CLS Blue Sky Blog

ESG Investing: Why Here? Why Now?

ESG investing is taking the world of finance by storm.  Few concepts have come to dominate an academic discipline as quickly as Environmental, Social, and Governance (ESG) has come to dominate the field of corporate law.  While certain forms of ESG investing and governance have been around since the 19th century and achieved some prominence during the anti-apartheid movement, [1] the term “ESG” first appeared in 2004, when the former UN secretary general challenged various financial institutions “to develop guidelines and recommendations on how to better integrate environmental, social and corporate governance issues in asset management, securities brokerage services and associated research functions” [2]

A few statistics are telling. Almost half of investors who responded to a 2020 EY survey said they are investing in ESG products, which is almost double the proportion of investors who reported including ESG products in their portfolios as recently as 2019.[3] Investors are placing a significant emphasis on asset managers’ ESG policies when deciding whether to invest with a manager, as evidenced by the fact that nearly all investors (88 percent) ask managers how ESG is incorporated into their investment decisions.[4]  A recent Morgan Stanley survey found that almost 90 percent of millennials would prefer to have investments that suit their values.[5]

In a recent article, I seek to shed light on the nature, purpose, and prospects of ESG investing. Along the way, I develop an explanation for why ESG principles suddenly have emerged to dominate the corporate governance and investing landscape. Clearly, the real and existential threat of climate change has galvanized the investing public into taking some sort of action.  As such, I argue that the ESG movement reflects a significant libertarian turn in American politics.  This is because one would ordinarily think that government rather than the private sector would be the place to look for solutions to broad societal problems like social injustice and protecting the environment.

Climate change is a paradigmatic case in which government action is the appropriate channel for redressing grave social injury because it involves an industry-wide practice, and action or cessation by a single firm would not achieve the desired result of mitigating the injury.

The emergence of ESG investing and governance demonstrates a consensus that government lacks credibility and probably cannot solve these broad problems.  In simple terms, government unresponsiveness and ineptitude have created a vacuum, and the ESG movement reflects a shift from primary reliance on government to primary reliance on the private sector.

Thus, ESG investing and governance can be explained, at least in part, as a response to the failure of government on environmental and social problems.  This explains the “E” and the “S” in ESG. But it does not explain the “G,” or governance component.  Besides lack of faith in government, the emergence of ESG is attributable to the ESG movement’s intense focus on allowing management to govern for the “long term.” This serves the private interests of important political groups such as organized labor and corporate management, because it takes pressure off of management to focus on profit maximization or objective criteria such as share prices for evaluating managerial performance.  In addition, ESG governance’s focus on the long term can help companies to deter takeovers, and ineffective management to escape accountability.

Thus the recent success of the ESG movement rests on the confluence of the private interests of management and a secular loss of confidence in the ability of government.  This loss of confidence has played conveniently into the hands of corporate managers who wish to avoid accountability.

While the ESG movement has attracted investors, I argue that it will not ameliorate the fundamental problems of global warming and income inequality that it purports to address.  In fact, much, if not most, of ESG investing is “cheap talk” in light of three fundamental realities: (a) corporate managers are overwhelmingly compensated with bonuses, stock, and stock options, all of which reward strong shareholder performance rather than the achievement of ESG objectives; (b) activist investors, particularly activist hedge funds, and other elements of the market for corporate control pose an existential threat to managers who ignore the shareholder-wealth maximization paradigm; and (c) corporations are run by or under the direction of their boards of directors, which are elected exclusively by shareholders.


[1] Robert G. Eccles, Linda-Eling Lee and Judith C. Stroehle, The Social Origins of ESG: An

Analysis of Innovest and KLD, 33 Organization and Environment 575, 576-577 (2019).

[2] United Nations, Who Cares Who Wins: Connecting Financial Markets to a Changing World (2004)

[3] Ryan Munson, Jessica Bloom, Natalie Deak Jaros, and Jun Li,  Does Accelerating  Adaption Present Obstacles or Increase Opportunities? Ernst & Young LLP,

[4] Id.

[5] Morgan Stanley, Survey Finds Investor Enthusiasm for Sustainable Investing at an All-Time High Sep 12, 2019,,report%2C%2090%25%20among%20millennials.

This post comes to us from Jonathan R. Macey, the Sam Harris Professor of Corporate Law, Corporate Finance and Securities Law at Yale Law School and a research fellow at George Mason Law & Economics Center. It is based on his recent article, “ESG Investing: Why Here? Why Now?” forthcoming 2022 in the Berkeley Business Law Journal and available here. The opinions expressed in the post are the author’s alone and do not represent the official position of the Law & Economics Center, George Mason University, or any other organization with which they or I am affiliated.

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