The New Capitalism (ESG: Myths and Realities)
Environmental, social and governance investing—ESG investing for short—is the latest movement by activists to compel businesses and persuade investors to pursue larger social goals, including environmental initiatives, by mandating more extensive disclosure of environmental, social and governance practices of public companies.
But a new essay series by the Fraser Institute—ESG: Myths and Realities—highlights the misunderstandings and simplifications of this call for increased financial disclosure regulations.
The first essay, “The New Capitalism,” identifies the various arguments made in favour of ESG investing, including mandatory ESG disclosures by public companies. According to ESG advocates, the justification for expansive and mandatory ESG disclosure regulations is that they will contribute to investors being better informed about the ESG practices of public companies (their carbon usage, for example) with the goal of more investment capital flowing to ESG-intensive companies and less flowing to companies lagging behind in their ESG initiatives.
But calls to mandate companies to pursue goals other than maximizing returns to shareholders shows a fundamental misunderstanding of how market economies work. Specifically, firms pursuing profits already have to consider their communities, employees, suppliers, customers, and anyone connected with the business.
Future essays in the series will explore core questions and misunderstandings related to the ESG movement including how it undermines the fiduciary responsibilities of corporate directors; whether investors actually earn higher returns from ESG investing; and how market economies already achieve many of the things to which ESG advocates aspire, among other topics.