In a new article, I argue that standardized, credible, publicly available ESG information will enable corporations’ stakeholders and potential stakeholders to repurpose their corporations. By “repurpose,” I mean control the corporation and redirect its employees’ efforts to corporate social responsibility (CSR).

Repurposing’s mechanism will be the competitive markets in which the corporations acquire their resources from potential stakeholders. Potential stakeholders – persons considering becoming or remaining customers, employees, suppliers, investors, or host communities – will, by their decisions, confer benefits on the corporations they choose (ESG Benefit).  Most will exercise their discretion to confer ESG Benefit in accord with CSR ratings and rankings. The corporations will voluntarily repurpose themselves to capture those benefits.

The engine of change will be a newly effective ESG information system.  Thousands of organizations world-wide – including NGOs, governments, information processors, and the corporations themselves – have been constructing the system for more than two decades. When complete, it will continually measure about 1,000 standardized data points for each of tens of thousands of participating corporations, report them publicly, digest them into ratings and rankings, and deliver the necessary information to potential stakeholders at their points of decision making.

The last essential step to make the system effective is for a single set of reporting standards to dominate. Only then will the information collected be comparable across corporations. At present, corporations are reporting to a variety of standards, including their own ad hoc standards. But a single set of standards may become dominant in as little as two or three years. That is because (1) the SEC is considering adopting a set of standards and (2) in January 2020, Blackrock, State Street, and other influential investors began pressing corporations to report to standards of the Sustainability Accounting Standards Board. The number doing so has since been increasing exponentially.

CSR is immensely popular within all stakeholder groups. A substantial literature reports that potential stakeholders are willing to incur significantly higher costs to transact with high-CSR performers. Consumers not only state in surveys a willingness to pay more for socially responsible products, in controlled experiments they actually buy more socially responsible products and pay more for them. Corporations devote substantial resources to vetting the corporations with which they deal and deselecting corporations from their supply chains based on CSR performance. Fifty-five percent of surveyed Americans and 75 percent of millennials say they would take a pay cut to work for a socially responsible company. Forty-four percent of Americans report that they “worry a great deal about climate change.” The most sophisticated institutional investors are not only spearheading the growing demand for standardized ESG information, they are examining ESG risks for all the corporations in which they invest. Although no estimates of total ESG Benefit are yet available, ESG Benefit will be substantial.

When potential stakeholders have credible ESG information they will, for the first time, be able to know, compare, and react to corporations’ differing levels of CSR. They will be aided by more than 600 organizations that are already engaged in CSR rating and ranking. Stakeholder markets will shift sales revenues, high quality employees, executives, suppliers, business opportunities, and community support to the highest ESG performers.

Once the ratings and rankings are credible, corporations will have no practical alternative to competing for high CSR ratings and rankings and the ESG Benefit that will come with them. First, by publishing CSR reports touting their levels of responsibility and providing ESG data, over 90 percent of public companies have already conceded the necessity to be perceived as environmentally and socially responsible. To backtrack would be embarrassing. Second, the pressures for climate change, environmental, and social reforms continue to build. By refusing to compete for high CSR ratings and rankings, corporations would be making a dangerous bet against the reform efforts’ success. Third, the reformers are right about the future. Once CSR is measured, it is inevitable that it will be managed. Governments will, for the first time, have the information they need to mandate CSR.  If the market demand for CSR proves insufficient to repurpose the corporation, governments will likely mandate the repurposing. Thus, CSR resisters would be ostracized, required by regulators to report, and ultimately forced to comply with prevailing CSR standards.

Although CSR may cost the corporation more in the short run than the current practice of externalization of social costs, it will cost the corporation less in the long run. Thus, CSR is an investment, not an expense. Corporations that make the investment need not raise their prices.  Corporations that decline to invest and instead rely on price and quality alone will sink to the bottom of the CSR ratings and rankings.

Parallel reform efforts will contribute additional pressures to repurpose. They include mandatory CSR reporting, mandatory CSR compliance, changes to the law of corporate purpose and fiduciary duties, employee voting for directors, mutual fund pass-through voting, stewardship codes, supply chain due diligence laws, and social norm-building.

Repurposing’s success will demonstrate that the corporation’s true role is to recruit and organize stakeholders in the production of goods and services. Whether the corporation seeks to maximize shareholder wealth is an unimportant detail. The corporation acquires capital in the same way it acquires other necessary resources: through contracting in stakeholder markets. The corporation’s purpose is not solely economic. To survive in the new, information rich environment, corporations will have to serve the economic, environmental, and social interests of the stakeholders who contribute resources.

Repurposing’s initial target will be the externalization of social costs – most notably greenhouse gas emissions. But the corporation’s potential stakeholders – including its customers – furnish all the resources corporations need to operate. By their market choices, potential stakeholders can make the corporation’s purpose whatever they want it to be.

This post comes to us from Lynn M. LoPucki, the Security Pacific Bank Distinguished Professor of Law at the UCLA School of Law, and is based on his recent article, “Repurposing the Corporation Through Stakeholder Markets,” forthcoming in the UC Davis Law Review and available here.