Fellow Story

Saad: Reforming Corporate Governance Is a Path to Better ESG Strategy

Fellow(s): Aisha Saad

Editor’s note: This is an excerpt from a March 12, 2024 original story on Bloomberg Law written by Aisha Saad and edited by Jada Chin and Daniel Xu.

Environmental, social, and governance activity has become a major target in the right-wing campaign against “woke capitalism.” Corporate ESG technocracy that prioritizes topical expertise and relevant, routine procedures rather than politics could be a solution for more purposeful and effective ESG programs.

A turn away from corporate ESG is playing out against the backdrop of a forceful legislative attack by Republican lawmakers: At last count, 181 anti-ESG bills were proposed or enacted between 2018 and 2023.

Financial institutions are reacting to these attacks. Last month, JPMorgan Chase & Co. and State Street Corp. exited the world’s biggest investor coalition on climate change, Climate Action 100+.

Other companies are also shifting gears on ESG. Executives at ExxonMobil Corp. initiated a high-profile legal battle against two of the company’s activist investors, casting their climate-focused shareholder proposal, which called on the company to reduce its emissions, as a bad-faith effort to undermine the company’s business.

Saving ESG from its critics will require a new corporate governance model that overcomes its key weaknesses. Some anti-ESG advocacy is undoubtedly opportunistic, seeking to score political points by making a bogeyman of any decisions not rationalized in terms of short-term profit. But to dismiss all critique of ESG is misguided.

Accountability challenges riddle ESG governance and remain largely unaddressed by ESG’s supporters, who generally champion one of two ways to administer ESG.

One model relies on the benevolence of corporate executives, and empowers them to manage the corporation on behalf of shareholders and stakeholders who are affected by its business. A second model looks to shareholders and activists to champion social welfare goals using the tools of shareholder democracy.

Both models fail to address fundamental problems of accountability and coordination that arise when corporations adopt goals broader than short-term pursuit of profit.

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