Non-Legal Advice: How Attorneys Counsel Clients on Investors' ESG Demands

• Author: Carolyn Exarhakis
• Position: J.D., Georgetown University Law Center (expected May 2022); B.A., University of Colorado Boulder (2017)
• Pages: 957-975

Non-Legal Advice: How Attorneys Counsel Clients

on Investors’ ESG Demands

CAROLYN EXARHAKIS*

INTRODUCTION

In 1970, Milton Friedman, an economist at the University of Chicago, pub-

lished “A Friedman doctrine – The Social Responsibility of Business Is to

Increase Its Profits” in the New York Times, in which he argued that companies

should focus exclusively on providing financial benefits to their shareholders.

1

In

August 2019, the Milton Friedman doctrine was forcefully rejected by the

Business Roundtable (“BRT”) when they revised their Principles of Corporate

Governance (“BRT Principles”) to redefine that the purpose of a corporation is to

“deliver value to all” stakeholders, including customers, employees, suppliers,

communities, and shareholders.’”

2

The CEOs from 181 publicly traded compa-

nies signed the BRT’s revised BRT Principles.

3

Companies switched their focus

from “shareholders” to “all stakeholders,” and the updated BRT Principles advise

corporations to “deliver value to customers, invest in employees, deal fairly and

ethically with suppliers, support the communities in which they work, and gener-

ate long-term value for shareholders.”

4

Many, however, find the BRT Principles

and other similar statements, such as social media posts promising to support

racial justice, to have been more performative than substantive.

5

* J.D., Georgetown University Law Center (expected May 2022); B.A., University of Colorado Boulder

(2017). © 2021, Carolyn Exarhakis.

1. Milton Friedman, A Friedman doctrine– The Social Responsibility of Business is to Increase Its Profits,

N.Y. TIMES (Sept. 13, 1970) § SM (Magazine), at 22, https://timesmachine.nytimes.com/timesmachine/1970/

09/13/issue.html [https://perma.cc/WE5J-BMJZ].

2. Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All

Americans’, BUSINESS ROUNDTABLE (Aug. 2019). See generally STATEMENT ON THE PURPOSE OF A

CORPORATION, BUSINESS ROUNDTABLE (DATE?), https://opportunity.businessroundtable.org/ourcommitment/

[https://perma.cc/5B9L-3PJ7].

3. KKS Advisors & Test of Corporate Purpose, COVID-19 and Inequality: A Test of Corporate Purpose, 6

(Sept. 2020), https://c6a26163-5098-4e74-89da-9f6c9cc2e20c.filesusr.com/ugd/f64551_67ddbd692f7d476e9

71388737ecfbf77.pdf [https://perma.cc/F39Y-Z2CA].

4. Id. at 23.

5. See, e.g., Peter S. Goodman, Stakeholder Capitalism Gets a Report Card. It’s Not Good., N.Y. TIMES

(Sept. 22, 2020, updated Dec. 2, 2020) (finding that signatories to the BRT Principles have performed no better

than other companies. Shareholders, during the COVID-19 pandemic, have “suffered initial plunges in asset

values but then recovered; tens of millions of wage-earners remain jobless, massing at food banks”); Lucien

Bebchuk & Roberto Tallarita, The Illusory Promise of Stakeholders Governance, HARV. L. SCH. F. ON CORP.

GOVERNANCE (2020) (asserting in a blog post summarizing their forthcoming Cornell Law Review article that

the BRT Principles should “not be expected, and was largely not intended by its signatories, to bring about

major changes in the treatment of stakeholders”); Letter from Senator Elizabeth Warren to Business

957

The relevance and importance of ESG is skyrocketing.

6

ESG stands for “envi-

ronmental, social and corporate governance.” The “environmental” prong

includes greenhouse gas emissions, energy efficiency, and waste management.

7

The “social” prong includes human rights, labor standards, and employee rela-

tions.

8

Finally, the “corporate governance” prong includes board diversity, execu-

tive pay, and bribery/corruption.

9

ESG investing considers these three criteria–

environmental, social, and governance–when making investments while also con-

sidering financial returns.

10

ESG investing is premised on the assumption that

ESG practices have positive effects, at least in the long-term, on the financial per-

formance of a company.

11

Often it is considering these criteria in light of the fact

that they can have long-term effects on the financials.

12

For example, as the world

moves toward renewable energy, ESG considerations help investors understand

that oil and gas may not be as profitable as it once was; solar or wind energy

might be extremely profitable in a decade.

13

Roundtable (Sept. 17, 2020) (urging BRT signatories to take more concrete efforts, especially record and pub-

licly report the specific efforts they are taking to end their contributions to systematic racial inequality).

6. See, e.g., Rheaa Rao, How Shops Recruit for ESG Roles, IGNITES (Nov. 16, 2020) (noting there is a

“growing interest in sustainable investing” that has required asset managers to hire ESG-focused

professionals).

7. How has COVID-19 impacted ESG investing?, UBS (2020), https://www.ubs.com/global/en/asset-

management/insights/panorama/mid-year/2020/covid-19-impacted-esg-investing.html [https://perma.cc/L2ZE-

Q8UK] [hereinafter UBS REPORT ON COVID-19 IMPACTS].

8. Id.

9. Id.

10. See Riccardo Boffo & Robert Patalano, ESG Investing: Practices, Progress and Challenges, OECD

PARIS, 6 (2020), https://www.oecd.org/finance/ESG-Investing-Practices-Progress-Challenges.pdf [https://

perma.cc/KAR4-JSEA].

11. See, e.g., Crisis as Catalyst: Corporate Resiliency and the Future of ESG, STATE STREET, 6 (2020)

https://www.statestreet.com/content/dam/statestreet/documents/Articles/Crisis-as-Catalyst-Corporate-Responsiblity-

and-ESG-George-Serafeim.pdf [https://perma.cc/MNZ8-2SJ8] (acknowledging that quarterly earnings calls are

short-term performance based, whereas ESG are inherently longer term); Edelman Trust Barometer 2020, Special

Report: Institutional Investors, 15 EDELMAN? (2020), https://perma.cc/Z3MR-VBBS (88% of US investors agree

that “companies that prioritize ESG initiatives represent better opportunities for long-term returns than companies

that do not”).

12. See, e.g., UBS REPORT ON COVID-19 IMPACTS, supra note 7 (“ESG investing is based on the assump-

tion that ESG factors have financial relevance.”).

13. See, e.g., Letter from Engine No. 1 GP LLC to Exxon Mobil Corp. (Dec. 7, 2020) (letter from Engine

No. One, in coordination with one of Exxon’s largest investors, the California State Teachers’ Retirement

System, to Board of Exxon Mobil Corporation illustrating their atrocious financial performance and urging

Exxon to consider adding four new independent directors with energy industry experience to its Board);

Clifford Krauss, U.S. and European Oil Giants Go Different Ways on Climate Change, N.Y. TIMES (Sept. 21,

2020, updated Dec. 11, 2020) (noting that while European-based energy companies are “selling off oil fields,

planning a sharp reduction in emissions and investing billions in renewable energy,” American energy compa-

nies are “doubling down on oil and natural gas”); Anne Barnard, New York’s $226 Billion Pension Fund Is

Dropping Fossil Fuel Stocks, N.Y. TIMES (Dec. 9, 2020) (stating that New York State’s pension fund is drop-

ping “many of its fossil fuel stocks in the next five years and [selling] its shares in other companies that contrib-

ute to global warming”).

958 THE GEORGETOWN JOURNAL OF LEGAL ETHICS [Vol. 34:957