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The Business Lawyer

Summer 2022 | Volume 77, Issue 3

The ESG Movement: Law, Economics and Values

Robert Miller and Seth C Oranburg


  • The following papers began as contributions to a conference on “The ESG Movement: Law, Economics and Values,” which took place on October 8 and 9, 2021.
  • The ESG movement is a complex and multi-faceted phenomenon that raises a host of important issues in law, economics, and morals.
  • These papers address many of these issues from a variety of normative perspectives.
The ESG Movement: Law, Economics and Values

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The following papers began as contributions to a conference on “The ESG Movement: Law, Economics and Values,” which took place on October 8 and 9, 2021, and which was co-sponsored by the Program on Organizations, Business and Markets of the Classical Liberal Institute at New York University Law School and the Business Law Section of the American Bar Association. As conveners of the conference and co-directors of the Program on Organizations, Business and Markets, we are very pleased to see these papers published in The Business Lawyer, our co-sponsor’s flagship publication.

As the title of the conference implies, the ESG movement is a complex and multi-faceted phenomenon that raises a host of important issues in law, economics, and morals, and the papers that follow address many of these issues from a variety of normative perspectives. The papers can be conveniently ordered by their degree of theoretical abstraction. Beginning at the least theoretical end of the spectrum and thus closest to current market practice, Mr. Povilonis looks at a new form of deal technology—sustainability-linked bonds (SLBs)—that neatly avoid any fiduciary issues that a board’s pursuing ESG objectives might raise. In issuing an SLB, a company makes a contractual commitment to the bondholders to achieve certain specified ESG goals (e.g., decreasing carbon emissions by certain amounts by a certain date) in exchange for a more favorable interest rate. By shifting ESG concerns from the equity markets to the debt markets, SLBs solve many of the most vexing problems related to ESG investing: the ESG goals of an investment are carefully specified ex ante, investors have a contractual right to see those goals attained, only investors willing to sacrifice return to fund those particular ESG goals do so, and shareholder value is enhanced.

Professor Bainbridge takes the discussion from market practices to legal doctrine and notes that two important corporate governance trends are intersecting with potentially important doctrinal consequences: The steady expansion of Caremark liability for board oversight failures is colliding with demands that the board be more active in overseeing ESG issues. Professor Bainbridge focuses on the point of intersection and considers whether a board’s failure to adequately supervise the corporation’s performance in connection with ESG concerns should result in liability under Caremark. He argues that it should not. Indeed, in a wide-ranging paper, Professor Bainbridge argues that the original Caremark decision was an error and that this error should not be compounded by imposing liability on directors with respect to ESG issues.

Professor Shill and Professor Oranburg both turn the discussion to securities regulation, but they come to largely opposing conclusions. Professor Shill takes a close look at the Securities and Exchange Commission’s human capital management disclosure rule, which took effect in November 2020, and he uses hand-collected data from the 2021 annual reports of fifty software firms to investigate various issues related to geography, including geographic pay disparities and new forms of employee diffusion such as remote work. He argues for enhanced disclosure by issuers concerning such issues as well as increased use of geographical data by proxy advisors and institutional investors, and he then advocates for imposing human capital management disclosure requirements on all large asset managers, whether they are publicly or privately held.

Professor Oranburg considers proposals for increasing required ESG disclosure more generally, and he argues that, although the goal of such proposals is to encourage companies to engage in more socially responsible activities, the result of mandated disclosure may well be the exact opposite. In making this case, he draws on theoretical work related to Regulation FD, and he reviews recent empirical studies suggesting that mandatory ESG disclosure is not associated with beneficial real-world outcomes. He concludes that the costs of mandated ESG disclosure would likely exceed its benefits.

Moving toward the more theoretical end of the spectrum, Professor Levmore explores the idea, first suggested by Professors Hart and Zingales, that corporations should maximize shareholder welfare rather than the firm’s market value, as when the company is the “least-cost altruist” because it has a competitive advantage in producing some social benefit valued by its shareholders. Noting that in an efficient market companies will respond to shareholder preferences of this kind, Professor Levmore argues that such efficiency requires that investors understand how much return they are sacrificing for which particular social benefits. Although he thinks that market pressures to disclose estimates of the relevant costs and benefits will increase, he also thinks that potential liability under the federal securities laws will deter corporations from making expansive and detailed disclosures. To deal with this problem, Professor Levmore suggests allowing a safe-harbor for such disclosures, perhaps with third-party verification of the relevant claims. He argues, however, that added transparency about these issues will likely disappoint socially minded investors who may learn that they are better off taking their money and themselves funding environmental or other political causes they favor.

Next, Professors Bebchuk and Kastiel and Mr. Tallarita consider a weaker form of stakeholder governance, the “enlightened shareholder value” model, which does not endorse conferring benefits on stakeholders that would sacrifice long-term shareholder value but does urge directors to consider the interests of stakeholders in the pursuit of such value. The authors argue that enthusiasm for this model rests on a misperception about the frequency of “win-win situations” that benefit both shareholders and stakeholders. They identify four assumptions under which the enlightened shareholder value model is operationally equivalent to, and would produce the same outcomes as, the traditional shareholder wealth maximization model. Relaxing these assumptions, the authors examine four arguments for moving to the enlightened shareholder value model but find each of them to be unwarranted. They conclude that such a move would be at best inconsequential and at worst detrimental if it introduced illusory hopes that corporations would protect stakeholders on their own.

The last two papers focus on the strong form of stakeholder governance under which directors may (or perhaps should) confer benefits on non-shareholder constituencies even when doing so does not produce value for the shareholders in the long term. Professor Epstein approaches the problem by examining a variety of situations in which fiduciaries have obligations running to beneficiaries with disparate and often conflicting interests, as would happen if directors were to represent not only shareholders but also employees, customers, creditors, suppliers, and the public at large. Professor Epstein argues that more coherence emerges from a system in which each discrete group of beneficiaries has its own representative with unambiguous fiduciary duties. He concludes that the inevitable conflicts of interest among stakeholders in a given class and between stakeholders in different classes pose insuperable difficulties that are better handled by the traditional shareholder primacy model, which succeeds precisely because it abstracts from different non-pecuniary values different shareholders may have.

In the final paper, Professor Miller argues that, while critics of the stakeholder governance model have long complained that the model provides directors no definite standards for making business decisions, this criticism is in fact grossly understated. In Professor Miller’s view, because the stakeholder model includes no normative criteria by which to determine which interests of stakeholders should be respected or how interests of one group of stakeholders should be traded off against those of another, the stakeholder model provides no basis for saying that any decision the directors might make is any better—or any worse—than any other. The model is not just insufficiently determinate but radically indeterminate. Professor Miller considers various ways the model could be supplemented to reduce this indeterminacy within manageable limits but argues that such attempts are doomed to fail. He concludes by noting a rare point of agreement between leading stakeholder advocates and their critics, viz., that under a stakeholder model, business decisions by directors would be determined not in any principled manner but by the varying abilities of different interest groups to pressure or lobby the directors to transfer value to them.