ESG, has been driven by the private sector and intensely debated in the context of privately ordered responsible business conduct standards, and formed part of a rich debates among market actors and public international organizations about the role and nature of so-called non-financial siclosure in genmeral, and sustainability and climate related factors in decision making. The idea has been that consideration of these factors could substantially change the way that businesses approach value maximizing deciswions by giving value to these non-financial factors.
Over the past few years, massive asset managers and financial institutions have increasingly focused on prioritizing ESG factors when making key investment decisions. They have particularly set their sights on investing in companies based on those companies' efforts to combat climate change and curb their carbon footprints.Companies like BlackRock, State Street and Vanguard, which collectively manage trillions of dollars in assets, have taken lead roles in the ESG movement. (25 states hit Biden admin with lawsuit over climate action targeting Americans' retirement savings)
The problem, however, has always been the reluctance to embed these within financial disclosure regimes and to preserve their role as qualitative risk factors. The move to metrics has produced additional challenges.
Regarding ESG metrics, there is a strong argument that the quality and reliability of ESG metrics need to improve. The role of ESG metrics as a proxy of sustainability performance is highly prominent in empirical studies in the SRI performance theme. However, there are two main measurement problems with ESG metrics: lack of transparency and lack of consistency or convergence. (A Systematic Literature Review of Socially Reposnible Investing (SRI) and Environmental Social Givernnace (ESG), p- 25).
On the other hand, for the World Bank Groups Internaitonal Finance Corporation, "ESG Standards comprise the Performance Standards, which define clients' responsibilities for managing their environmental and social risks, and the Corporate Governance Methodology, which sets out an approach to evaluate and improve the corporate governance of clients." (IFC, Environmental, Social, and Governance).
The goal oriented policy objectives of ESG have also been underscored by the OECD, one that seeks to recionceive the traditional focus on value maximization grounded in traditional financial analysis to a more generalized set of public objectives toward which economic actoivity can contribute, on e in which the markers of financial value are made more a function of public good objectives.
While noteworthy progress has been made, considerable challenges hinder the efficient mobilisation of capital to support ESG and climate-related objectives. Greater comparability of climate transition methodologies, as well as transparency and interpretability of climate finance and ESG metrics are urgently needed. In response to the rapid growth of market practices with respect to ESG investing to assess and manage climate transition risks in financial markets, the OECD Committee on Financial Markets (CMF) has developed a substantive body of work that provides analysis on challenges with respect to current market practices, and proposes policy considerations to improve them (OECD, Policy guidance on market practices to strengthen ESG investing and finance a climate transition. p. 7)
ESG initiatives have been tied to the UN Sustainability Development Goals and its 2030 Agenda. It has also become a focus of shareholder actions within enterprises, and regulatory programs in the US federal government.
ESG breakthroughs last year included a surge in shareholder proposals meant to pressure corporations to do better on climate, diversity and similar topics. Meanwhile, the Securities and Exchange Commission unveiled a slew of guidance and rule proposals to improve disclosures and add clarity to ESG investing, including the agency’s controversial proposal for climate risk disclosure. (Investors defend ESG ‘materiality’ in expectation of more attacks).
More recently it has become lumped together with a host of what
opponents call an ideological push to transform society in all sorts of
ways--and that has in turn produced an increasingly vocal and organized
resistance. It has now also become a focus of politics, one with increasing importance. "EU rules require large companies and listed companies to publish regular
reports on the social and environmental risks they face, and on how
their activities impact people and the environment." (EU Corporate sustainability reporting
(disclosure touches on environmental matters; social and employee
aspects; respect for human rights; anti-corruption and bribery issues;
diversity on board of directors)).
The emergence of ESG narratives and methodologies has generated reaction--not only in the economic but in the political sphere as well. ESG has been increasingly treated as an ideological movement the object of which is the erosion of a key element of core objectives in the economic sector. That assault is undertaken through sideways strategies, ESG included, that seeks to transform purpose by changing the focus of fiduciary duty (and director discretion in decision making), and by adding categories of risk into decision-making analytics. Even if the traditional core purpose of economic activity, to maximize the value of the economic value of collective activity, is retained, its meaning and the factors that must be considered can substantially change the environment in which decisions are made and analytics are fashioned. The core concept of value maximization, remains highly relevant. It was nicely summarized, even in an environment friendly to ESG analytics, in instruments such as the Santiago Principles (Principle 19: "The SWF’s investment decisions should aim to maximize risk-adjusted financial returns in a manner consistent with its investment policy, and based on economic and financial grounds."). And in this form the concept of value maximization serves political ends in transnational spaces. It underlines the strong connection between purpose, concepts of maximization, and the protections of markets as the driving force of economic activity (around which states serve to protect their own interests through regulation and the protection of a level playing field in which they shed their political advantage when they enter the market (and the market distinguishes between between public (political) and private (economic) activity on the basis of some sort of value maximization theory based on financial, rather than social, governance or other criteria.
Yet ESG is still in search of a disciplinary maturity. Issues of consensus, scalability, quantification, and comparability remain unresolved. The marketplace for ESG modalities is vigorous. Its anchoring in qualitative analytics and risk analysis produces a temptation for speculation that can be used to advance strategic agendas. No one has been particularly shy about trumpeting these background objectives. Yet risk based analysis produces it own problems. The issue emerges from the essential political ideology of risk in economic activity. The thrust of much public policy over the last century has been both to unearth, but also to constrain risk and risk taking. Prevent-mitigate-and remedy strategies, for example, suggest a preference for risk aversion. The state and its instrumentalities tend to be risk averse--the essence of the ideology of compliance based governmentality. However, the ideology of risk taking in markets based economies had, at least in its inception, been grounded on notions of facilitating, and in some respects (eg asset partitioning) encouraging risk. Risk taking is an essential feature of the value of capital and labor pooling to achieve value growth. The state, then, in a markets privileging environment is caught on the horns of potentially incompatible objectives: the convergence of economic and administrative collectives around notions of compliance and state duty; or the promotion of risk taking in economic ventures to create prosperity and enhance the production of value that can then be tapped for all kinds of purposes. Conundrum follows--yet most participants in the chattering about this remain blissfully oblivious to the analytics of that conundrum.
It ought to surprise few people, then, that in this anarchic and dynamic environment, the concept of value maximization, its meaning, and its relevance remains hotly contested, sometimes as part of the debate about corporate purpose (see Brief
Thoughts on Martin Lipton: "ESG, Stakeholder Governance, and the Duty
of the Corporation" (Harvard Law School Forum on Corporate Governance). That aligns with the continued robustness of the core principles of globalization based on idea of a level playing field in which states have a duty to enhance value in the macro community, while economic enterprises have a micro obligation of value enhancement (mindful of business, legal, and financial risk) toward its community of investors or in some instances for the enhancement of its value as a going concern (discussed here). The investment industry has tried to push back, "pressing the importance of environmental, social and governance considerations in U.S. financial markets ahead of an expected pushback from Republican Party aligned officials as they take control of the House. Firms and funds with acute interest in ESG are adamant that issues such as climate change and human capital management are financially material, albeit non-traditional, issues. The fight against ESG may even add to the growing body of evidence that such factors are critical to investors, according to some." (Investors defend ESG ‘materiality’ in expectation of more attacks).
It has also taken a turn toward law. In late 2022sit was reported that some influential senators threatened to use their oversight powers to consider the implications under US antitrust laws, of the development of ESG reporting and decision making modalities (Senate Republicans warn U.S. law firms over ESG advice).
The senators cited a "collusive effort to restrict the supply of coal, oil, and gas, which is driving up energy costs across the globe and empowering America’s adversaries abroad." They said Congress would refer anticompetitive actions made in the name of ESG to federal antitrust authorities and told the firms they have a duty to inform clients of such regulatory risks. (Ibud.).
More recently 25 State Attorney's General have recently filed a lawsuit challenging a Biden Administration effort to incorporate ESG in Pension fund investment decision making. The Press Release issued by the Attorney General of Virginia nicely summarizes the action and its rationale:
Attorney General Jason Miyares filed a lawsuit alongside 24 other
state attorneys general challenging a Department of Labor rule which
would affect the retirement accounts of millions of people. The rule
would allow 401(k) managers to direct their clients’ money to ESG
(Environmental Social Governance) investments and runs contrary to
existing rules and the Employee Retirement Income Security Act of 1974
The new rule, “Prudence and Loyalty in Selecting Plan Investments and
Exercising Shareholder Rights,” will take effect on January 30,
2023. Two-thirds of the U.S. population’s retirement savings accounts
would be affected, totaling $12 trillion in assets. Strict laws placed
in ERISA are intended to protect retirement savings from unnecessary
“The Biden Administration continues to use other people’s money to
achieve its political goals. Virginia families have worked hard to build
their retirement accounts. The federal government should be protecting
that money, not putting it at risk to support the progressive ESG
agenda. But this new rule—created by an unelected and unaccountable
bureaucracy without input from Congress or the American people—puts
progressive politics above Virginians’ financial wellbeing and security.
It is another unilateral and illegal power grab by the Biden
Administration,” said Attorney General Miyares.
From the complaint: “[T]he 2022 Investment Duties Rule makes changes
that authorize fiduciaries to consider and promote “nonpecuniary
benefits” when making investment decisions. ... Contrary to Congress’s
clear intent, these changes make it easier for fiduciaries to act with
mixed motives. They also make it harder for beneficiaries to police such
The complaint may be accessed here and below.