ESG, Stakeholder Governance, and the Duty of the Corporation

Abstract

Recently, there has been much confusion and misinformation about (1) environmental, social, and governance (ESG) considerations, (2) the ways in which companies, boards, asset managers, investment funds, and other market participants can, do, and should factor such considerations into their decision-making processes, and (3) the need for companies to consider, balance, advance, and appropriately protect stakeholder interests in order to create value, generate sustainable returns, and guard against downside risks to value and corporate health. This cloud of confusion stems, in part, from nascent efforts to politicize ESG. Consider the Trump administration’s proposed rulemaking in the Department of Labor that would have required fiduciaries of retirement plans making investment decisions to focus solely on “pecuniary” factors (and, in turn, would have burdened the ability of fiduciaries to appropriately take ESG factors into account in selecting investments and engaging in risk-return analyses). And consider the letter sent to BlackRock last month by 19 Republican attorneys general, accusing the asset manager of prioritizing its “climate agenda” over the interests of pensioners’ investments. These developments unfortunately fail to appreciate that ESG, properly understood, is merely a collection of quite disparate risks that corporations face, from climate change to human capital to diversity to relations among the board, management, shareholders, and other stakeholders. We write to resituate the role of ESG and stakeholder governance within the well-established legal framework of corporate fiduciary duties.

Keywords: ESG, stakeholder, environmental, governance, BlackRock, climate change, purpose, corporation, Caremark, boards, Sonnenfeld, Davos Manifesto

JEL Classification: K2, K10, K22, K32