Report: Environmental, Social, and Governance (ESG) Goals Remain Vague but Pose Major Threat

A new Competitive Enterprise Institute report takes a close look at environmental, social, and governance (ESG) theory, a trending cause aimed at pressuring for-profit corporations to signal allegiance to activist issues like reducing climate change and child labor. The report explores questions like: What specifically do ESG activists want companies to do, what are the consequences, and what happens if ESG values move from voluntary to mandatory?

“Investors are eager to know whether ESG investing is compatible with market-rate returns,” said Richard Morrison, CEI research fellow and author of the report. “But the real question we should all be asking is whether the ‘socially conscious’ policies recommended by advocates are good ideas in the first place.”

Climate change activists demand an end to financing of fossil-fuel energy projects, for example, but a developing country trying to transition away from burning animal dung and wood will need the most affordable electricity possible. The world’s poorest people need that affordable energy to fuel economic growth and curtail illness from breathing indoor air pollution. A coal- or natural gas-fired power plant would deliver the quickest, most affordable energy, but a company’s ESG commitment might preclude it from financing or building that plant.

In addition to such dire humanitarian conflicts, ESG activism generates other long-term contradictions that have not been thought through, the report explains. What happens when ESG-pledged companies reject legal and profitable (but politically incorrect) opportunities that a competitor swoops in to capture?

“Pressuring companies to undertake policies and divide their profits counter to shareholder interests— things they would not normally consider doing— won’t work on a grand scale if compliance remains voluntary,” Morrison explained. “ESG will sooner or later need government mandates for companies that refuse to go along with voluntary policies that harm their shareholders, fail to serve consumer needs, or compromise their ability to succeed.”

Fortunately, people who care about specific causes already have means to achieve their goals. People who want to build a corporation that truly serves environmental and social priorities rather than shareholders can start a “public benefit” corporation, for example, which legally prioritizes the interests of alternate stakeholder groups. This option is available in most states, including the state that is the top incorporation destination: Delaware. 

“In a free society, we can work or not work for any given company, invest in or divest from any particular fund, and buy or boycott any products we want,” said Morrison. “Who gets to decide what ‘responsible’ is? The answer to that question is ‘each of us.’”

View the report: Environmental, Social, and Governance Theory: Defusing a Major Threat to Shareholder Rights by Richard Morrison