The Missing "T" in ESG

55 Pages Posted: 22 Apr 2024

See all articles by Danielle A. Chaim

Danielle A. Chaim

Bar-Ilan University - Faculty of Law

Gideon Parchomovsky

Hebrew University of Jerusalem - Faculty of Law; University of Pennsylvania Carey Law School

Date Written: April 21, 2024

Abstract

Environmental, social, and governance (“ESG”) philosophy is the zeitgeist of our time. The rise of ESG investments came against the perceived failure of the government to adequately promote socially important goals. And so, corporations are now being praised and credited for stepping up where the government has fallen short. In this Essay, we contend that the standard narrative of ESG suffers from a major flaw. The reason for this discrepancy is taxes. The companies that are widely perceived as saviors of the ESG era are in fact the cause of some of the main deficiencies ESG seeks to redress. Astoundingly, public corporations—many of which have the highest ESG scores and are the largest recipients of ESG fund investments—are also the biggest tax avoiders. As this Essay shows, through the exploitation of legal loopholes and other grey areas, these companies increasingly deprive governments of the funding needed for the provision of public goods and the promotion of important societal policies, exacerbating administrative inefficiencies and deepening societal inequality—outcomes that are starkly at odds with ESG principles. To address this paradox, this Essay advocates incorporating tax-avoidance behavior into ESG ratings. It also argues that tax considerations should be accorded considerable weight not only by ESG rating agencies but also by institutional investors who shoulder part of the fault for the existing state of affairs. Implementation of this proposal would not only rectify incongruities within ESG investment but also provide the public with a more robust and accurate representation of a company’s genuine ESG standing.

Keywords: ESG, Corporate Governance, Stakeholder Capitalism, Corporate Tax Avoidance, Institutional Investors, Rating Agencies, Sustainability, Socially Responsible Investing,

Suggested Citation

Chaim, Danielle A. and Parchomovsky, Gideon, The Missing "T" in ESG (April 21, 2024). Vanderbilt Law Review, Vol. 77, No. 3, 2024, Bar Ilan University Faculty of Law Research Paper No. 4802304, U of Penn, Inst for Law & Econ Research Paper No. 24-18, Available at SSRN: https://ssrn.com/abstract=4802304 or http://dx.doi.org/10.2139/ssrn.4802304

Danielle A. Chaim (Contact Author)

Bar-Ilan University - Faculty of Law ( email )

Faculty of Law
Ramat Gan, 52900
Israel

Gideon Parchomovsky

Hebrew University of Jerusalem - Faculty of Law ( email )

Mount Scopus
Mount Scopus, IL 91905
Israel

University of Pennsylvania Carey Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-898-1603 (Phone)

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