The market is taking care of corporate responsibility, rendering government irrelevant

Environmental, social and governance investing, known as ESG, has been gaining favor with socially conscious people. The goal is to support companies whose corporate policies are socially responsible beyond the dictates of maximizing value to the shareholders. Worldwide ESG investment could reach $30 trillion by the end of the decade, according to one recent analysis.

This is changing the way corporations do business. It’s also changing the way business schools teach and creating pressure to change the ways companies are evaluated by investors.

Consequently, this kind of investing has its critics. Tesla chief executive Elon Musk recently called environmental, social and governance investing a “scam” that has been “weaponized by phony social justice warriors.” University of Colorado finance professor Sanjai Bhagat has argued that ESG investors are sacrificing returns without really changing the world.

Tesla isn’t the only company encountering the contradictions of ESG. Any Russian company that benefited from ESG investing now finds itself on the outs with such investors because of the Russian government’s invasion of Ukraine.

Then there is the reality that the vast majority of ESG investing takes place in Europe, not the United States. Europe has about 80% of the total assets in these funds and more than eight times as many sustainable investing funds as the United States.

Although the recent downturn in markets may cause some investors to reconsider whether they are willing to sacrifice returns in a quest for corporate responsibility, these indexes are here to stay. As investing becomes accessible to more people, investors are seeking more information about companies and stocks. Today’s investors aren’t just looking at Security and Exchange Commission reports filed each quarter; they’re consuming a steady stream of information from companies and observers.

The world has changed. Twenty-five years ago, my corporations professor at McGeorge School of Law emphasized companies’ obligations to their shareholders. Today, nearly every business school in America offers instruction on the principles of corporate responsibility.

This is likely because we once expected government to solve problems, and governments’ failure to do so has caused the public to look for solutions from the private sector.

We also once argued about the very existence of climate change. That debate really became moot as soon as insurance premiums began to reflect the risk associated with changes in the climate. The market dictated the result.

The principles of ESG are following a parallel path. Over time, publicly traded companies are going to be expected to disclose more information about their internal practices and external impact. These changes are not taking place because of legislation in Washington, D.C., or Sacramento; they are happening due to changes in corporate culture.

Any intervention in this arena by the state of California or the federal government would be counterproductive at this point. The trend is toward more and better information, and government isn’t needed to make it happen.

Social judgment of private businesses is going to continue to evolve. Businesses are not fighting this evolution. They are changing, and we should let them keep changing.

This story was originally published June 22, 2022 at 9:09 AM.