Today the Competitive Enterprise Institute published my new study on theories of enlightened investing, Environmental, Social, and Governance Theory: Defusing a Major Threat to Shareholder Rights. It evaluates ESG theory, its possible threats to property, speech, and association rights, and how policy makers can avoid those dangers. As the executive summary explains, the ideas underlying current responsible investing practice are not new:
The concept known environmental, social, and governance (ESG) theory has a long history of similar, predecessor concepts both in academic literature and in the business world. For over a century, critics of the market economy, largely inspired by progressive political goals, have argued that for-profit corporations should not limit themselves to seeking profits for their shareholders, but should engage—or be required to engage—in various sorts of activism to address social problems and concerns. This movement grew up alongside evolving expectations of social responsibility within the business community that motivated many managers and executives to provide a range of services voluntarily to employees and to their local communities.
The study goes on to summarize recent research calling into question the validity and reliability of ESG measurements and scores. It also and evaluates the different incentives that motivate groups as disparate as activists, CEOs, asset managers, and retail investors to participate in the world of ESG investing.
Ultimately, the biggest problem with the current generation of ESG theory is that it could place in the hands of the federal government, in particular the Securities and Exchange Commission, the power to make decisions for the entire country that should either be legislated in Congress or avoided altogether as inconsistent with our constitutional rights.
Some critics have rightly asked whether ESG-compliant financial products can be as profitable as traditional investments, but the real question is whether the progressive policy goals they advance are worthwhile in the first place.