temperatures. Many founders and investors began exploring ventures beneficial to society, such as FinTech firms aiding the unbanked or providing loans to early-stage entrepreneurs who traditionally lacked access to financing. This progressive approach eventually evolved into a focus on Diversity, Equity, and Inclusion (DEI). Similarly, some entrepreneurs and investors prioritized strong corporate governance, emphasizing shareholder interests, employee welfare, and the creation of in-demand products and services. Over time, however, this objective morphed into enforcing strict adherence to specific ideological principles.
Since 2016-17, the concepts of ESG and DEI have been predominantly shaped and defined by liberal political parties in many Western countries. This dominance over the definitions meant that any deviation or questioning of these concepts often led to labels such as ‘right-wing’, ‘climate deniers’, or ‘racists’. Some startups introduced the idea of value-based investing, with the most unusual being an ‘Anti-Trump’ investing theme app. It was peculiar to see an investment app creating an asset class specifically against a person. (In a few years, they were gone).
Diversity is great for business because in general, it adds value. For example, when Microsoft was looking for growth in India they hired an Indian man who was born and raised in India with experience and education both in India and the United States. IBM, Google, Twitter followed a similar approach. However, if the definition is owned by one ideologist group, it is no longer diverse. Imagine forced DEI in each of these companies. Since Indians are not minorities in the tech industry, who fits the narrow lens of DEI leadership? Joe Biden promised only a Black Woman for VP and Supreme Court. Although both of them may be highly qualified, Biden’s specific criteria led to perceptions that the selections were based solely on race and gender and they may not be the most qualified people for the job. Contrast this with Barack Obama’s election. Fed up with the ongoing unnecessary foreign wars by George Bush, people from various races and religions eagerly supported Barack Obama. Their support was not simply because he was black, but because he presented a new and hopeful vision for America. Obama wasn’t selected because he was black; he triumphed over well-funded and prominent competitors in the primaries, including Hillary Clinton, and defeated the unpopular, war-favoring Republican candidate, John McCain, in the general election. This broad-based appeal stood in stark contrast to the approach later observed in universities and corporations, which seemed more aligned with the trends established during Joe Biden’s presidency. This perspective has resulted in a widespread misconception that individuals from minority groups are only in their positions due to DEI initiatives or Affirmative Action, rather than their own merit. This belief unfairly subjects these individuals to the constant challenge of disproving the assumption that their achievements are solely a result of DEI policies, rather than their own skills and qualifications.
In the summer of 2020, the societal unrest led to increased investment in and hiring of underserved minorities, a well-intentioned move that unfortunately soon became entangled in divisiveness and conflict. Firms that had enthusiastically recruited for DEI and ESG positions found themselves forced to downsize these roles when faced with adverse financial market conditions in 2022. Numerous comments on LinkedIn indicated a shift in corporate perception; individuals with DEI roles on their resumes were increasingly viewed as less employable, as corporations began to regard them more as “police” rather than “value creators”.
After the Israel-Gaza conflict on October 7th, 2023, the animosity that had been simmering on American campuses, partly incited by the DEI movement, became more evident. In a surprising move, Bill Ackman publicly questioned the DEI’s effectiveness. At the time of this writing, the presidents of Harvard and the University of Pennsylvania have resigned, perhaps reflecting a broader reassessment of DEI initiatives. Ackman’s surprising stance against DEI follows Elon Musk’s surprising open criticism of suppressed speech last year, which led him to acquire Twitter. In a recent interview, Musk proudly stated that he has contributed more to environmental sustainability than anyone else on Earth. Yet, his company, Tesla, was excluded from the White House’s climate event, which is not surprising given that he no longer aligns with the political party that defines the standards of ESG.
On the right side of the political spectrum, many entrepreneurs have founded companies on the flawed theory that consumers will continue to boycott companies that are against conservative values. ‘Bud Light’ became a buzzword in this context, only to see the brand’s popularity return to its previous levels in the following months. Same with Nike or any company you name it. The enthusiasm is short-lived. They will soon need to learn that consumers prefer great products at competitive prices. We live in an era characterized by on-demand, fast, and affordably priced products. They could learn from Temu and Shein as examples both of which have full potential to put every fast fashion brand and retailer like Amazon out of business. Or from TikTok which if allowed to compete freely may pose an existential threat to many social media platforms. How are they doing it? Through efficient supply chains, affordable pricing, superior technology, and a strong focus on customers.
Initially rooted in noble intentions and inclusive ideals, DEI and ESG have increasingly become entangled in divisive ideologies and political alignments. This shift has led to a significant divide, with movements and investment strategies being co-opted by different ideological factions. Consequently, the once broad appeal of these concepts is being overshadowed by a narrow focus on specific ideologies, leading to polarization and a decline in public and investor interest. It underscores the importance of maintaining a balanced approach in business and social entrepreneurship. As we look ahead, the sustainability of these movements hinges on their ability to adapt and remain relevant. The decline in support for these movements signals a turning point, suggesting that a reevaluation of these strategies is imminent.
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