The anti-ESG movement also dates back to the early 2000s, but it took much longer than pro-ESG efforts to meaningfully gain traction. In 2004, a partisan nonprofit led by prominent tobacco lobbyist Steven Milloy launched a website called “CSR Watch,” which hailed itself as exposing the “anti-business” motivations behind corporate social responsibility and socially responsible investing. The website is now defunct.
By many accounts, the anti-ESG movement truly took off only in the last few years. Morningstar reported that in 2020, there was an uptick in the establishment of so-called “anti-ESG funds,” which employ a range of investment strategies that are designed to oppose sustainable and ESG investing. Also in recent years, state legislatures across the country have endeavored to restrict or otherwise discourage the use of ESG factors. Recent analysis by a large law firm reported that, in 2023, there was a significant uptick in state and federal legislative activity related to ESG and concluded that the debate over ESG in public investments is likely to continue in 2024 and for years to come.
Despite the rise of the anti-ESG movement, there is strong evidence that ESG remains a priority for investors. For instance, support for the Principles for Responsible Investment has grown exponentially since their 2006 launch. As of this month, the principles have 5,345 signatories with combined assets under management of more than $121 trillion, demonstrating that ESG continues to be a priority for asset managers and other institutional investors.
A central claim of many within the anti-ESG movement is that ESG is fundamentally incompatible with the goal of maximizing corporate value. That is wrong.
Under Delaware law—the dominant source of U.S. corporate law—directors’ fiduciary duties are informed by the “perpetual entity model.” That model recognizes that corporations, by default, have a perpetual existence. Their directors, in turn, owe fiduciary duties not to current stockholders but to the shares themselves, which, like the corporation itself, presumptively exist forever. As Vice Chancellor Laster of the Delaware Court of Chancery recently explained in McRitchie v. Zuckerberg, No. 2022-0890-JTL (Apr. 30, 2024), because shares are freely alienable, individual stockholders are incidental to this fiduciary relationship—they enter the mix only because shares have owners.
Consequently, the proper orientation of directors’ fiduciary duties is toward maximizing the value of the corporation and its shares over a long-term investment horizon. That a particular stockholder may hope to profit in the near term is largely irrelevant, as directors are not duty-bound to maximize short-term profitability. As Delaware courts have long held, directors’ fiduciary duties are “unremitting.” As a result, the goal of maximizing long-term values is “the constant compass by which all director actions for the corporation and interactions with its shareholders must be guided.” Malone v. Brincat, 722 A.2d 5 (Del. 1998).
ESG dovetails with these foundational principles of corporate law. Many proponents of ESG are investors and asset managers seeking to improve the long-term performance of the companies in which they invest. Just last week, the global head of sustainable investing at one of Canada’s largest pension funds observed that behind the “ESG” label is “a set of growing and material risks that is just fundamental to [fund managers’] fiduciary duty.”
Delaware courts have made explicitly clear that corporate directors can account for all such considerations. As Vice Chancellor Will reiterated in an opinion issued last year, directors are permitted to account for the interests of corporate stakeholders that are “rationally related” to building long-term value. Simeone v. Walt Disney Co., 302 A.3d 956, 971 (Del. Ch. 2023). Delaware courts will not “question rational judgments about how promoting non-stockholder interests—be it through making a charitable contribution, paying employees higher salaries and benefits, or more general norms like promoting a particular corporate culture—ultimately promote stockholder value.” Id. (quoting eBay Domestic Holdings., Inc. v. Newmark, 16 A.3d 1, 34 (Del. Ch. 2010)).
Put simply, the goal of ESG is not to advance a radical environmental or social agenda, as former vice president Pence suggested—the goal is to achieve long-term value creation through an entirely sound governance strategy that accounts for all material risks. As the Who Cares Wins report observed two decades ago, accounting for ESG considerations can enable companies to increase shareholder value, while at the same time contributing to the sustainable development of the societies in which they operate.
What’s more, ESG is succeeding in improving long-term investment performance. A 2021 report published by New York University’s Stern Center for Sustainable Business found a positive correlation between ESG and financial performance, with improved financial performance due to ESG becoming more marked over longer time horizons. Along similar lines, the report also found that ESG investing provides downside protection, particularly in times of social or economic crisis—another important consideration for investors focused on long-term value. Numerous other studies have reached similar conclusions. See US SIF (Sustainable Investment Forum), Financial Performance with Sustainable Investing.
At bottom, bright-line rules proscribing ESG considerations are at odds with the fact-specific analysis required to assess a fiduciary’s compliance with the fiduciary’s duties. A federal district court recently said it well, explaining that when a fiduciary determines that a strategy will maximize value for beneficiaries, the fiduciary “may pursue the strategy, whether pro-ESG, anti-ESG, or entirely unrelated to ESG.” Utah v. Walsh, 2023 WL 6205926, at *5 (N.D. Tex. Sept. 21, 2023).