The Rise of ESG: a Legal Perspective

ESG stands for Environmental, Social, and Governance, and it is a method of quantifying and scoring the non-financial impacts of companies or investments. As a concept in corporate governance and institutional investment, ESG has grown massively since its formal introduction in a 2006 UN report on the Principles for Responsible Investment, which garnered the support and agreement of asset managers representing $6.5 trillion in assets under management. As of June 2019, this number has grown to $82 trillion.    

Companies incorporating ESG into their strategy and corporate culture can be broadly understood as having three primary motivations: a desire to do good, a desire to appear to do good, and a desire to achieve superior financial returns. In its 2021 address by CEO Larry Fink, BlackRock — the world’s largest asset manager — emphasizes the outperformance of ESG-incorporating firms, even within the same industry, and the necessity of “being connected to stakeholders — establishing trust with them and acting with purpose … to compete and deliver long-term, durable profits for shareholders.”


ESG reporting in the U.S. is currently voluntary. However recent trends indicate that reporting may become mandatory in the medium term: the House of Representatives recently passed the ESG Disclosure Simplification Act of 2021, mandating the U.S. Securities and Exchange Commission (SEC) to define ESG metrics and require companies to disclose their ESG metrics. Senate Republicans have opposed any such requirements, making it unlikely to pass soon, but the momentum behind ESG remains strong. The SEC has responded by proposing a new rule-making agenda that incorporates ESG by “proposing requirements for investment companies and investment advisers related to ESG factors, including ESG claims and related disclosures.” In a strongly worded statement by then-SEC Acting Chair Herren Lee, climate and ESG have been designated as “key to investors — and therefore key to our core mission.” 

This proposed rulemaking push has not gone without challenge, as evidenced by the counterarguments presented by Professor of Law and Management at Vanderbilt University Amanda Rose in her public comments to the SEC. Her argument highlights the potential financial costs of increased disclosure and “deep, more philosophical questions … For example, questions of institutional competence and democratic accountability.” Rose uses the example of the European Union’s legislative corporate social responsibility guidelines, which resulted in mandatory ESG disclosure in 2018, to underline that ESG regulation can and should originate from a democratic legislative mandate rather than a bureaucratic one.       


Regardless of the nuances of the SEC’s potential new rules, ESG is “accelerating” as its principles become incorporated into the Commodity Futures Trading Commission and the Treasury Department’s actions. Indeed, ESG continues to grow in acceptance amongst institutions and investors. A survey of over 190 leading corporate counsels in Europe and the U.S. found that 96% had implemented or were developing an ESG plan. In-house counsels play an important role in the creation and implementation of such plans with 59% of respondents having contributed to an ESG plan. A further 85% of corporate counsel believe “ESG will remain a top priority for general counsels in the future.”

Jack Kelly

Jack Kelly is a member of the Harvard Class of 2023 and an HULR Staff Writer for the Fall 2021 Issue.

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