A Las Vegas boutique complex litigation law firm
Scroll or swipe to go to the page.
Insight

More Than a Buzzword: ESG’s Rightful Place in the Boardroom

ESG is a copiously used term as of late, but one thing that’s abundantly clear about it? Just how misunderstood the movement and its objectives really are, and how it should impact the boardroom.

Abstract image of the earth covered in trees, leaves and nature
Maureen Gershanik

Maureen Gershanik

June 18, 2023 11:04 PM

The newest culture war in American life? ESG. The term, which refers to an investment strategy that considers a company’s “environmental, social and governance” profile, was relatively obscure pre-pandemic, forming part of the lexicon mainly of institutional asset managers, investor relations professionals and Fortune 500 company directors.

Although ESG has exploded into our mainstream consciousness, it has developed a variety of meanings, leading to confusion and disagreement about its objective. This article posits, however, that ESG has been profoundly misunderstood. Once we consider its origins, it is clear that ESG squarely belongs as a topic of discussion in the boardroom and as part of a corporation’s long-term strategic plan.

Who Cares Wins: The Origins of ESG

To make sense of ESG, it is helpful to understand its beginnings. The term was coined in the 2004 United Nations Who Cares Wins report produced by a joint initiative among the U.N. and some of the world’s largest financial institutions. The effort was part of a years-long strategy by U.N. Secretary General Kofi Annan to partner with business leaders, particularly in the financial sector, to promote a stable, sustainable global economy.[1]

Annan’s determination marked a profound shift. For decades, many considered the U.N.’s programs and policies to be distinctly anti-business. As University of Pennsylvania law professor Elizabeth Pollman has recounted, Annan saw an opportunity to make business a “part of the solution for advancing [U.N.] goals” to address globalization’s strain on the environment and society.[2] The sponsoring financial institutions recommended ways “to better integrate environmental, social and governance issues in analysis, asset management and securities brokerage” services. Pollman explains that large banks, insurance companies and investment advisers were drawn to the effort because of studies showing the “business case” for ESG.[3] According to the report: “Companies that perform better with regard to these issues can increase shareholder value by, for example, properly managing risks, anticipating regulatory action or accessing new markets, while at the same time contributing to the sustainable development of the societies in which they operate. Moreover, these issues can have a strong impact on reputation and brands, an increasingly important part of company value.”

From Elon to the State of Florida, ESG Faces Criticism

In April 2022, Elon Musk Tweeted to his followers, “I am increasingly convinced that corporate ESG is the Devil Incarnate.” Devil or not, ESG’s political critics say it is a strategy to promote “wokeness,” or left-leaning, progressive values in corporate America and (ultimately) American culture. Still, other critics are focused on the bottom line; they claim ESG promotes a shift in values at the expense of value, with pensioners and other investors forced to sacrifice financial returns for the sake of socially motivated agendas of the institutions managing their funds.

Since 2022, several states have passed so-called “anti-ESG” legislation or policies. These measures vary, but their gist is to prohibit ESG investing with state funds, including public retirement system assets, and to require the consideration solely of “pecuniary” factors when selecting investments. Notably, Florida announced in December 2022 that it would pull $2 billion of state investments from management by BlackRock, a company that considers ESG in its investment programs.

Staying on Message

Setting aside the “woke capitalism” narrative, the central message of Who Cares Wins remains critically important for corporate boards and C-suite managers to understand. Its aim, after all, was to highlight “issues which have or could have a material impact on investment value.”

Who Cares Wins framed ESG as a logical part of corporate risk management and as an awareness of opportunities to innovate, explore new markets and respond to changing consumer and societal preferences. Indeed, the report envisioned a corporation’s ESG strategy as a possible source of competitive advantage. In particular, Who Cares Wins emphasized the need for companies to monitor climate change’s impact on their business; prepare for future regulation and the eventual transition toward renewable energy sources; guard against environmental liabilities from company operations, products and services; improve workplace health and safety to increase worker retention and productivity; engage with their communities; and increase accountability of corporate decision-makers and promote honest and ethical behavior.

Although ESG has exploded into our mainstream consciousness, it has developed a variety of meanings, leading to confusion and disagreement about its objective."

The report conceived of ESG as directly linked to firm performance and enhanced investment returns. It was never intended to replace traditional investment analysis or justify making investment decisions based on political or moral agendas. In fact, the report explicitly reminds pension fund trustees that in analyzing ESG factors, they must consider their fiduciary obligations to act in the best interest of plan participants.

ESG’s Seat at the Table

Today, the ESG factors considered in Who Cares Wins have expanded to include a myriad of issues like biodiversity and water scarcity; worker training; diversity, equity and inclusion; and measures designed to give shareholders a greater voice.

As business risks and opportunities evolve, the topics encompassed within ESG may change, but the board’s responsibility to consider these issues is not new. State corporation law has long provided that a company’s business and affairs are managed by or under the direction and subject to the oversight of the board of directors.

One challenge facing corporations and their boards is that ESG is, by its very nature, long-term in focus. Matters like climate change ask boards and C-suite executives to manage risks that may arise far into the future and that they perceive as not affecting them or even their grandchildren.

Under state corporation law, though, the board is responsible for developing and monitoring the corporation’s long-term strategy. Further, directors must act in the company’s best interest, not any one shareholder or group of shareholders who may have a shorter-term focus.

A corporation exists only by the will of the people as expressed through state corporation statutes. And business corporations, certainly publicly traded ones, exist to provide some benefit—a product or service—to society at large. Thus, it is entirely reasonable to expect corporations with perpetual existence to be mindful of their impact on people and planet, along with the effect of those impacts on the value of the corporate enterprise. Similarly, it is also reasonable to expect that they be forward-thinking and consider innovative opportunities to maintain their competitiveness and brand.

The board, if properly informed, acting in good faith and without conflicts of interest, has wide latitude to consider ESG factors in its decision-making and the discretion to decide among short-, medium-, or long-term time horizons. Balancing risk and reward and exercising informed business judgment is the essence of the board’s role.

ESG in Practice

Considering ESG is an essential part of a board’s fiduciary duties, and institutional investors, like BlackRock, are paying attention. As life expectancies rise, workers must grow assets to fund longer retirements. Because a worker in her 40s may have a 30-year investment horizon or longer, it is incumbent upon the plan fiduciary managing her assets to consider the sustainability of the companies in the investment portfolio given environmental changes, evolving consumer preferences, the availability of “greener” and “cleaner” technologies and production practices, trends in human capital management and other factors.

But beyond fiduciary responsibilities, ESG makes good business sense. And—because investors are demanding it—it is consistent with free market principles. To prohibit ESG by law would be shortsighted government interference in business and, even worse, may lead to foregone opportunities and even investment losses for retirees.

Maureen Gershanik is a partner and a member of Fishman Haygood’s Business Section in New Orleans, La. She advises clients on ESG initiatives and practices in the areas of corporate law and governance, securities law, and mergers and acquisitions. She was a panelist for “Activism and ESG Considerations in Today’s World” at the 35th Annual Tulane Corporate Law Institute this past March, and she is a New Orleans 2023 Best Lawyers “Lawyer of the Year” in both Mergers and Acquisitions Law and Securities/Capital Markets Law.


[1] © Elizabeth Pollman, The Making and Meaning of ESG 7-9 (Eur. Corp. Governance Inst., Law Working Paper No. 659/2022, 2022).

[2] Id. at 9.

[3] Id. at 11.

Headline Image: Adobe Stock/erika8213

Related Articles

The Corporate Law & Commercial Litigation Legal Guide 2023


by Best Lawyers

Best Lawyers is excited to launch the Corporate Law & Commercial Litigation Legal Guide for 2023, featuring recognized lawyers for many corporate and commercial specialties.

Shadows of people on a busy street and office buildings

IN PARTNERSHIP

DSK Law: Experience, Dedication and Service to Florida


by DSK Law

DSK Law has represented clients in an array of commercial and business litigation cases in Florida with great attention to detail and communication since 1976.

Group of lawyers standing together outside in front of building

Digital IP’s New Frontier


by Elizabeth D. Ferrill and Soniya Shaw

The initial NFT mania might have run its course, but blockchain technology shows great promise in patent management and intellectual-property protections. Yet many hurdles remain.

NFT coins floating out of a framed piece of artwork on black background

Keep an Eye on AI


by Danielle Ochs and Jennifer G. Betts

Artificial intelligence tools—most notably the “generative AI” systems that have so captured the public imagination lately—are proliferating. How will legislators, regulators and employers deal with the changes these systems bring to the workplace?

Robot in business suit sits at desk beside human man in business suit

IN PARTNERSHIP

Taking an Important Case to Trial


by Sara Margolis and Steven F. Molo

MoloLamken LLP partners Steven Molo and Sara Margolis discuss how a party in a high-stakes trial might improve its chances of success, or, at least avoid disaster.

Close up view of courthouse building and word Justice

IN PARTNERSHIP

The Practice Ain’t What It Used to Be


by J. Scott Flowers

Lawyers of newer generations are taking different and often surprising approaches to their practice, but it’s important for seasoned lawyers to continue setting examples of professionalism.

Male judge in court room talking with two female lawyers

Non-Compete Agreements in the Sale of a Business


by A. Bernard Bays and John W. Kelly

In Hawaii non-compete agreements can still be enforced in the sale of businesses. Here’s a primer on how to make them enforceable.

Cartoon image of fist punching through red doors with man running on top of hand on blue background

Trending Articles

Presenting The Best Lawyers in Australia™ 2025


by Best Lawyers

Best Lawyers is proud to present The Best Lawyers in Australia for 2025, marking the 17th consecutive year of Best Lawyers awards in Australia.

Australia flag over outline of country

Legal Distinction on Display: 15th Edition of The Best Lawyers in France™


by Best Lawyers

The industry’s best lawyers and firms working in France are revealed in the newly released, comprehensive the 15th Edition of The Best Lawyers in France™.

French flag in front of country's outline

How To Find A Pro Bono Lawyer


by Best Lawyers

Best Lawyers dives into the vital role pro bono lawyers play in ensuring access to justice for all and the transformative impact they have on communities.

Hands joined around a table with phone, paper, pen and glasses

How Palworld Is Testing the Limits of Nintendo’s Legal Power


by Gregory Sirico

Many are calling the new game Palworld “Pokémon GO with guns,” noting the games striking similarities. Experts speculate how Nintendo could take legal action.

Animated figures with guns stand on top of creatures

Announcing The Best Lawyers in New Zealand™ 2025 Awards


by Best Lawyers

Best Lawyers is announcing the 16th edition of The Best Lawyers in New Zealand for 2025, including individual Best Lawyers and "Lawyer of the Year" awards.

New Zealand flag over image of country outline

Announcing the 13th Edition of Best Lawyers Rankings in the United Kingdom


by Best Lawyers

Best Lawyers is proud to announce the newest edition of legal rankings in the United Kingdom, marking the 13th consecutive edition of awards in the country.

British flag in front of country's outline

Announcing The Best Lawyers in Japan™ 2025


by Best Lawyers

For a milestone 15th edition, Best Lawyers is proud to announce The Best Lawyers in Japan.

Japan flag over outline of country

The Best Lawyers in Singapore™ 2025 Edition


by Best Lawyers

For 2025, Best Lawyers presents the most esteemed awards for lawyers and law firms in Singapore.

Singapore flag over outline of country

Announcing the 16th Edition of the Best Lawyers in Germany Rankings


by Best Lawyers

Best Lawyers announces the 16th edition of The Best Lawyers in Germany™, featuring a unique set of rankings that highlights Germany's top legal talent.

German flag in front of country's outline

How Much Is a Lawyer Consultation Fee?


by Best Lawyers

Best Lawyers breaks down the key differences between consultation and retainer fees when hiring an attorney, a crucial first step in the legal process.

Client consulting with lawyer wearing a suit

Celebrating Excellence in Law: 11th Edition of Best Lawyers in Italy™


by Best Lawyers

Best Lawyers announces the 11th edition of The Best Lawyers in Italy™, which features an elite list of awards showcasing Italy's current legal talent.

Italian flag in front of country's outline

Presenting the 2024 Best Lawyers Employment and Workers’ Compensation Legal Guide


by Best Lawyers

The 2024 Best Lawyers Employment and Workers' Compensation Legal Guide provides exclusive access to all Best Lawyers awards in related practice areas. Read below and explore the legal guide.

Illustration of several men and women in shades of orange and teal

Things to Do Before a Car Accident Happens to You


by Ellie Shaffer

In a car accident, certain things are beyond the point of no return, while some are well within an individual's control. Here's how to stay legally prepared.

Car dashcam recording street ahead

Combating Nuclear Verdicts: Empirically Supported Strategies to Deflate the Effects of Anchoring Bias


by Sloan L. Abernathy

Sometimes a verdict can be the difference between amicability and nuclear level developments. But what is anchoring bias and how can strategy combat this?

Lawyer speaking in courtroom with crowd and judge in the foreground

The Push and Pitfalls of New York’s Attempt to Expand Wrongful Death Recovery


by Elizabeth M. Midgley and V. Christopher Potenza

The New York State Legislature recently went about updating certain wrongful death provisions and how they can be carried out in the future. Here's the latest.

Red tape blocking off a section of street

Attacked From All Sides: What Is Happening in the World of Restrictive Covenants?


by Christine Bestor Townsend

One employment lawyer explains how companies can navigate challenges of federal and state governmental scrutiny on restrictive covenant agreements.

Illustration of two men pulling on string with blue door between them

This article is a part of the Best Lawyers Corporate Law & Commercial Litigation Legal Guide. Read thought leadership from recognized lawyers and navigate a list of all honorees in the associated practice areas.

Explore the Legal Guide