WHAT IS ESG?

The abbreviation “ESG” is used as shorthand for a dizzyingly broad array of environmental, social, and governance topics affecting businesses, including climate change, human capital management, supply chain management, human rights, cybersecurity, diversity and inclusion, corporate tax policy, corporate political spending, executive compensation practices, and more.2 Members of the ESG movement are similarly diverse, in both identity and motivation. They include financially motivated investors and traditional asset managers who believe companies’ approach to (at least certain) ESG topics will bear on companies’ long-term performance or the long-term performance of the investors’ or asset managers’ broader investment portfolios.3 They also include values-based investors who care about whether and how corporations address (at least certain) ESG topics because of religious or sociopolitical commitments. The ESG umbrella also shelters various noninvestor corporate stakeholders and third parties who care about whether and how corporations address (at least certain) ESG topics because they are personally affected (e.g., employees vis-à-vis labor practices) or because of religious or sociopolitical commitments (e.g., environmentalists vis-à-vis environmental impact). ESG proponents also include members.

of an emerging corps of people and institutions who profit from the movement, including corporate sustainability officers, providers of ESG ratings and indices, accounting firms that offer ESG-related services, and managers of specialized ESG-investment vehicles.

Even the Business Roundtable seemingly embraced ESG in 2019 in its Statement on the Purpose of the Corporation,4 though some suspect its motivations have more to do with public relations or a desire to protect executives from shareholder discipline than a true commitment to ESG.5 The stated motivations of others involved in the movement are also questionable. Traditional asset managers claim that their commitment to ESG is motivated by a desire to improve long-term fund performance for the benefit of investors.6 But agency costs offer an alternative potential explanation: embracing the ESG movement may help asset managers curry political favor, enabling them to fend off greater regulation of the industry;7 it may advance the personal sociopolitical commitments of those who run them; or it may offer a way to attract investors to fund offerings without imposing any meaningful limitations on how a fund is managed.