1 Context and Background
The bloom is off the rose of ESG, the now well-known acronym for environmental, social, and governance strategies in business and investing. To be sure, one’s perspective on the growth and vitality of ESG may depend on one’s geographical location and investment focus. In Europe, despite some political retrenchment (Gros, Reference Gros2024), ESG has become established through the enactment of legislation at the European Union (EU) level (Rasche et al., Reference Rasche, Morsing, Moon and Kourula2023). According to one estimate by J.P. Morgan, approximately 80 percent of ESG assets under management (AUM) are in firms domiciled in Europe (Nelson, Reference Nelson2024). In the United States, a political backlash against ESG has characterized it as “woke capitalism” promulgated by elites acting outside democratic processes (DeSantis, Reference DeSantis2023; Gelles, Reference Gelles2023). Many US states have gone so far as to ban investment strategies by government entities based on ESG criteria (Malone, Holland & Houston, Reference Malone, Holland and Houston2023; Shanor & Light Reference Shanor and Light2023). Net outflows in US ESG-denominated funds were $19.6 billion in 2024 as the anti-ESG sentiment grew (Morningstar, 2025).
Donald Trump’s return as president in 2025 will reinforce the ESG backlash, and his administration will reverse federal laws and policies that favored ESG (Nelson, Reference Nelson2024). For example, the US Department of Labor’s guidance on the use of ESG criteria for retirement plan investments will shift again toward adopting a narrow interpretation, returning to rules that require investment fiduciaries to prioritize financial returns and avoid ESG factors unless they are linked to long-term profits, though interpretation of “long-term” may still allow some room for flexibility (Croce, Reference Croce2025; see also Schanzenbach & Sitkoff, Reference Schanzenbach and Sitkoff2020). Other US policies favoring ESG are also shifting in the other direction, such as in Trump’s executive orders to undercut the wind energy industry (Plumer, Reference Plumer2025), and again to withdraw the United States from the Paris Agreement (Harvey, Reference Harvey2025).
The political backlash against ESG in the United States, however, does not necessarily spell its doom. As noted above, Europe remains a stronghold of ESG theory and practice, and only 11 percent of global ESG-denominated sustainability funds in the world are in US-based firms (Nelson, Reference Nelson2024). One recent academic study estimates that the percentage of ESG-denominated investments in total AUM was around 6 percent in 2021 (Pástor, Stambaugh & Taylor, Reference Pástor, Stambaugh and Taylor2024). Total US AUM using ESG are estimated by one source as of this writing to be $6.5 trillion, a significant but nevertheless relatively small part of the total $52.5 trillion US AUM (Nelson, Reference Nelson2024).
Other countries, including China, have adopted their own versions of ESG. In 2024, China released Chinese Sustainability Disclosure Standards that are intended to comply with standards adopted by the International Sustainability Standards Board (ISSB) (Interesse, Reference Interesse2024). The ISSB standards seem likely to become at least one primary global metric for climate and other corporate sustainability reporting (IFRS, 2023; 2025). The ISSB’s voluntary standards often intersect with and are sometimes even directly adopted by regulatory authorities, such as in China’s new ESG law or in California’s climate disclosure laws.
In this context, we think that it is most likely that the EU as well as the nonprofit ISSB will take the lead in developing a regulatory framework and technical reporting standards for ESG-related disclosures. At the same time, some of the political backlash against ESG that has arisen in the United States may also affect the development of legal standards in Europe given the hard truth that complying with reporting standards related to climate and other ESG-related issues is not costless. As of this writing, some influential business firms in Europe are pushing to reduce the compliance obligations and related costs of the new ESG-related regulations. For instance, the Confederation of European Business recommended significantly watering down the Corporate Sustainability Reporting Directive and postponing its implementation by two years (BusinessEurope, 2025).
At the same time, there is no indication that the global climate crisis and other global social and environmental problems will abate, which suggests that some forms of political pressure on firms as well as governments to address these problems will, in one way or another, continue. It remains an open question whether a “Brussels effect” (Bradford, Reference Bradford2020; Janse & Bradford, Reference Janse and Bradford2021), reinforced by a similar “California effect” (Vogel, Reference Vogel1997), will move the world toward increasing levels of ESG-related disclosures that will be systemically important (see also Delmas, Gerrard & Orts, Reference Delmas, Gerrard and Orts2023). In other words, if European countries and California take the lead in developing ESG policies and standards, particularly if they are followed by other countries such as China (thus, also maybe a “Beijing effect”), then large companies with a presence in these markets will have to adapt and follow the leaders. At least, it is possible to imagine that a global convergence of ESG policies and standards could emerge over time, perhaps eventually consolidated into and reinforced by some kind of global regulatory body.
The current juncture in the controversial but ongoing development of ESG regulations and voluntary standards provides a timely opportunity to step back and assess the theoretical as well as practical issues at stake in what might be called the ESG movement. Its origins can be traced to a series of meetings that began in 2004 between the United Nations, led by Secretary-General Kofi Annan, and a selected number of financial institutions under the umbrella of the Who Cares Wins initiative (see Pollman, Reference Pollman2024).
The origin story of the ESG movement reveals an underlying objective to address global environmental and social challenges as identified in various United Nations efforts over the years by leveraging financial investments and adopting investment principles, policies, and practices that consider these larger societal-level problems. The original report of the Who Cares Wins initiative concludes: “In the long-term, therefore, investment markets have a clear self–interest in contributing to better management of environmental and social impacts in a way that contributes to the sustainable development of global society” (United Nations Global Compact (UNGC), 2005, p. 3). It is also telling that a significant portion of the “green tilt” of financial investments adopting ESG criteria correlates with financial firms that have adopted the United Nations’ Principles for Responsible Investment (PRI) first launched in 2006 (Pástor, Stambaugh & Taylor, Reference Pástor, Stambaugh and Taylor2024; see also UNGC, n.d.).
The plot of the ESG story seems to have changed, however, over the last few decades following its origin in a partnership of large investment firms with the United Nations. Today, a prevailing attitude toward ESG (or what some might call “mainstream ESG”) focuses only on what lawyers and accountants call financial materiality. The concept of financial materiality emphasizes the relevance of both internal and external factors that could have an impact on the financial performance of a business organization. These factors are then taken into account by investors and others evaluating the economic health and future prospects of a business. “Material facts” relevant to a “reasonable investor” refer to regulatory and accounting standards required for periodic disclosure (see, e.g., Loss, Seligman & Paredes, Reference Loss, Seligman and Paredes2011, pp. 777–780).
This means that ESG criteria are identified and measured by firms and investors if they affect or influence the long-term bottom-line profits of businesses. In other words, the theory and practice of ESG seems to be reverting to a purely financial focus instead of a broader concern with social, environmental, and governance objectives. A debate has emerged, particularly in Europe and in the context of the emerging EU regulations, whether an improved standard of “double materiality” should be adopted that includes nonfinancial as well as financial measures of ESG performance (see, e.g., Baumüller & Sopp, Reference Baumüller and Sopp2022; De Cristofaro & Gulluscio, Reference De Cristofaro and Gulluscio2023). At a minimum, a focus only on financial materiality for ESG standards seems to be under pressure and merits further debate.
This book dives under the surface of current ESG policies and practices to interrogate the theoretical and philosophical grounding of ESG. The book does so at an opportune moment, because ESG standards and practices are in flux, and at least in some quarters they are under political attack as well as continuing academic debate. Academic critiques of ESG have focused on the vagueness of its definitions, the coherence of its stated objectives, the confusion among different ESG standards that have been promulgated, and the questionable “win-win” claims of financial gains following ESG measurements that have been made by enthusiastic purveyors of ESG funds to investors (see, e.g., Berg, Kölbel & Rigobon, Reference Berg, Kölbel and Rigobo2022; Fairfax, Reference Fairfax2022; King & Pucker, Reference King and Pucker2022; Larcker, Tayan & Watts, Reference Larcker, Tayan and Watts2022; Larcker et al., Reference Larcker, Pomorski, Tayan and Watts2022; Reiser & Tucker, Reference Reiser and Tucker2020). Unfortunately, ESG claims appear too frequently to represent “aspirational talk” or, in Harry Frankfurt’s famous formulation, “bullshit” (Christensen, Kärreman & Rasche, Reference Christensen, Kärreman and Rasche2019; Frankfurt, Reference Frankfurt2005) rather than true environmental or social improvements in the real world. The prevalence of misrepresentation in the use of ESG criteria in selling funds under false pretenses has resulted in allegations of greenwashing (The Economist, 2021; Flood, Reference Flood2023; Parameshwaran, Reference Parameshwaran2023) and settlements of cases of outright fraud in the United States (US Securities and Exchange Commission (SEC), 2022a; 2022b). In Europe, half of the investment funds designating themselves to be fighting climate change or human rights violations in China have been found, in fact, to be heavily invested in fossil fuel companies or Chinese firms implicated in rights violations (Busch, Reference Busch2023, p. 327; see also InfluenceMap, 2021). Financial commentators have gone so far as to call ESG investing a “sham” (Taparia, Reference Taparia2022) or “mostly a sham” (Surowiecki, Reference Surowiecki2023).
Current controversies over ESG come from different directions. Some fear that the move toward ESG in corporate governance and financial investing is broadening conceptions of firms’ social purposes or objectives in a direction that increases costs for businesses and reduces overall wealth produced for society. Such a perspective basically rejects ESG altogether. Others see ESG as a pure risk management exercise based on compliance considerations and limited to addressing financially material issues. This perspective seems to have become the prevailing attitude toward ESG among practitioners. Yet others embrace a version of ESG that is not limited to financial considerations, but instead includes concern for the actual contribution and impact that ESG investing has on real-world environmental and social challenges.
Given the many interpretations of ESG, it is perhaps understandable, though not justifiable, that so many discussions of ESG avoid the question that we put centrally forward in this book: How do ethics and ESG relate to each other?
We make an overarching claim here: The theory and practice of ESG must address important debates about ethics. Even if, as a matter of empirical fact, the prevailing view of ESG has become a narrow one that reduces social and environmental challenges to financial criteria, we maintain that ethical considerations require that nonfinancial impacts be considered when developing ESG strategies or measurements. The three dimensions E, S, and G embrace objectives that cannot be reduced to financial calculations or economic valuations. Reasonable minds may differ about the priorities, but many, if not all, of the contributions in this volume suggest that ESG strategies should focus on creating real-life impacts on morally significant problems like climate change, protecting basic human rights, and combating corporate corruption.
Another theme relates directly to law. For some supporters of ESG, adopting ESG strategies and metrics means adopting a strategy that reduces the risks of regulatory and legal intervention (e.g., Henisz, Koller & Nuttall, Reference Henisz, Koller and Nuttall2019, p. 5). Some practitioners may quietly pursue this kind of strategy. The whistleblower Tariq Fancy accused BlackRock, for example, of doing exactly this (see Butterfield, Reference Butterfield2023). This approach is deeply deceptive, however, because unlike explicit claims that amount to greenwashing, it is a strategy that is adopted secretly, and therefore, cannot be easily exposed. ESG strategies, policies, and practices that are adopted for the purpose of avoiding regulation of any kind are suspect. A well-known business strategy to counter regulation that is seen as a threat to profits is to adopt some version of “voluntary regulation” (Lyon & Maxwell, Reference Lyon, Maxwell, Nicita and Franzini2002). The trouble is this kind of voluntary regulation is often not very effective in addressing the larger social or environmental problem at issue (see, e.g., King & Lenox, Reference King and Lenox2000).
This does not mean that businesses should not play a positive role in regulation. It is in the public interest as well as the interest of affected business firms and their participants to adopt regulations when needed to address social or environmental problems, but also to do so at the lowest cost – both for the firms themselves and for society.
In this connection, an approach of informational regulation – such as adopted in some versions of ESG-related laws in Europe, China, and California – might be recommended as a way to strengthen the reliability of ESG disclosures. Information regulation is an alternative to other kinds of regulation that directly seek to abate socially or environmentally undesirable behavior, such as laws against pollution emissions above a certain quantitative limit (Kleindorfer & Orts, Reference Kleindorfer and Orts1998; see also Kuh, Reference Kuh2022; Schulz, Reference Schulz2015; Sunstein, Reference Sunstein1999). For example, rather than ban cigarette smoking or alcohol consumption, or impose taxes on the sale of tobacco or alcohol, a government may choose to require mandatory labels that disclose risks. Informational regulation may also supplement traditional kinds of regulation. For example, laws requiring companies to disclose their greenhouse gas emissions may supplement taxes on fossil fuels or the subsidizing of electric vehicles.
Informational regulation improves on so-called voluntary regulation because it involves the government in standard-setting and oversight rather than relying on firms to set their own standards and police their own statements. The claims made by firms, including about ESG topics, become legally enforceable. If firms or individuals lie to the government, then they are liable to be punished in some form. An everyday example is committing fraud when submitting individual tax returns. Similarly, government-mandated disclosures of information can support lawsuits by private parties, such as under the private rights of actions under US securities laws. The ESG-related regulation in the EU (Rasche et al., Reference Rasche, Morsing, Moon and Kourula2023) – and in other jurisdictions such as China (see Interesse, Reference Interesse2024) and California (Delmas, Gerrard & Orts, Reference Delmas, Gerrard and Orts2023) – may be correctly categorized as informational regulation, and this method of regulation has significant advantages over both voluntary disclosure and other methods of regulation (such as quantitative emission limits or emission-reduction technology requirements). Informational regulation is decentralized, it encourages firms to measure the nonfinancial metrics of their performance, it aims to encourage “reflexive” or self-reflective processes within firms about the external impact of their behavior, and it can provide incentives for making progress that differ from the blunt force of regulatory prohibitions or taxes (see, e.g., Kleindorfer & Orts, Reference Kleindorfer and Orts1998; Orts, Reference Orts1995; see also de Bruin, Reference de Bruin, Sandberg and Warenski2024).
At the same time, informational regulation is not costless. Many firms facing increasing ESG-related regulation are objecting to it on precisely this ground (BusinessEurope, 2025). Rather than just complaining, however, it would likely be more effective for firms to argue for regulatory alternatives. Sometimes informational regulation is not the best alternative kind of regulation to address a particular environmental or social risk (Ben-Shahar & Schneider, Reference Ben-Shahar and Schneider2014; Kleindorfer & Orts, Reference Kleindorfer and Orts1998). For example, with respect to what scientists warn to be our climate emergency (Lenton et al., Reference Lenton, Rockström, Gaffney, Rahmstorf, Richardson, Steffen and Schellnhuber2019; Ripple et al., Reference Ripple2022), some form of direct regulation or regulatory incentives such as “putting a price” on carbon emissions or subsidizing climate-friendly businesses may work better than informational regulation. Or some combination of several different approaches may make sense, given the global stakes (Orts, Reference Orts2011). What regulatory approach makes the most sense in terms of making progress on the climate is therefore a matter for further continuing debate (Coffee, Reference Coffee2022).
For some of the largest and most pressing social and environmental problems, business firms and investors in them, as well as individuals in their capacities as citizens and consumers, have an ethical duty to play a role in helping to address these problems. We can, in this sense, imagine a world “beyond ESG” where the substantive issues represented in E, S, and G are taken seriously. In many cases, this will require business firms to take their ethical responsibilities seriously and, at least in some cases, such as climate change, engage productively in the process of adopting effective as well as efficient laws and regulations.
2 The Ethics of ESG: Chapters in This Volume
With this context and background in mind, the present volume undertakes a rigorous examination of the major ethical issues involved in current controversies surrounding ESG with the aim of contributing to a broader understanding of this phenomenon as well as offering valuable direction for future research on this topic. In what follows, we propose to group current ESG ethical debates around three fundamental questions: What is the place of ethics in defining ESG purposes? How can we bridge the gap between profitability and sustainability goals in ESG? What is ethically relevant in ESG disclosure? The chapters included in the volume provide different answers to these questions.
2.1 Is ESG Dead? Exploring the Scope and Purposes of ESG
As we suggested above, the ESG movement is now facing a profound crisis, particularly as evident in, but not limited to, the United States. This decline has led some observers to predict the death of ESG (Damodaran, Reference Damodaran2023; Goodkind, Reference Goodkind2023). Has the ESG movement now entered into a slow but inexorable decline?
The future of ESG is not easily predicted. However, the rapid development of ESG over the past several decades has resulted in significant uncertainty regarding the interpretation of the ESG movement itself. Indeed, many current controversies surrounding ESG stem from fundamental disagreements among practitioners and academics about both the scope and purpose of ESG.
In Chapter 1, Lisa Fairfax focuses precisely on this confusion around the meaning and interpretation of ESG, both in narrow academic circles and in the wider public debate. Beyond the political connotations that characterize current debates on ESG, particularly in the United States, two opposing normative conceptions of ESG emerge. The first links ESG to the normative view, widely supported in the literature on corporate social responsibility (CSR), that the objectives of business should go beyond financial interests alone and should encompass a range of social and environmental concerns. This view, largely inspired by a kind of “stakeholderism” – to use Fairfax’s expression drawn originally from business ethics jargon – is compared against those who support decidedly a shareholder-oriented conception of ESG. For Fairfax, only one of these conceptions seems likely to prevail in the long run; the view that links ESG to the measurement of economic risks and opportunities and is focused on economic value. Fairfax’s chapter reconstructs the genesis of the ESG movement, starting with the publication of the UN report Who Cares Wins in 2004. This document is an important reference for understanding the scope of ESG and the original intentions of the actors involved in the process of expanding the notion of materiality to include ethical, environmental, and social considerations. In this document, and in other key documents that have accompanied its development, ESG has been understood in a narrow sense as focused on measurements of risk and financial value and in line with fiduciary duties. In the author’s view, this is the only “sustainable” understanding of ESG. Although narrower than more expansive stakeholder or CSR conceptions, Fairfax argues, this economic conception of ESG can still promote important ethical and social goals and encourage a corporate vision that embraces a broader ideal of sustainability that improves on traditional approaches.
Joseph Heath and Sareh Pouryousefi (Chapter 2) also believe that the proper conception of ESG cannot be divorced from the shareholder perspective. The authors argue that there is an important, and often underestimated, innovation in the ESG framework that marks a clear departure from the stakeholder approach in business ethics. In particular, while the triple bottom line was meant to emphasize the inclusion of nonfinancial factors, such as the environment and other social concerns, ESG treats the three pillars, environmental, social, and governance, all in the same way as relevant factors from the perspective of shareholders. The main problem with ESG, then, is that the introduction of nonfinancial concerns may lead to breaches of agency obligations or open the door to misconduct by some agents. The problem is not so much that ESG funds include nonstrictly financial concerns, since it is possible that investors have an interest in promoting social and/or environmental objectives as well as profits. Rather, according to the authors, the problem is that ESG funds bundle too many different concerns together, which is likely to confuse investors rather than inform them, and thus, reduce transparency. To illustrate this problem, they consider the case of pension funds. These funds are constrained in ways that other funds are not, and fiduciary duties impose important limits on the inclusion of ESG factors. In many countries, notably the United States and Canada, pension fund managers are legally obliged to act in the sole interest of the beneficiaries with a primary focus on financial performance. The problem, as Heath and Pouryousefi see it, does not require eliminating nonfinancial factors from investor initiatives, but rather limiting such factors to those that best and most accessibly align with shareholder perceived interests while respecting local legal regulations.
A different, critical perspective on the scope and the necessarily plural purposes of ESG is instead offered by Valentina Gentile, Eric Orts, and Alan Strudler in Chapter 3 (also three of the co-editors of this book and co-authors of the introduction). They argue that contributing to the public good by respecting a pluralism of business purposes should be a priority from an ESG perspective. The chapter examines the controversies over the purposes and objectives of ESG and defends a conception of ESG as inextricably linked to environmental and social goals. While criticizing a profit-maximization understanding of ESG, the authors suggest that a plausible understanding of ESG purposes should include moral responsibility and ethical reasoning, which may conflict with the priority of financial returns. In defending this alternative normative account of ESG purposes, the authors consider the question of who has the legal, political, and moral authority to decide on this matter. This question is inevitably tied to the problem of what account of the “good” or “justice” this view of ESG purposes should embody, given the pluralism of conceptions of the good life – and to a certain extent also of justice – emerging in our societies. In this context, they introduce what they call the Political Liberal Problem. Their account of this problem recommends that corporate leaders should refrain from promoting a particular view of the good life on behalf of their constituents. The authors show that a normative conception of ESG purposes depends crucially on the ability to defend the relatively autonomous moral judgment of corporate leaders in setting ESG policies and strategies. Thus, on the one hand, this view requires relaxing the fiduciary duties that bind managers and directors to shareholders. On the other hand, to be widely defensible, ESG policies and strategies should be aligned with widely shared social and environmental goals that democratic societies are likely to support.
2.2 Critical Perspectives on ESG: Bridging the Gap between Profitability and Sustainability
With the suggestive title “Is ESG dead? Long live ESG,” Lindsay Hooper’s (Reference Hooper2024) recent article in the Financial Times calls for a fundamental redesign of markets to reduce the existing gap between profitability and sustainability. On this account, ESG, in its current form based on disclosure and voluntary market action, will not be the catalyst for the change needed to address existential threats such as climate change or global inequality. The market itself will not survive if it does not respond properly to these challenges. The future of ESG, on Hooper’s account, critically depends on whether firms and major financial actors will be able to prioritize long-term social and environmental objectives over short-term financial returns.
In line with this view, the chapters included in this part of the volume suggest that the logic of profit maximization as a ground for justifying ESG should be replaced with a more robust ethical approach – one which allows prioritizing a proactive commitment to protect certain values designated in the categories of environment, society, and governance in a manner that goes beyond profit maximization.
It is often said that ESG, as it is currently conceived and practised, problematically reduces different values and objectives to one single valuation system, namely, financial materiality. The crux of the issue lies in the incommensurability between social and environmental goals and the objectives of economic efficiency or success.
In Chapter 4, the philosopher Thomas Donaldson explains why “intrinsic values” such as environmental integrity are in fact “incommensurable” with the language of efficiency he and argues that we need an alternative conceptualization of ESG to effectively include these values in the business strategies of firms. Donaldson points out that intrinsic values relate to a normative language that serves to justify what is right or good to do. Instead, efficiency is valued instrumentally, that is, to the extent that it advances some intrinsic good. In essence, current efficiency-based business models are inadequate because they both underestimate and misunderstand the importance of the moral dimension. Problems such as the environmental crisis cannot be addressed, let alone solved, without taking a normative stance.
For Donaldson, strategic approaches to CSR and, more recently, ESG strategies that emphasize the convergence of efficiency and sustainability objectives fail to recognize that there is an inevitable “value gap” between the two. Very often firms deviate from ideal social and environmental outcomes. Moreover, Donaldson warns, deviations that show a pattern in relation to certain deep values are particularly damaging. In such cases, it is necessary to integrate these values along with other concerns, such as shareholder returns, into the decision-making process itself. Donaldson concludes then, for example, that companies in extractive industries such as oil and mining should incorporate the intrinsic value of environmental integrity into their governance framework, and that this intrinsic value should be pursued even at the expense of financial returns.
Colin Mayer, in Chapter 5, also insists that the traditional concern with maximizing shareholder returns alone is inadequate to meet the critical challenges we face, which require a much broader ideal of responsibility. Mayer invites us to rethink the concept of economic “success” through the lenses of Adam Smith’s idea of an “impartial spectator,” which suggests embracing a perspective that goes beyond individual self-interest. Profit should not come from harming others, says Mayer. Companies should therefore bear the costs of correcting, repairing, or mitigating the harm they cause to others and make adequate provision for the costs that will arise in the future. Without these limitations, business success will lead eventually instead to failure. Thus, a sophisticated understanding of Smith’s impartial spectator reveals the need for business purposes that “produce profitable solutions for the problems of people and planet, not profiting from producing problems for either.” Success, for Mayer, depends on the ability to provide solutions rather than creating problems for others. This view, which combines a robust sense of responsibility with the principle of “profit without harm,” should inform current ESG strategies.
In Chapter 6, Andreas Georg Scherer, Dana Entenza, and David Sieber-Mengel provide a different normative critique of the traditional “business case” for ESG from a deliberative democracy perspective. The authors insist that this traditional approach stems from a problematic interpretation of the market and states, understood as entities that can regulate each other and generate “win-win” solutions. Based on these premises, proponents of ESG – ever since its first elaboration at the United Nations – have systematically excluded the critical voices of key actors such as nonprofit organizations, civil society, and, more generally, those most affected by the results of their economic activity from the processes of gathering and processing relevant information. This has led to the consecration of a model that is inadequate to address some complex, uncertain, and important challenges, such as climate change and global inequality. Absent certain premises, such as rationality and perfect information, markets have no control over negative externalities arising from economic activity. Similarly, these externalities cannot be bridged by states that are weakened by globalization. ESG investing therefore needs to be reformulated to directly address these critical social and environmental problems. For Scherer, Entenza, and Sieber, the first step in this process involves changing the way relevant information is collected and processed. Their chapter recommends that the main actors involved in this process, in particular the rating agencies, should include voices from outside the financial world and develop a deliberative approach that puts a variety of stakeholders and social and environmental issues at the center of ESG logic and policy-making.
2.3 ESG Disclosure: Ethical Dilemmas, Materiality, and Beyond
Disclosure of relevant information about social and environmental impacts along with financial performance is, as we have seen, a hallmark of the ESG movement, marking a clear shift from traditional approaches to CSR and sustainability. Yet, several important questions arise: Why is disclosure so important? What is the real purpose of disclosure? Are existing ESG metrics sufficient? The chapters included in this part all focus on ESG disclosure, examining its role, instruments, and limitations.
Steen Vallentin, in Chapter 7, presents a view of ESG disclosure that goes beyond impact assessment to provide an integrated information system for collecting, analyzing, and disseminating data on environmental, social, and governance performance. ESG therefore touches on a distinct ethical dimension, which is what he calls “informational ethics.” Informational ethics emphasizes the importance of collecting, processing, and publishing accurate and relevant data to measure environmental, social, and governance performance. It helps to prevent greenwashing and create a more robust information infrastructure. Vallentin argues that the ethics of ESG needs to be understood in terms of the ability to satisfy growing information needs by investors and other stakeholder groups. He conceptualizes ESG not as a new standalone concept that remains detached from prior concepts, such as CSR and business ethics, but as a framework that builds on and extends the modes of “responsibilization” introduced by such concepts.
In Chapter 8, Andreas Rasche (also a co-editor of the book and co-author of this introduction) notes that the alleged nonethical and “objective” nature of ESG metrics and measurements, far from demonstrating that there is a natural alignment between profit and ethical goals, often leads to anti-ethical practices. Very often, moral considerations are crowded out of the conceptual space of sustainability itself. Rasche argues that the marginalization of ethics is the result of a complex process involving both the collection and processing of relevant information for the construction of ESG metrics. The chapter provides a detailed description of the actors involved in collecting relevant information for quantification and the different ethical issues at stake. It focuses on three key dimensions of quantification – visibility/invisibility, power, and opportunity – that raise ethical concerns within the context of ESG integration practices. First, the quantification of noncomparable values, implicit in financial materiality, risks making some environmental and social problems invisible. Second, aggregating data can also render some critical ethical issues invisible. Third, the practice of standardizing metrics for comparative purposes, promoted primarily by rating agencies and companies, contributes to the opacity of ESG metrics. Finally, the unequal power of the various actors involved in this process results in limited access to data for the majority of actors. According to Rasche’s analysis, then, not only do prevailing ESG practices often ignore ethical considerations, but they can also often affirmatively cause or at least encourage unethical business behavior.
In Chapter 9, Laura Marie Edinger-Schons and Judith Stroehle also discuss the quantification of social and environmental impacts. Their chapter identifies three related problems connected with monetary valuation of nonfinancial impacts. First, as Donaldson also emphasizes in Chapter 4, this approach does not consider entities that have value in themselves such as human life and ecosystems. Indeed, as Edinger-Schons and Stroehle explain, the use of ESG metrics could even encourage the exploitation of the environment and human lives if this proves to be economically beneficial. Second, they argue that a purely quantitative approach tends to underestimate the intrinsic importance of ethical and social values that cannot be compensated for by economic gains. Finally, ESG strategies and metrics developed in the West are often imposed top-down in the global South in contexts that are very different in terms of socioeconomic organization and culture. This leads to forms of neo-colonialism. Edinger-Schons and Stroehle therefore propose an approach to sustainability impact assessment that should complement traditional quantitative methods based on five principles: respect for intrinsic values, proactive harm prevention, equity, transparency and accountability, and long-term sustainability.
3 Conclusion
Taken together, the chapters in this book emphasize that the contemporary theory and practice of ESG cannot ignore ethics. Doing so will lead either to greenwashing (explicitly or implicitly) or a failure to make progress on the substance of ESG objectives. In terms of their predictions and prescriptions, the authors here differ. Some see the prevailing theories and practices that emphasize financial materiality and a focus on shareholder primacy as either their predicted future direction, their prescribed future direction, or both. Others believe ESG can have a positive ethical and environmental impact if legal or political reforms are adopted – such as more robust informational regimes or more inclusive democratic processes. Improvements in terms of the accuracy and relevance of current ESG practices are also feasible. At a minimum, the current political controversies and academic debates surrounding prevailing theories and practices of ESG mean that the world will move, in some manner, beyond the status quo. ESG may in fact die, but if so, it will most likely be replaced by some other superseding approach, because the larger social and environmental problems that ESG identifies will not disappear. ESG may also adapt, responding to ethical, legal, and other criticisms raised in this book and elsewhere. We hope, in any event, that this collection of contributions will help to advance and deepen debates about ESG and how it can (or cannot) contribute to finding desperately needed solutions to some of the largest and most pressing social and environmental challenges that we face in our world today.
