A Rothschild who crusaded for kinder capitalism adjusts to the Trump era

Lynn Forester de Rothschild is a friend of Hillary Clinton who raised funds for her White House campaign, and roped in Britain’s now-King Charles III and the pope to try to reform capitalism a decade ago.

Lady de Rothschild, as the American-British businesswoman is known in the U.K., thinks companies ought to treat their workers and customers well, because it is good for business.

But the New Jersey native, who got rich investing in telecoms and whose third marriage brought her into the Rothschild clan, said that this “kind of obvious" point “slid down a slippery slope into an alphabet soup. I regret the slippery slope and I believe we don’t need to worry about DEI or ESG by name."

Sitting on a bar stool in Davos, where the world’s elites were gathered to talk, party and make deals, she said that ESG (environmental, social and governance-focused) investing to push companies to treat the environment and workers better is no longer the right approach. The new hope: Trump could support the working class by increasing the minimum wage and opportunities.

This is a big change. Back in 2015 she gathered together investors and CEOs overseeing $25 trillion in assets, plus former President Bill Clinton, and pushed companies to adopt ESG.

“If all those attending the conference moved beyond a focus on quarterly results and instead integrated environmental, social and governance (ESG) metrics into their investment decisions, they could both do well and do good," she wrote in an opinion article for The Wall Street Journal.

ESG took off in boardrooms, where Rothschild is a director of Estée Lauder and previously of Gulfstream Aerospace, before it was bought by General Dynamics, among others. It also took off among investors who hoped to salve their consciences while making money, though her efforts to attract funds by co-founding Inclusive Capital Partners with activist Jeff Ubben didn’t work out. Finance academics joined in.

Those who resisted the rush were sidelined, abused or ignored, while fund managers rushed to launch high-fee products to take advantage and a dedicated consulting industry developed.

The turn against ESG is a fascinating case study in how investment fads get going, and how they die. In this sense Trump is pushing at an open door. ESG and DEI, or diversity, equity and inclusion initiatives, peaked in 2021 when the postpandemic bubble in “green" stocks burst.

Until then academics had found papers showing a link between investment returns and ESG, or parts of ESG, were easy to get published. Anti-ESG papers rarely appeared in print.

As Alex Edmans, professor of finance at London Business School, points out in his book “May Contain Lies," there was confirmation bias: People wanted to believe that doing the right thing would be profitable, and overlooked flaws in the papers. Those who highlighted the problems struggled to get anyone to listen.

Fund managers and consultants used these studies, and their own, often deeply flawed, research to push high-cost funds to a public that also wanted to believe there was no trade-off between making money and doing good.

I think the ESG backlash naturally follows the bursting of the bubble, but it is also true that the right realized they could use the same tactics as the left to push companies to act the way they wanted.

“The left/NGO community figured out that the shareholder process is the place to put pressure on," said one big bank chief executive. “Now the right’s figured it out too."

One measure of how things are changing is an informal survey by Wei Jiang, finance professor at Emory University, of ESG-related academic papers in the top five finance journals. She found that until 2021 all the published papers were either positive or neutral about the effect on investors of ESG initiatives by companies. In 2021, negative papers started to be published, and now most papers find there is a trade-off between companies doing good things and investors making money (well, duh).

A sign of that change can be seen in the re-evaluation of a 2016 paper by Aaron Yoon, an associate accounting professor at Northwestern, George Serafeim, a professor at Harvard Business School, and Mozaffar Khan, now a fund manager at Causeway Capital Management. It has been hailed as one of the founding papers of academic ESG, claiming to show that companies made more money if they applied ESG issues in areas financially material to them. Now it is under assault.

A paper last year by Byung Hyun Ahn and Panos Patatoukas at the University of California, Berkeley, and George Skiadopoulos at Queen Mary, University of London, retested and found that if anything it was the other way round: Profitable growth companies also happen to score well on ESG. Standard financial measures used by investors predict the performance, so what does ESG add? Luca Berchicci of Erasmus University Rotterdam and Boston University’s Andrew King found the results didn’t repeat when assumptions by Yoon, Serafeim and Khan were varied slightly.

I have long been skeptical of ESG’s claims, not least because ESG scores are so subjective. All the air has gone out of the ESG bubble, with green stocks that led the market in 2021 back below their prepandemic levels.

But the anti-ESG crowd should be careful about pushing back too hard. Just because ESG doesn’t increase value, it doesn’t mean that doing the opposite—perhaps following Meta CEO Mark Zuckerberg’s call for more “masculine energy" in the workplace—will boost profits or stock prices.

As Rothschild puts it, “We have to go back to common sense: What are those factors that make businesses better?" Investors should apply this basic skepticism to all new ideas in investment, not only ESG.

Write to James Mackintosh at james.mackintosh@wsj.com.