NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

The largest mainstream institutional investors and the rating agencies that serve them now say they consider high quality Environmental, Social, and Governance (“ESG”) practices by corporations to be necessary for sustainable, long-term wealth creation—a position that has generated academic and political controversy. But for all the debate surrounding the use of ESG for investing, virtually no attention has been paid to a core tension in the ESG policies of major investors and rating agencies — the discordance of the “G” from the “E” and “S.”

In today’s parlance, ESG is short-hand for things like social responsibility, treating stakeholders well, not creating environmental harm. That is, in the policy debate, ESG is mostly about the “E” and the “S.”  Until recently, environmental, labor, and other social proposals at company meetings drew little support from the “Big Three” asset managers (BlackRock, Vanguard, and State Street)  or other mainstream investors. By contrast to “E” and “S” proposals, however, “G” proposals to companies have long garnished strong support by institutional investors, including the Big Three. However, impetus for these successful G proposals has had nothing to do with the environment or stakeholders like workers, or issues like gender or racial diversity. Rather, they promoted stockholder primacy by making companies more open to the market for corporate control, by forcing changes in policy at the instance of a momentary stockholder majority, and by aligning company management’s pay to only one constituency — stockholders — by tying it tightly to total stock return.

Photo courtesy of Edward Howell.