Private Prisons Are a Socially Responsible Investment, According to Bizarre Wall Street Measures

CoreCivic, the first publicly traded prison company in America and the first to operate both private prisons and private immigration detention centers on a for-profit basis, had another first to announce. Damon T. Hininger, the chief executive, paused to share the news on a call with investors last month: CoreCivic Inc. was the first company after the George Floyd protests to proactively conduct a “racial equity audit,” the results of which it was now ready to release.

“CoreCivic is one of the very few companies in the United States that has proactively embraced the process,” Hininger gloated.

The private prison corporation’s stock price and access to bond markets had been battered by pressure over its role in profiting from immigrant detention and for providing financial support to Donald Trump’s presidency. The company is currently facing a class-action lawsuit brought by immigration detainees claiming that they were forced to work with little or no pay. The racial equity audit was a conscious effort by CoreCivic not only to mend its poor public image, but also to harness public interest in racial justice to bring the company back into the good graces of Wall Street investors.

The contents of CoreCivic’s audit pointed to mostly superficial contributions to diversity and equity. The report, conducted by Moore & Van Allen, a North Carolina-based law firm, offered some room for improvement but largely applauded the private prison giant for its “genuine” commitment to diversity principles, including by raising cultural awareness with a mural of Martin Luther King Jr. at one of its Immigration and Customs Enforcement detention centers in Arizona. The report also praised CoreCivic for its philanthropy and business practices that have “benefitted communities of color.”

In an accompanying report on the company’s diversity, equity, and inclusion — known as DEI — CoreCivic touted its ranks of nonwhite prison guards, diversity on its board of directors, and diverse ranks of wardens, as well as its partnership with a Black-led, pro-business trade group.

Those supposed strides elicited eye rolls among its critics. “They put children’s murals on the wall while incarcerating infants. That doesn’t mean they have positive impacts for children,” said Bob Libal, a longtime watchdog of the private prison industry, referencing the company’s Taylor, Texas-based ICE detention center.

“This is hollow at best, and probably a deeply cynical attempt to whitewash a company that has a horrible reputation, a horrible track record of abuse and neglect of people who’ve been sentenced in their facilities,” added Libal. The company has faced multiple allegations of severe understaffing and safety issues, as well as unsanitary conditions in many facilities.

“The reality is, CoreCivic’s entire existence is offensive to Black and brown communities. They’re trying to create some version, right, some image that they aren’t one thousand percent harmful,” said Bianca Tylek, the founder of Worth Rises, an advocacy group that focuses on the privatization of the criminal justice system.

“The audit tells us nothing,” said Tylek. “The private prison business model is the problem. Everything they do is the problem, and to be honest, sometimes we’re at odds with other advocates because these racial equity audits are absolutely ridiculous and not an effective advocacy tool.”

Asked for comment about activist concerns, CoreCivic reiterated its support for the “principles of diversity, equity and inclusion.” The company, said spokesperson Ryan Gustin, “didn’t hesitate to participate in the recent racial equity audit.”

But Tylek, Libal, and members of the activist community are not the intended audience for the report; the racial equity audit and similar measures are part of an opaque and virtually unregulated rubric that sets the flow of massive piles of investor dollars. CoreCivic’s gestures are meant to shape its standing in “environmental, social, and governance,” or ESG, funds, a catchall term for a system that allows investors to put their money into companies that score as socially responsible by various metrics.

Compliance can be lucrative. For instance, among the many ESG ratings agencies, a company with nonwhite or female board members or a decision to simply conduct a racial equity audit or DEI report can automatically lead to a higher score, and corporations with high ESG rankings find placement in special exchange-traded funds, or ETFs, that are marketed as socially responsible, opening the door for investor cash.

Over $35 trillion in global assets are invested in funds that claim to vet companies using ESG principles, making the label one of the hottest trends in finance. Following the racial justice protests of 2020, a coalition of institutional funds, which now includes the California State Teachers’ Retirement System, a pension fund with over $250 billion in assets, launched proxy campaigns to pressure publicly traded companies to undergo racial equity audits and to prioritize racial diversity issues.

Proponents of the approach claim that the market sprouting up around ESG principles provides a window, guiding investors into safer, less controversial companies while creating a market incentive for good corporate behavior, whether on racial justice, the climate crisis, or any number of issues.

Larry Fink, the chief executive of BlackRock Inc. and one of the most powerful ESG-focused asset managers in the world, has described the move toward socially responsible investing as a “tectonic shift” that stands to reshape capitalism as we know it. In his letter to investors this year, Fink made clear that racially diverse boards and racial diversity would be a focus of his company.

BlackRock is among the many corporations that sponsor television advertisements — the latest featuring NBA star Jalen Duren — touting their socially responsible or sustainable investment funds, luring ordinary retail investors.

But a growing chorus of critics have questioned the lofty promises of ESG investing. The high-minded rhetoric of the movement, they argue, serves to enrich a small set of ESG-focused consultants and fund managers while misleading the public and investor community and providing little to no benefit to society. They charge that the investing trend is no more than reputation laundering and, potentially, fraud on an industrial scale.

“People who are buying these funds almost always believe that they’re doing something to make the world a better place, and in reality, they’re just moving shares around in publicly traded companies,” said Tariq Fancy, the former head of social responsibility investing at BlackRock, who has emerged in recent years as a critic of ESG.

“It’s actually dangerous because they imply real-world impact, creating a societal placebo,” continued Fancy. “It actually lowers the case for government regulation. If you think you can do something quick and easy like ESG, then it follows to say, ‘We don’t need a carbon tax.’”

Fancy also finds the righteous rhetoric of his former employer hypocritical. BlackRock will make a fortune in fees promoting an ESG model entirely based on voluntary self-reporting requirements and opaque scores, said Fancy, while using its power as a shareholder to block proposals that call on companies to disclose political spending — the very political spending that corporations use to prevent any meaningful laws and government regulations on social welfare spending or pollution.

“It’s like they’re giving us talking points on good sportsmanship, meanwhile, they’re saying it’s all right for teams to secretly pay off the referees.”

In an email, BlackRock spokesperson Matt Kobussen noted that the company provides multiple ESG index products, some of which include CoreCivic, and others that do not. The ETF that includes private prisons is based on ESG criteria provided by the index provider S&P, while another, the MSCI Small Cap ESG Aware, uses an index provided by MSCI, “does not have exposure to CoreCivic or GEO Group,” which is another main prison company.

Despite the rhetoric, the portfolio managers preaching the gospel of ESG are in fact legally prohibited from doing anything that compromises corporate profits. The types of changes they promote are superficial at best, critics charge.

What’s more, regulators have taken notice that fund managers have marketed ESG investing with little due diligence in regard to how companies are changing any actual business practices or whether companies included in the funds meet the stated criteria. In May, around 50 German police officers raided the Frankfurt offices of DWS Group, the asset manager subsidiary of Deutsche Bank. The investigation stems from allegations by a former DWS Group executive that the company had made misleading statements about how ESG assets were allocated.

And this year, the Bank of New York Mellon Corp.’s asset manager paid $1.5 million to settle claims by the Securities and Exchange Commission over “misstatements and omissions about ESG considerations.” The bank, as part of the settlement, did not admit any guilt.

Earlier this month, word leaked that the SEC is currently investigating Goldman Sachs Group Inc. over similar claims about its ESG mutual fund business. In June 2020, Goldman Sachs renamed its blue-chip fund as the U.S. Equity ESG Fund, while maintaining the same top holdings.

Last month, the SEC began collecting comments for new regulations aimed at boosting transparency and accountability around ESG funds.

Measures of Goodness

At the core of the criticisms is the fact that there is no set definition for how ESG rankings are devised. Competing ratings agencies and financial analysts offer a tangled web of various scores, with no consistency from firm to firm.

Charles Schwab Corp.’s asset management arm, for example, last year launched Schwab Ariel ESG ETF, an ESG fund that excludes tobacco products, the extraction of fossil fuels, weapons manufacturers, and operators of private prisons such as CoreCivic.

Other asset managers, however, sell ESG funds that do include private prisons. BlackRock’s iShares ESG Screened S&P Small-Cap ETF, one of its social responsibility funds, includes CoreCivic. Investors purchasing shares in DWS Group’s Xtrackers S&P SmallCap 600 ESG are also buying a slice of CoreCivic.

State Street Corp., an asset manager that is one of the loudest and most prominent proponents of ESG, markets a social responsibility fund, SPDR S&P SmallCap 600 ESG ETF, that owns shares in CoreCivic as well as the second-largest private prison company in the U.S., GEO Group Inc.

State Street spokesperson Deborah Heindel said in an email that ESG can be very broad or specific depending on who’s defining the term. “Case in point, a Google search pulls several million results from countless sources,” she said.

Ratings agencies can change ESG formulas on a dime, with little public notice. Fund managers are free to choose any ratings agency with any formula, often with most sources of information completely self-reported by corporations.

CoreCivic, in its own ESG report, touts a 2021 award issued by Newsweek/Statista claiming that it is one of America’s most responsible companies. The Newsweek/Statista ESG rankings give CoreCivic a high social rating in part based on the prison company’s commitment to “good causes” and the number of women and racial minorities on its board of directors.

The criteria for what constitutes a socially responsible investment can change from day to day. In March, analysts from Citigroup Inc. suggested that companies that manufacture weapons used for the war in Ukraine to thwart the Russian invasion could count toward a better ESG score. “Defending the values of liberal democracies and creating a deterrent, which preserves peace and global stability,” they wrote.

Before this year, many ESG funds promoted the exclusion of certain arms manufacturers, arguing that the global sale of bombs and missiles did not constitute a social good — now there’s a push to reward arms makers. If a shift in public opinion can reshape the entire model, that leaves many to wonder how any fund can claim fixed principles when ideas around social responsibility are inherently subjective.

“It’s a scam, that’s all it is, a scam,” said Aswath Damodaran, a professor of finance at New York University’s Stern School of Business, of ESG. “How can you have a measure of goodness? Or let me put it another way: Name me one social factor where we have consensus in society. How the heck are we going to come up with one score?”

The CoreCivic board of directors, its ESG report proudly notes, is 36 percent “gender or racially diverse,” a figure that the company notes won recognition from a women’s advocacy group. The private prison company’s board includes Donna Alvarado, a former Reagan administration official, and Thurgood Marshall Jr., the son of the former Supreme Court justice.

“For-profit incarceration is the antithesis of social responsibility,” said Libal. “They’ve made profits on the back of incarceration at record numbers while contributing millions of dollars in campaign contributions to ensure their interests are met.”

“If your board is diverse, it doesn’t matter what you’re selling, right?” he added. “If you have enough women on the board of Blackwater, that doesn’t make mercenary companies a positive influence on the world.”

“Greenwashing Is a Feature, Not a Bug”

Fulfilling diversity goals is a highly visible way to offset lower scores in other areas. Defense contractors, fossil fuel companies, banks, and pharmaceutical giants that annually hike the prices of lifesaving drugs have all used diversity metrics to earn placement as socially responsible companies, eligible for placement in lucrative ESG funds. And according to a review by The Intercept, several of the corporations commonly included in ESGs have recently been under investigation or scrutiny, engaging in business practices that few would call socially responsible.

Eli Lilly and Co., the pharmaceutical company, is facing multiple regulatory and legal battles over its practice of hiking the price of insulin. The company raised the price of its Humalog line of insulin products by 1,219 percent since it launched. The high prevalence of diabetes among nonwhite Americans has placed the rising costs of insulin disproportionately on members of racial minority groups, a dynamic that some public health researchers argue amounts to a form of structural racism.

But the disparate impact of drug pricing dynamics are not measured by ESG scores. Instead, the Eli Lilly report notes that the company promotes diversity through a variety of measures, such as DEI training and employee resource groups that sponsor events such as the Lunar New Year Gala.

Those efforts are among the qualifications used to include Eli Lilly prominently in multiple ESG exchange-traded funds. Eli Lilly is the second-largest holding of a BlackRock fund marketed as focused on promoting companies that excel in the fields of diversity and inclusion.

Just Capital, a not-for-profit group that provides ESG rankings, scores Amazon as an industry leader and a three-time winner of its America’s Most Just Companies award. Despite an aggressive anti-union campaign against its warehouse workers in Alabama and New York that has garnered international condemnation and wide-ranging complaints about working conditions, the Seattle-based company scores relatively highly in the category of labor practices. One reason is Amazon’s “diversity, equity, and inclusion” policies and the total number of jobs the company has created — two areas in which Just Capital ranks Amazon as the best company in America.

“I think it’s smoke and mirrors. From a social, from a labor perspective, it’s not a good company. That’s like rating the Triangle Shirtwaist Co. a model employer in New York,” said Seth Goldstein, an attorney for the Amazon Labor Union, which represents warehouse workers who won an upset victory to form the company’s first labor union.

Just Capital — whose board includes HuffPost founder Arianna Huffington and Marc Morial, the president of the National Urban League — partners with Goldman Sachs to promote a special ESG fund that utilizes the organization’s social responsibility analytics. The third-largest holding for the fund is Amazon.

In response to an inquiry from The Intercept, Just Capital said that Amazon was scored on a number of factors. “We find that, like many other companies, Amazon is both a leader and a laggard relative to its peers across all of the individual stakeholder categories that we measure, from communities to environment to workers,” wrote Martin Whittaker, chief executive of Just Capital, in a statement to The Intercept.

PepsiCo Inc. and Coca-Cola Co., for instance, routinely score well on ESG rankings through relatively low greenhouse gas emissions, while delivering a core product that is fueling a crisis of diabetes, obesity, and heart disease, noted Hans Taparia, an associate professor also at NYU’s Stern School of Business, in an article for the Stanford Social Innovation Review. Alphabet, Amazon, and Facebook are also among the largest holdings of ESG funds but engage in a variety of monopoly, surveillance advertising practices and provide a core product that has fueled mental health issues among users. They all tout DEI and diversity-related measures in the glossy ESG reports that are submitted to fund managers.

“If a company’s core business model does so much harm,” wrote Taparia, “the cover-up through ‘good behavior’ on other parameters shouldn’t be so easy.”

Exxon Mobil Corp., one of the largest oil and gas companies in the world, has been cited as a prime example of an ESG victory, after the company added board members viewed as more favorable to action on climate change last year in response to pressure from activist investors and ESG-minded asset managers.

But there is still little evidence that ExxonMobil has changed any core fossil fuel-related business practices. The oil giant has massively increased spending on green-related marketing, and the word “climate” now appears all over its corporate reports. The company has sold off some assets that will be developed by other companies.

Damodaran and his NYU colleagues have chronicled many of the inconsistencies and the subjective nature of ESG rankings. As oil majors sell off carbon-intensive oil and gas assets in order to comply with ESG fund objectives, Damodaran noted, the same assets are being purchased by private equity firms that are far less accountable, a shift in hands that he argues nullifies any greenhouse gas benefit from the campaign.

“So basically, here’s what you accomplished,” said Damodaran. “You took the reserves out of a company where you had a semblance of prudent strategy in process and put it in the hands of the least scrupulous people on the face of the Earth. And if you declared this to be a victory, I’d hate to see what your defeat looks like.”

The calls for decarbonization, once central in the ESG movement, can also be offset by racial metrics. ESG rankings maintained by the S&P 500 now include ExxonMobil but exclude electric car marker Tesla Inc. One of the reasons? Racial discrimination charges lodged against Tesla, a dynamic bitterly highlighted by Tesla chief executive Elon Musk on Twitter. Many of the charges, including a class-action lawsuit, are still making their way through court.

Researchers have also found that companies selectively omit certain suppliers and business practices in order to artificially report low carbon emissions and thereby gain higher ESG scores.

One of the most revealing reports came from Bloomberg News, which found that one of the largest ESG ranking companies, MSCI Inc., which BlackRock uses to market “sustainable” stocks and bonds, provided year-to-year upgraded rankings to companies that increased levels of carbon emissions.

In the case of McDonald’s Corp., MSCI provided an upgraded ESG ranking despite the fact that the company produced an increase of 7 percent in global emissions over four years. The ratings agency made the determination because the climate crisis did not pose a special risk or “opportunity” for the company.

The MSCI rankings for climate change score corporations over the possibility of climate regulations and whether restrictions on carbon emissions could harm future profits. In other words, when anti-regulation Republicans take office, the environmental scores of fossil fuel companies improve.

When MSCI gave positive “water stress” scores, the rating had no bearing on pollution or discharges into local water systems. Rather, the scores were awarded based on whether chemical companies had enough water to sustain their factories — an inversion of the very idea of environmentalism that reporters labeled as blatant doublespeak.

“This is exactly what gamification looks like: You create the rules of the game, I’ll find a way to play it,” said Damodaran. “A lot of ESG advocates say ESG would work except for the greenwashing. And my response is, greenwashing is a feature, not a bug. It’s exactly what you get when you create something like ESG.”

High-Minded Rhetoric, Even Higher Fees

Three weeks after the George Floyd protests began in 2020, Marvin Owens, then the senior director for economic programs at the NAACP, appeared on CNBC to tout an ESG-style fund on diversity branded with the NAACP.

“The problem that has existed for ESG is that the ‘S’ has been very difficult to define, and that’s why an organization like the NAACP, with its 111-year history of being advocates for African Americans in this country, is the right kind of organization to partner on this work,” said Owens.

The ETF, Owens told CNBC, is “the next evolution in our corporate advocacy work around closing the wealth gap for African Americans in this country.” The Minority Empowerment ETF website features the logo of the NAACP and iconic images from civil rights history.

Owens noted that the fund used a variety of diversity metrics, reflecting the NAACP’s scorecards on corporations, to invest in companies that make “commitments, public commitments, to standing against racial discrimination.”

Two years later, the NAACP ETF’s largest holdings include Amazon, Tesla, Meta Platforms Inc., Johnson & Johnson, Microsoft Corp., JPMorgan Chase & Co., and Nvidia Corp. The holdings are fairly similar to many large- and mid-cap ETFs, such as the Vanguard Total Stock Market Index Fund, or VTI, which has the same seven companies among its largest holdings.

The difference, however, is the fee structure. The Minority Empowerment ETF has a fee of 0.49 percent compared with the VTI fee of 0.03 percent, making the NAACP ETF 16 times more expensive for investors. Impact Shares, the plan sponsor that operates the Minority Empowerment ETF, in addition to other thematic ETFs around sustainability and women’s empowerment, says that the excess profits after expense fees are donated back to the NAACP, though it has not made enough fees to transfer any funds to the NAACP yet.

Impact Shares has lobbied the federal government to allow retirement plans to be invested with ESG funds. The investment firm wrote to regulators “on behalf of Impact Shares and our advocacy partners including the NAACP.”

Asked how the ETF fund has impacted racial justice issues, Ethan Powell, the chief executive of Impact Shares, gave Amazon credit for permitting its workers to vote on a union. Amazon, he claimed, engaged in a “significant shift in company policy” by allowing workers at its Alabama warehouse “the opportunity to vote on unionization” this year.

Labor officials, however, contend that Amazon spent millions of dollars on efforts to derail the union vote and engaged in a campaign of intimidation and surveillance against workers suspected of sympathizing with the union — and that the unionization at Amazon was in spite of the company’s efforts, not because of them.

LGBTQ Loyalty Holdings Inc., a company led in part by former Massachusetts Rep. Barney Frank, launched the LGBTQ + ESG100 ETF, which invested in large-cap public companies that “demonstrated a commitment to LGBTQ diversity and inclusion.” The fund, which wound down earlier this year, had an even higher fee structure of 0.75 percent.

Despite the fact that the ESGs largely mirror traditional ETFs, a higher fee structure, typically benefiting investment managers, is common across the board. An analysis from the Wall Street Journal found that ESG funds have 43 percent higher fees than widely popular standard index funds.

Fancy, the BlackRock social responsibility head turned critic, has argued repeatedly that many ESG funds are virtually identical to existing mutual funds, rebranded as “green” with higher fees. There are almost no discernible differences other than marketing, he has said in a series of confessional essays about the nature of ESG.

The notion of investment funds that promote social change without any of the guilt of profiting from capitalism can be alluring. Betterment, a millennial-focused “robo-advisor” that markets wealth-building strategies, has sponsored Facebook ads promising racial justice-minded investing. Betterment steers consumers to products such as the NAACP ETF without warning of the high fees or an explanation that many of the holdings are simply traditional large companies that investors would find in ordinary funds.

Asset managers have even worked with public relations firms to co-opt public opinion around social justice movements into inflows of cash to ESG funds. In 2017, at the height of the #MeToo movement, State Street worked with advertising agency McCann New York to create the “Fearless Girl” campaign, which featured a statue of a young woman, with her arms planted defiantly on her hips, that was placed in front of the bronze Charging Bull outside the New York Stock Exchange.

The wildly successful ad campaign, launched the day after International Women’s Day, was designed to advertise State Street’s women-focused SHE ETF, an ESG fund marketed as a vehicle to promote companies with gender diversity on corporate boards. But the corporate beneficiaries of the fund might come as a surprise to retail investors who thought they were supporting the political goals of #MeToo or feminism more broadly. The current SHE ETF holdings include weapons maker Northrop Grumman Corp., fracking giant Pioneer Natural Resources Co., and health insurer UnitedHealth Group Inc.

State Street and other fund managers have boasted about the growth of ESG funds as a cash cow. Last December, Gary Shedlin, the chief financial officer at BlackRock, appeared at a conference hosted by Goldman Sachs at the Conrad Hotel in New York to tout the growth of the firm’s ESG business. BlackRock ESG-related products, he said, had generated over 20 percent new fee growth. In January, BlackRock’s ESG funds reportedly surged to over $508 billion in managed assets, more than double the previous year.

It’s not just fund managers that are poised to gain from the influx of money into ESG. The trend has been a job creator for accountants, analysts, and other specialty consultants. MSCI, the largest data provider for ESG funds, disclosed that revenue from its ESG ratings business jumped to $166 million in 2021 from $90 million in 2019.

Both former attorneys general of the Obama administration are now serving as consultants to companies hoping to burnish their credentials as racially progressive. Eric Holder, now with the law firm Covington & Burling, was tapped by Citigroup to conduct its racial equity audit, to review its efforts to close the racial wealth gap. In April, Amazon announced that Loretta Lynch, a partner with Paul, Weiss, Rifkind, Wharton & Garrison, will work for the company to produce a similar report.

And Preet Bharara, the former U.S. attorney for the Southern District of New York, an Obama administration prosecutor turned vocal Trump critic, this month announced his move to become a partner at the law firm WilmerHale. According to reports, he will focus on advising companies on ESG. “Simple-minded criticism of this issue fails to appreciate its complexity and its emerging importance,” Bharara told the New York Times.

ESG investing has been an attractive proposition for investors who consider themselves to be civic-minded and want to use market logic to make change. But as The Intercept’s review shows, diversity audits and other superficial measures are simply being used to sell investors on the same old funds.

The implication is explicit. Moore & Van Allen, the firm that conducted the racial equity audit on behalf of CoreCivic, noted in an article this year that such audits serve multiple goals, including increased profits and a competitive advantage in a market. The public relations benefits are also clear, the law firm argued. The racial equity audits can lead to a “positive impact on reputation for companies,” partners at the firm wrote.

Placing selective pressure on a few companies won’t work, Damodaran argued, because businesses that voluntarily retreat from one area will be swiftly replaced by less accountable players, such as private equity or hedge funds. If advocates seek better business practices, he said, they should change the law to force compliance instead.

“These are decisions we should be making as voters, as regulators pushing for change,” said Damodaran. “Instead, we’ve passed on this responsibility to CEOs and fund managers to make these decisions for us.”

“The U.S. political sphere is putting optics over substance,” noted Fancy, the former BlackRock executive. “We could do some version of reparations, like a serious investment in Black communities and education and social welfare, but that’s going to cost a lot of money.” Instead, he said, high-profile Black Americans are elevated onto corporate boards to “create a marketing narrative” that helps a small number of elites without substantive change for the public.

One chief executive of a publicly traded company, who asked for anonymity while speaking with The Intercept, said he recently paid around $20,000 to social responsibility consultants in order to produce a special report to submit to ratings agencies. The ESG professionals created a document that dazzled with progress on a number of environmental and racial grounds. The self-reported data isn’t checked by anyone, he noted with a shrug.

The chief executive said that he appears white to most people, but he is technically a quarter nonwhite, making him, for the purposes of ESG, a “diverse” CEO — a dynamic he found absurd.

“It’s kind of like the one-drop rule. I’m diverse for the purpose of these rules, they really make no sense,” said the executive, who wondered how asset managers and investors can demand compliance on rules around racial identity when race is socially constructed, not a biological reality.

“We didn’t change any business practices. It’s a charade, yet no one questions this stuff,” he added. “It sounds good, but it doesn’t do anything.”