The ESG Threat
The following is an overview of Law & Liberty's December forum on the question of ESG.
Politics and ideology have a tendency to seep into every corner of our lives. One of the most efficient ways it has done so lately is through Environmental, Social, and Governance criteria (ESG) increasingly used by business, investment houses, and government regulators. Growing out of the “stakeholder” model of business governance, ESG claims to have the benign goal of ensuring that investors and others can know which businesses are “contributing to the realization of goals over and above profit.” But as Samuel Gregg showed in the lead essay of Law & Liberty’s December forum, ESG in practice is at best incoherent and at worst “risks corroding our understanding of the nature and proper ends of commercial enterprises.”
Many commentators have pointed out how ESG effectively imposes ideological litmus tests on businesses, becoming a cudgel to coerce certain policies. That is bad enough. But Gregg notes another corrosive attribute of ESG: it prevents us from seeing that commerce itself serves an important social function. By focusing on making a profit, businesses provide goods and services and employ workers. This is what a commercial enterprise does. By trying to make businesses into environmental activists or social justice organizations, ESG erodes our understanding that most social goods come about from people and firms going about their own business, not from activism.
Russell Greene, in his response, expands on and modifies Gregg’s thesis, asking “What Are the Aims of Business?” We need not believe that there is one, single purpose of business and commerce, according to Greene. Businesses can understand their role differently—some single-mindedly focused on profit, and others adopting some form of stakeholder theory. Our legal context allows for this, too. “America’s federalist system of corporate law permits a large degree of variation in corporate purpose from state to state. Different states have established different standards for fiduciary responsibility through case law and legislation.” The key, Greene argues, is to allow such liberty of choice to flourish, and not allow central political control of capital by means of ESG-based government regulation.
The idea of a corporation committed to profit alone, however, is the target of Austin Stone’s contribution. Gregg’s indictment of ESG may be correct, but the solutions are found wanting. We cannot hope for “value-neutral” corporations, Stone argues, for corporations do have real social responsibilities, too. Long before ESG, companies contributed to worthy social causes, sponsored scholarships, and instituted business practices that sacrificed profit-maximization for other social or environmental goods. The problem today is not the belief in broader moral purposes of business, but the values being pursued. A “complete solution” to the ESG problem, Stone believes, requires “room for government intervention.”
Does that amount to “ESG by Another Name”? That is the concern of Jennifer Schulp, who sees many of the political campaigns against ESG as participating in the same basic viewpoint. States who divest wholesale from funds that follow any sort of ESG guidance often conflict with the same fiduciary duty as ESG funds. A state has a right to contract the way it sees fit, but “The state’s contracting decisions, though, should be motivated primarily by investment performance and pecuniary interests, rather than exogenous policy or ideological concerns.”
In his response to his interlocutors, Gregg reaffirms the basic desirability of businesses that focus primarily on profits within the law, noting the social benefits that flow naturally from that. “[by] pursuing profit…businesses create possibilities for individuals to exercise their talents cooperatively with others, provide people with the incomes that they need to pursue many non-material goods, and help maintain and grow the material resources that any society needs if it is to prosper in material and non-material ways.”
