McPherrin: Social Responsibility, ESG Scores, and China’s Social Credit System – A Carousel of Authoritarian Control

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Corporate Social Responsibility, ESG Scores, and China’s latest foray into totalitarianism via its  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 financial elites operating from an ostensibly 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 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.”

These three systems are thematically unified around their intentional degradation of individual freedom and choice in service of centralized power.

Corporate Social Responsibility

Milton Friedman was one of the earliest and most vocal critics of businesses embodying a “social conscience.” He famously articulated that businessmen using 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.

Environmental, Social, and Governance Scores

Rupert Darwall of RealClearFoundation critically examined ESG via a report published in May of 2021, finding that the system’s sponsors 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 substantiate their stranglehold upon 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 shift 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 units of measurement 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, providing examples of what previous incarnations of ESG-sensitive 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 – such as China.

China’s Social Credit System

The Chinese Communist Party — already hell-bent on totalitarian control of its 1.4 billion citizens — has only doubled down on state-sponsored repression under the tenure of its latest Paramount Leader, Xi Jinping. To further their goal of complete social management — a core principle of socialist ideology — Xi and the CCP recently established a Social Credit System targeting companies and individuals alike.

Xi’s overarching vision for his society — using his own words from 2017 — is one in which “The trustworthy shall roam everywhere under heaven, while those who breach trust shall not be able to move a single step.”

While scoring (semi) private companies based upon their adherence to CCP principles is already concerning, it is the transposition of this system onto individuals that is more worrisome. An individual’s social credit score is based upon their financial credit — as determined by the CCP-controlled credit bureaus — combined with their level of “Chengxin” — loosely translated as “Morality” or “Integrity.”

Xi and his cabal have used their already gargantuan surveillance network and intelligence gathering capacity to create a comprehensive depository of centralized data – which is then parsed by the CCP to arbitrarily rank individuals based on their compliance with CCP principles.

The principle mechanisms by which the system forces behavioral compliance are country-wide blacklists, and a sprawling punishment and rewards system. Activities that are deemed to be “trust-breaking” can include publicly challenging the CCP, bad driving, smoking, buying or playing too many video games, and frequency of social media use, among countless others behaviors.

Punishments for these behaviors can include anything from travel bans, school expulsion, cessation of employment, paralyzing business audits, and public shaming, among other restrictions.

The most severe “crimes” are, of course, dealt with outside of the SCS, and will typically be met with swift imprisonment or execution at the hands of China’s brutal security forces.

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.

ESG scores threaten the same. The growing power of Wall Street’s “stakeholder capitalism” has given corporate CEO’s a degree of influence equivalent to what is enjoyed by Communist Party ideologues in China. Both systems are managed by elites at the top of the food chain subjectively determining what is “best” for society; elites elected by no one, and restricted by zero checks and balances.

As of now, ESG scores chiefly envelop metrics surrounding climate change, and diversity in the workplace. But, is it so farfetched to envision a scenario in which those values shift, corresponding to the changing goals and normative orientations of ESG’s creators? What if Blackrock CEO Larry Fink and his various peers decide that they would like to include metrics surrounding gun ownership, abortion rights, or free speech?

Though it is too late for the Chinese, those of us comfortably ensconced within the American democratic tradition should take heed of the CCP’s methods. America’s ever expanding domestic surveillance capabilities, the relentless degradation of our individual freedom and privacy via pandemic-related governmental edicts, and our nation’s intensifying cultural civil war have each created a fertile ground for a normatively motivated authoritarian takeover.

ESG scores represent the tip of the spear.


[Adapted from a piece first published at American Thinker].

Photo: Hand holding burning the American flag – a symbol of mass protests in the USA. Photo by: Marco Verch Professional Photographer, Attribution 2.0 Generic (CC BY 2.0).

Research Editor, Research Fellow at The Heartland Institute

Jack McPherrin is the managing editor of 1818 Magazine. Jack works as the research editor for the Editorial Department of The Heartland Institute, where he also contributes to the mission of the Socialism Research Center as a research fellow. He is in the final stages of completing his Master’s Degree in International Affairs from Loyola University-Chicago, where his myriad research interests primarily encompass domestic and international economic policy, global institutions, authoritarian regimes, and foreign affairs - with a particular emphasis upon Russia and China. Prior to his graduate pursuits, Jack spent six years in the private sector after graduating from Boston College with a dual Bachelor's Degree in Economics and History. He currently resides in the Lincoln Park neighborhood of Chicago, a few short miles from where he was raised.

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