There is no voluntary path to Net Zero: Evidence from ESG investing

The world is awash with news of net zero. From oil companies to civil society and big governments to small nation-states, everyone seems keen to announce their intention to decarbonize. Of particular relevance to this Article, our home country of Canada has gotten in on the action, with the enactment of legislation entitled The Canadian Net-Zero Emissions Accountability Act (see https://www.canada.ca/en/services/environment/weather/climatechange/climate-plan/net-zero-emissions-2050.html). Like most of these announcements, the aforementioned Act centers around 2050 – an easy to remember year that is ostensibly far enough off to be achievable, but yet close enough to meaningfully move the needle. 

But will these large government plans work? What can we expect with major measures that are relatively far off in the future – particularly ones that involve voluntary measures? And will these plans efficiently support goals like protecting our coastlines, reducing wildfire risk, and supporting Indigenous communities in circumpolar regions – all at an acceptable cost?

No one knows for sure, but there are illustrative experiences that hint at where this might end up. So-called ESG (Environmental, Social, and Governance) investing – a private sector approach that has especially animated academic contributors keen to see the integration of ESG criteria into investment and corporate decision-making – has a history that might provide insight. Helpfully for this analysis, ESG bears many similarities to national climate plans, including large scales, long timeframes to implementation, and a huge number of actors with different values and motivations. Much like useful national climate action, useful ESG is numerical with appropriate baselines and harnesses the incentives of different actors (the latter generally meaning “required”, rather than something that can be declined). 

ESG comes in a variety of different formats and flavors, and although we will be using the term ESG in this piece, it can also be described in synonymous terms like enlightened shareholder value and stakeholder governance. Think of different terms like enlightened shareholder value and stakeholder governance as analogous to socialists, liberals, and conservatives all operating within democratic free market confines – different in some respects, and yet given a fundamental interest in democracy and the market, much the same. To much fanfare, the ESG world saw the 2019 Business Roundtable (BRT) gather together leaders from some of the world’s most famous corporations to propose a new Statement on the Purpose of the Corporation (BRT, n.d.). The released Statement affirmed that the environment was represented in the list of stakeholders deserving of consideration, as signatories would “…protect the environment by embracing sustainable practices across our businesses.” The 181 CEOs, representing such blue-chip names as Bank of America and Google’s parent company Alphabet, also pledged to support several other worthy causes, including better supplier relationship practices and improving diversity and inclusion for their employees. Such outcomes are put forth as a counterweight to the pressing environmental and social problems plaguing both developed and developing nations: a seemingly paradise-like combination of ongoing corporate expansion while also resolving major societal struggles. 

Not surprisingly, governments have based thinking on what is already in play, and appear to be taking an ESG-esque approach to their planning. For example, the abovementioned official website home page highlights wording around “impressive” progress made after companies were “encouraged” to make changes. However, recent scholarship – notably by Lucian Bebchuk’s group at Harvard Law School’s Program on Corporate Governance – urges caution in doing so. According to Bebchuk and collaborators, stakeholder capitalism, enlightened shareholder value, and other variants of ESG are not an advancement over the status quo; instead, such concepts are “operationally” equivalent to the shareholder-centric views that underlie all corporate operations. Many ESG-like exercises, such thinkers argue, are merely for show – and have little to no ultimate benefits for many of the supposed beneficiaries. 

Compelling empirical findings on the flaws of voluntary corporate-driven activities are outlined in articles led by Bebchuk (including aptly named pieces such as Bebchuk & Tallarita’s The Illusory Promise of Stakeholder Governance and Will Corporations Deliver Value to all Stakeholders?). This skeptical view is reinforced by quantitatively-rooted assessments of both private equity (Bebchuk et al.’s For Whom Corporate Leaders Bargain) and public equity (Bebchuk et al. in Stakeholder Capitalism in the Time of COVID) examples, wherein the authors find extensive evidence of a failure to deliver protections for vulnerable stakeholders. Repeatedly, Bebchuk’s group finds an absence of ‘skin in the game’ on the part of corporate representatives – leading to rhetoric and promises falling far short of reality.

This absence of incentives is vividly and convincingly elucidated in yet another Bebchuk-led analysis: How Twitter Pushed Stakeholders Under the Bus. Specifically, this particular discussion paper provides a case study on a much-discussed (and recent, as of the time of writing) example – technology entrepreneur Elon Musk’s takeover of social media company Twitter. The authors outline how this previously public company, which professed a comprehensive and public commitment to ESG-linked actions, negotiated for literally zero post-deal protections for stakeholders such as employees. Remarkably, even non-binding soft pledges were not pursued, despite evidence that Musk did not intend to uphold the self-proclaimed high ESG standards that Twitter had described as central to the company’s operations.

In sum – and to distill a sophisticated series of papers down into just a few words – it appears that whether one assesses the outcomes qualitatively (e.g. How Twitter Pushed Stakeholders under the Bus) or quantitatively (as 2023’s Stakeholder Capitalism in the Time of COVID did), substantive historical experience suggests the overwhelming majority of corporate leaders lack the appropriate incentives to take meaningful ESG action. ESG, to (re-)quote Bebchuk and collaborators, is mostly for show. Big public sector plans like Canada’s Net-Zero Emissions Accountability Act are theoretically different and may yield different outcomes, but they also bear many similarities to issues that have arisen in ESG, such as the structural incentive flaws of voluntary measures, the need for managing special interests, and difficulties in finding win-wins that placate everyone. As we work together to address the climate crisis, policymakers need to be optimistic. But this optimism must be tempered by remembering ESG’s history – a history which suggests that non-voluntary, quantitatively-backed measures aligned with best-in-class science policy are likely to yield the outcomes most of us seek.