ESG and Private Ordering

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University of Chicago Law School




Easterbrook and Fischel’s seminal book The Economic Structure of Corporate Law has taught us the crucial role of markets in shaping the corporate contract. With the rise of ESG, the nature of that contract is changing, but the importance of markets (and of their limitations) is not. In this piece, building on our previous work that traces the remarkable growth of ESG to a shift in demand, primarily, but not solely, among millennials, we discuss the role of markets in shaping ESG, as well as their limitations. The rise of social values, and the increasing willingness of millennials to act on them as market participants and corporate stakeholders, has forced managers to respond in ways that multiply the effect of those values. Critically, these preferences ultimately act as a constraint on firms’ behavior, and the emergence of ESG is best understood as a product of strong, though sometimes excessive, incentives to respond to social demand. Thus, conducting a context specific incentives’ analysis, rather than assuming that markets are always efficient or inefficient, should be preserved in the ESG era.


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