European Business Law Review
Volume 35, Issue 3/4 (2024) pp. 551 – 576

https://doi.org/10.54648/eulr2024031

Abstract

ESG (Environment, Social, and Governance) engagement has become a standard practice for public companies, with global asset managers credited for driving this change. Opinions vary on its implications: some view it as crucial for risk management, especially regarding “boundary risks” – those risks occurring beyond a firm’s structural boundaries but involving its responsibility, such as labor/human rights abuses, environmental damage, and community impacts. Others argue that this engagement has a political connotation and gives rise to concerns about democratic accountability and legitimacy. In the meantime, ESG regulation is being introduced, both in Europe and several US states. 

In this Article I employ a social welfare approach to evaluate these opposite scholarly positions and examine the impact of ESG and boundary risk regulation. I show that due to heterogenous ESG preferences, tradeoffs affecting consumption choices and the prevailing, investor-driven conformity observed in ESG practices, these practices may not necessarily maximize social welfare. This conclusion has two key implications for the outstanding debate on ESG and boundary risks. First, the argument that current ESG engagement is inherently legitimate because it increases overall social welfare lacks theoretical support. Second, this suggests the desirability of regulation to enhance ESG legitimacy, though tradeoffs between legitimacy and regulatory efficiency may arise.

Extract

To read more, you can buy this article.