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Is ESG inherently political or core to understanding business risk? What are the right metrics to measure ESG? Could increased awareness around ESG change how shareholders wield their voting power? 

Those were among the questions discussed during the University of Chicago Booth School of Business three-part virtual series on Unpacking ESG, cosponsored by the Stigler Center for the Study of the Economy and the State and the Rustandy Center for Social Sector Innovation, in partnership with the Financial Times

Panel 1: ESG Standards and Disclosures: The Good, the Bad, and the Ugly

In the first panel, Tom Gosling, Executive Fellow at the London Business School and the European Corporate Governance Institute, and Christian Leuz, Charles F. Pohl Distinguished Service Professor of Accounting and Finance at Chicago Booth, delved into the structure of ESG regulations and the intended and unintended impact. 

“There are two quite different sets of objectives behind ESG disclosures,” Gosling said, noting that while there was widespread agreement on giving investors information to assess ESG risks that affect enterprise value, there was less so around the objective of redirecting corporate behavior to address environmental and social issues. 

Leuz said new regulations mandating increased transparency could lead to favorable outcomes but could also lead to unforeseen consequences, including potentially diverting resources to data collection and disclosure instead of projects with more direct impact. “Disclosure needs to be a stepping stone,” he said.

Panel 2: Shareholder Democracy: Is a Revolution on the Horizon?

In the second discussion, Lisa Fairfax, Presidential Professor and Co-Director, Institute for Law and Economics, University of Pennsylvania Carey Law School, Alex Thaler, Co-Founder/CEO, Iconik, and Luigi Zingales, Robert C. McCormack Distinguished Service Professor of Entrepreneurship and Finance at Chicago Booth, focused on the nature and structure of shareholder activism. 

Zingales, noting that voting power was concentrated with three institutional shareholders in a world where corporations had outsized impact on the environment, said it was essential to redistribute the power. “We should delegate issues of management to management,” he said. “But there are issues of values that cannot be delegated to management because management is not appointed to represent us from the point of values. If the question is: are you prepared to give up some profits in order not to sell machine guns in every department store in the country? I think a lot of investors would say yes.”

Fairfax, noting that some of the pushback was occurring just as efforts around climate change and social equity were gaining traction, said it was clear that shareholders were not a monolith - and that some of the areas of interest may have been unanticipated. “As soon as the institutional investors got traction around these important issues, there has been a real blowback in ways that could undermine the institutions’ ability to wield that power. What’s happening here may be a pushback on the underlying issue,” she said.

Fairfax also pointed out that shareholders were not representative of the larger social demographics because only a small percentage of Americans owned stocks. “We need to think about educating citizens around the importance of holding shares and developing participation with regard to their shares,” she said, while cautioning that it was important to ensure that shareholders were getting the right information to make informed decisions.

Thaler said corporate boards and big asset managers were being challenged because of pressure from conservative and progressive groups. “Reforging the connection between the issuers and the beneficiaries and the folks who own those shares is very valuable, and will help point the direction in terms of what kind of policies they should pursue,” he said.

Panel 3: Is Corporate ESG “Woke” Capitalism?

In the final panel, Marianne Bertrand, Chris P. Dialynas Distinguished Service Professor of Economics at Chicago Booth, Jay Clayton, former US Securities and Exchange Commission Chair and Senior Policy Advisor and Of Counsel, Sullivan & Cromwell, and Damien Dwin, Founder and CEO, Lafayette Square, debated ESG’s role in business.

Bertrand said she viewed ESG as a way to think about maximizing profits over the long term, and also as a way to be responsive to customers and employees who wanted companies to take action on their behalf. “When you think about the longer term, a lot of investments that do not make sense in the short-term start making sense,” she said. “ESG is just what Friedman is asking us to do.”

Clayton said the politicization around ESG was in large part because it meant different things to different people. “People are talking past each other with respect to ESG,” he said. “Lumping E, S, andG together makes for a lot of confusion.”

He urged companies to draw a distinction between activities that were core to their business, such as understanding customer preferences and training employees, and activities that were not. “When companies are aspirational and wade into the areas that are not core to their business, you are taking a risk,” he said.

Dwin, noting that half of all private capital was concentrated in five states, said it was ironic that public pensions that have been among the most vocal about ESG were exporting capital outside their communities. He said it was not the term but the underlying practices that needed change. “I don’t need the term, I don’t need the rhetoric. I need the performance and I need the transparency,” he said.

The discussions were moderated by Financial Times journalists, Kenza Bryan, Moral Money reporter, Simon Mundy, Moral Money editor, and Patrick Temple-West, Governance reporter.

About the Cosponsors

The George J. Stigler Center for the Study of the Economy and the State is dedicated to understanding issues at the intersection of politics and the economy. Through its ProMarket publication, Capitalisn’t podcast, and a range of programs, events, and initiatives, the Stigler Center has become an intellectual destination for research on regulatory capture, crony capitalism, and various forms of subversion of competition by special interest groups.

The Rustandy Center for Social Sector Innovation is the destination at the University of Chicago Booth School of Business for people committed to helping solve complex social and environmental problems. As Chicago Booth’s social impact hub, the Rustandy Center offers hands-on learning opportunities, supports innovative courses, and pursues research—all with the goal of developing people and practices with the potential to solve the world’s biggest problems. 

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In Partnership with the Financial Times

How are global economic stresses and conflict affecting the world of ESG and green investing? And how can business work with governments and wider society for the greater good? Read FT Moral Money, your essential, trusted guide to the investment and business revolution you can’t afford to ignore.

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