ESG Investing: Why Here? Why Now?

34 Pages Posted: 26 Oct 2021 Last revised: 10 Mar 2022

See all articles by Jonathan R. Macey

Jonathan R. Macey

Yale Law School; European Corporate Governance Institute (ECGI)

Date Written: October 14, 2021


This Article seeks to shed light on the nature, purpose and prospects of ESG investing. Along the way, it develops an explanation for why so-called “ESG” or Environmental, Social and Governance 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 the history of American politics. This is because one naturally would 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. The emergence of ESG investing and governance demonstrates a consensus that government lacks credibility and is not viewed by rational citizens as a likely source of solutions to these broad problems. In simple terms, government unresponsiveness and ineptitude have created a vacuum, and the ESG movement reflects a broad shift from primary reliance on government to primary reliance on the private sector as the source of solutions to broad social problems.

Thus, ESG investing and governance can be explained, at least in part, as a response to the failure of government. People are turning to corporations for solutions to problems that are in the proper domain of government because government has failed. 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 fact that the ESG movement focuses intensely on allowing management to govern for the “long term,” and 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 on objective criteria such as share prices for evaluating managerial performance. In addition, ESG governance is a new form of antitakeover device and a convenient tool for enabling ineffective management to escape accountability. Thus the recent success of the ESG movement is attributable to the confluence of the private interests of management with a secular loss of confidence in the ability of government even to address, much less to solve, the important environmental and social problems of the day. This loss of confidence has played conveniently into the hands of corporate managers who wish to avoid accountability.

While the ESG movement has found success in attracting investors, I argue that it will not be successful in ameliorating 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 by bonuses, stock and stock options, all of which are forms of compensation that 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 post 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, who are elected exclusively by shareholders.

Keywords: Corporate Governance, ESG Investing

JEL Classification: K22

Suggested Citation

Macey, Jonathan R., ESG Investing: Why Here? Why Now? (October 14, 2021). Yale Law & Economics Research Paper Forthcoming, Law & Economics Center at George Mason University Scalia Law School Research Paper Series No. 22-013, Available at SSRN: or

Jonathan R. Macey (Contact Author)

Yale Law School ( email )

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European Corporate Governance Institute (ECGI) ( email )

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