In the United States and elsewhere, new regulations, especially reporting requirements, are supposed to help meet this need. The logic is that if a company is required to report regularly on ESG performance, it will want to have gains to report. But reporting rules remain a work in progress, and their ability to spur action is not guaranteed.
For example, if ESG reporting rules leave space for “greenwashing” – when a company signals its commitment to environmental goals but avoids genuine action – their direct impact will be significantly weakened. Moreover, the credibility of ESG claims, true or not, would be diminished, reducing the benefits to firms taking consequential actions. Improved auditing – carried out either by existing bodies or new institutions – is thus essential to any ESG-reporting regulation.
There is another challenge when it comes to the “E” in ESG: assessing risk. Some of the new reporting regulations demand risk assessments, but there is disagreement about the severity and immediacy of the risks posed by climate change and environmental degradation. To be sure, with every continent now facing serious drought conditions, and one-third of Pakistan under water, the picture is becoming clearer. But the debate is hardly settled.
This brings us to another issue that deserves more attention. When we refer to ESG goals, we implicitly assume widely shared agreement on what these goals are. But this is often not the case. While most people would probably agree that extreme inequality is both morally wrong and socially and politically undesirable, there is no consensus on the threshold beyond which inequality becomes intolerable or even toxic. Likewise, though it is clear that a sensible transition away from fossil fuels is essential, views about what that would entail vary widely. The extremes – take no action or ban fossil-fuel investment – are not helpful.
In China’s top-down system, the ruling Communist Party sets ESG priorities, decides which tradeoffs to make, and tries to ensure effective implementation through direct involvement in corporate governance. The US, by contrast, maintains a bottom-up approach, with no clear mechanism for aggregating diverse views. This is not a fatal flaw, just an element of complexity.
But if we do not recognize and account for that complexity – including different perspectives on what constitutes economic, social, and environmental well-being – efforts to advance ESG goals could look like an attempt to impose a particular agenda through the backdoor. That would generate resistance and almost certainly impede – or even reverse – progress.
Michael Spence, a Nobel laureate in economics, is professor of economics emeritus and a former dean of the Graduate School of Business at Stanford University. He is senior fellow at the Hoover Institution, senior advisor to General Atlantic, and chairman of the firm’s Global Growth Institute. He serves on the Academic Committee at Luohan Academy, and chairs the Advisory Board of the Asia Global Institute. He was chairman of the independent Commission on Growth and Development, an international body that from 2006-10 analyzed opportunities for global economic growth, and is the author of "The Next Convergence: The Future of Economic Growth in a Multispeed World" (Macmillan Publishers, 2012).