On Nov. 3, London Business School Professor Alex Edmans gave the inaugural public lecture on corporate governance for the Institute for Corporate Governance (ICG) at Indiana University: “ESG: Do We Need It and Does It Work?”
Indiana University Professor Phil Cochran wrote, “Edmans recognizes that in a positive-sum (or “pie-growing”) world the returns on many ESG investments are quite difficult to quantify. However, Edmans suggests that will in the long run such investments will benefit both society and the firm.”
Richard Morrison at Competitive Enterprise Institute wrote “Edmans gets a lot of points for being reasonable, fair-minded, and data-driven” and “Edmans argues that modern firms can no longer be seen merely as following the law and not doing harm, but need to assert a reputation as solving the world’s social problems, in a disinterested way unrelated to profits.” Richard then touched on another important message of Edmans’ lecture: “Firms that try to be all ESG things to all people will likely not be a successful as ones that focus on a smaller subset of relevant and material topics” on which they have a comparative advantage.
View the slides from Alex’s lecture.
Below you will find the Q&A from Alex’s seminar:
Thanks very much to everyone who attended my webinar, and for all the questions that I received at the end. I only had time to answer some of them live, so am very happy to answer the other questions here. I also include some questions that I did answer live, because this allows me to add supplementary material (e.g. articles I’ve written on the topic) in case they are of value.
 World Economic Forum suggests 21 CORE METRICS and 34 EXPANDED METRICS to monitor ESG progress by companies. What is your opinion on those metrics. Do you endorse them?
Many of these metrics are not backed up by evidence. Indeed, the evidential underpinning for the whole report is shaky. The report states “There is emerging evidence that purpose-led firms outperform their peers in terms of shareholder value32”. Footnote 32 is this:
32. Michael Porter, George Serafeim, Mark Kramer, “Where ESG Fails”. Institutional
Investor, October 2019.
When you click on the article, the first line is “Despite countless studies, there has never been conclusive evidence that socially responsible screens deliver alpha”, which is the opposite of the quote in the report. However, due to confirmation bias, many people may have taken the quote at face value.
Going to specific metrics that the WEF recommends, one is the ratio of CEO pay to worker pay. However, careful academic research has found that high pay ratios are positively, not negatively, linked to firm value – and this result has been documented in the US, UK, and Germany.
Moreover, the problem is not just the particular approach that WEF has taken or the specific metrics that they have suggested, but the general concern that metrics only capture quantitative dimensions, yet a substantial part of sustainability is qualitative. An excessive focus on metrics can lead to “hitting the target, but missing the point”. For example, an emphasis on wages can lead to companies underweighting meaningful work and skills development. This is definitely not to say that we should have no metrics at all – data is useful – but that users of metrics need to be aware of their limitations. Many investors use them mechanically to drive decisions, and clients evaluate whether a fund is sustainable exclusively using the metrics of the companies in their portfolio. For further detail, please see my article “The Dangers of Sustainability Metrics”.
 Does the necessarily subjective nature of ESG investing mean that government agencies (like the U.S. SEC) should avoid issuing regulations in the area?
It does. Certainly, governments should encourage (and, in some cases, mandate) disclosure of certain ESG metrics. However, to regulate them – require companies to meet particular standards for these ESG metrics – is highly problematic for several reasons. First, as per my prior answer, it can lead to companies focusing only on the quantitative dimensions being measured rather than qualitative aspects. For example, mandating a minimum level of ethnic diversity in the board (which would benefit me) would be problematic as ignores the myriad of other dimensions of diversity (e.g. socioeconomic, educational, experiential). It’s not clear that the government should be telling companies who to hire; companies can decide what’s optimal in their circumstances. Certainly, companies should report the decisions they’ve made so that investors and stakeholders can evaluate them, but mandating the decisions themselves is problematic.
By analogy, the No Child Left Behind Act aimed to bring accountability to education, a field historically plagued by a lack of measurement/accountability – similar to how the current calls for ESG regulation are motivated by the historic lack of measurement/accountability in ESG. However, it led to schools “teaching to the test” – focusing entirely on the dimensions being measured. There is the risk of similar unintended consequences with a prescriptive approach to ESG regulation.
A second problem is that reasonable people may disagree even when presented with the same information. It’s well-known that ESG ratings widely diverge (see my article “The Inconsistency of ESG Ratings: Implications for Investors”). This is because an ESG assessment is necessarily subjective, as highlighted in the question. There are different ways to measure a particular item (e.g. is female-friendliness measured by the % of women on the board, the % of women in the workforce, or the gender pay gap?) and different ways to weigh different items (if A is more female-friendly than B but emits more carbon, which is the more sustainable company?) Any regulation will endorse one, and only one, view of the world. The same concern applies to ESG certifications, such as B Corp status. While I agree with their intent, it’s not clear why B Lab should be the one enlightened being that gets to decide which companies are ethical and which are not, because this assessment is necessarily subjective.
 Considering the difficult to assess the value of ESG factors, how do you value the efforts at the international level (e.g. G20, IFRS,..) to converge over a common disclosure framework and towards the alignment of different set of rules?
Please see my prior two responses. Common disclosure frameworks should definitely be encouraged. The danger is when they become too prescriptive, i.e. policymakers set the rules themselves, or investors effectively set rules by only investing in companies which meet minimum quantitative standards – without taking context into account or considering qualitative factors.
 What is your opinion on Jesse Fried’s article on diversity?
I think the article is very important, and provides much-needed evidential underpinning to a debate that has become increasingly fact-free. I am a strong supporter of diversity, being an ethnic minority myself, so my comments are based only on the scientific evidence rather than ideology. There are many papers that claim to find a positive impact of diversity on performance, but the evidence is actually very weak. Most egregious is a study which ran 90 regressions linking diversity to performance. None were significant, yet it claimed in the Executive Summary to have found a link. Jesse Fried’s article succinctly summarises what the most rigorous academic research on diversity finds – which is no relationship or, sometimes, a negative relationship.
Note that the absence of financial benefits of diversity does not mean there are no benefits of diversity – companies might pursue diversity for moral or ethical reasons – which is why the misrepresentation of data is not only disingenuous, but unnecessary. For further detail, including a summary of Fried’s article and the paper that claimed results despite 0 out of 90 regressions being significant, please see my article “Is There Really A Business Case For Diversity?”
 Every country is promoting ESGs. Are there any bad sides of doing intensive ESG?
Are you concerned about the resources devoted to virtue signalling that does not lead to fundamental improvement, but firms feel the pressure to appear virtuous?
These questions were asked by separate attendees but address a similar point. Often people talk about ESG as if more is better, but – as any other corporate decision – there are diminishing returns and, after a point, ESG becomes wasteful. CEOs have substantial personal incentives to undertake ESG even if it is excessive, and in particular to signal their ESG very publicly. They end up being seen as saviours of capitalism even if they underperform (e.g. Emmanuel Faber) or even if their primary product does not clearly create value for society (e.g. Ben & Jerry’s, whose main product contributes to global obesity). In the Q&A I referred to another benefit to the CEO – by donating to charities associated with members of her board, a CEO ends up being paid more and being less likely to be fired for poor performance. This was documented in a paper by Institute for Corporate Governance Director Jun Yang, co-authored with Ye Cai and Jin Xu, entitled “Paying by Donating: Corporate Donations Affiliated With Independent Directors.”
The solution to greenwashing is to evaluate ESG activities by the three principles referred to in my talk – multiplication, comparative advantage, and materiality. These principles help ensure that the activities truly create value for both shareholders and society, rather than being driven by good PR. For further detail on these principles, please see Chapter 3 of my book “Grow the Pie: How Great Companies Deliver Both Purpose and Profit”.
 I have a question regarding the incentives of doing ESG. You mentioned that firms should be encouraged to actually “do good” (with the intrinsic incentive of actually “doing good” rather than to follow an “instrumental approach”). This reminds me of the impression management of ESG investments and greenwashing disclosure practice. My question is that “what do you think regulators can do to curb such behaviours? Or this should be left to the market?” Thank you!
I think it is very difficult for regulators to curb such behaviours; instead, I fear that regulation will encourage such behaviours as companies can simply tick the regulatory boxes and focus only on the dimensions of ESG that have to be disclosed. Instead, it should be left to the market, since investors can evaluate whether the principles of multiplication, comparative advantage, and materiality are being followed.
Milton Friedman never said that a corporation should be a bad actor in search of profits. He was saying that if the company fails to make a profit it fails the shareholders. The implication is that if the corporation fails, workers lose jobs and customers lose their source of goods and services. That is a loss to society in general. I fully agree. Successful companies not only make profits, but they create jobs and provide goods and services that customers want. Many critics of Friedman (and shareholder capitalism more generally) have the “fixed pie” mentality, that the value created by a company is a fixed pie and so anything that goes to shareholders is at the expense of stakeholders. Thus, low profits are a good thing because it means that you’re giving more to your stakeholders. But the pie is not fixed. Companies that fail to make profits in the long-term are ones that shrink the pie through complacency and mismanagement. An example is Kodak, whose failure to respond to digitisation led to its bankruptcy in 2012. Not only was $31 billion of shareholder value wiped out, but also nearly 150,000 people lost their jobs. For further detail, please see my article “What Stakeholder Capitalism Can Learn From Milton Friedman.”
 It’s very original to contemplate M. Friedman 1970 proposition as a theorem. In that case, assuming shareholder maximization as the dependent variable, what the independent variables could be?
Thank you. A theorem needn’t involve dependent or independent variables; rather, it’s an “if … then” statement. For Modigliani-Miller, it’s “if we have perfect capital markets, then firm value is independent of capital structure.” For Friedman, it’s “if there’s a well-functioning government that internalizes externalities, and companies have no comparative advantage in serving society, then companies maximise social welfare by maximizing long-term profits.” For further detail, please see my article “What Stakeholder Capitalism Can Learn From Milton Friedman.”
 I really like how you analyze those underlying implicit assumptions in Friedman (1970). I find the third assumption particularly useful and sometimes hard to distinguish empirically. I know that you talked about some academic papers, but was wondering if you have more thoughts and some more suggestions on distinguishing firms’ intrinsic and instrumental motivations empirically?
Unfortunately, this will be hard to disentangle using a large-scale empirical analysis, as it requires bespoke analysis of individual companies. However, investors (or other stakeholders) might be able to help disentangle the motivations for a particular firm. First, instrumental motivations tend to be reactive. For example, many companies are now claiming to prioritise diversity as it’s a popular issue, and so they think that doing so will improve their PR. Companies that truly cared about diversity would have taken it seriously even before George Floyd’s murder. Second, instrumental motivations tend to focus on observable outcomes, e.g. adding token minorities to the board to tick a box. Intrinsic motivations are more hidden, such as creating a corporate culture that encourages dissent. Investors can uncover such actions through a “boots on the ground” approach of speaking to management (and, potentially, employees if they have access), but it is difficult for academic researchers to obtain large scale data on this.
 What is your perspective on the popularity now of ‘purpose’ as a solution for business evils/route to businesses actively doing good? Is there evidence to support the idea that ‘purpose’ is the/best way to encourage companies to actively do good? Should investors be demanding companies have a clear purpose (beyond/including profit)?
Purpose is indeed valuable as a route to actively doing good because it frees companies to undertake investments that couldn’t be justified with an instrumental calculation. It’s analogous to a person’s purpose – she chooses a job that she’s passionate about, rather than one that makes money, but by doing a job she loves, she might excel in her career and become financially successful as a by-product.
It is difficult to provide convincing evidence that purpose leads to value creation, because purpose is not randomly assigned to companies. Instead, companies choose to adopt a purpose, and the ones that choose to do so are likely ones that are creating value for wider society anyway. Thus, this requires a logical argument rather than one that’s based on hard data. Purpose is a “north star” which provides direction to a company and inspires it to think about actively creating value, just like having an ambition (e.g. something specific like running a marathon, or something general like being a great parent) inspires a person.
I’m not sure whether investors should be demanding companies have a clear purpose. I don’t think purpose is something that you can really force upon a company, any more than you can force a person to have an ambition she wouldn’t have anyway. If you are having to demand that a company have a purpose, you probably don’t want to be an investor in that company.
 How do you account for the fact that ESG actions can be used to distract from (used as a tool in lobbying against) necessary regulations?
I am less concerned that they are a distraction. Tariq Fancy claimed that ESG distracts from regulation, but he provides no evidence to support this or any of his other assertions despite his essay running to 40 pages. Instead, many ESG investors are supporters of regulation; for example, in July 2021, investors representing over $6 trillion in assets called for a global carbon price. Please see my response to Tariq Fancy, “Is Sustainable Investing Really a Dangerous Placebo?”, for more details.
 Could you share with us your thoughts on the future direction of ESG research, both theoretical research and empirical work? What are the important and interesting questions to be answered?
I am pleased that many academics are now interested in ESG – when I started out in this field 15 years ago, it was deeply unpopular. However, just like in the real world, there’s a serious danger of ESG becoming a bubble in academia. Some are jumping on the bandwagon to write papers on ESG with little knowledge of institutional detail. There are some theory models that aim to model ESG but what they model is substantially at odds with what happens in the real world, and many empirical papers which use measures of ESG which are similarly divorced from reality. However, since journals are also rushing to publish on ESG, but some editors and referees have little knowledge on the topic since it’s new, many erroneous papers get published. Then, future papers make the same incorrect assumptions, citing published papers as justification.
One example is the common use of “voting against management” as a sign of good investor governance/monitoring. But it takes neither skill nor time to vote against management; you can simply do so without analysing the issue to be voted upon. In reality, many investors engage with management to ensure that it ends up making a proposal that they are willing to vote for. One paper that recognises this is “Do Index Funds Monitor?” by Heath, Macciocchi, Michaely, and Ringgenberg. They address this issue by studying investor voting on proposals made by other shareholders, rather than management, for which engagement with management is moot.
Thus, one important future dimension is for both theoretical and empirical research to be much more aligned with institutional detail than it is currently. A second is for it to be more nuanced. Many papers study “is ESG good?” or “is ESG bad?” but ESG lumps together many different dimensions. Some of them may conflict. For example, G tends to be more about shareholders while ES are about stakeholders; closing down a polluting plant improves E but may worsen S by creating job losses. Similarly, whether ESG (or a specific dimension of ESG) is good or bad may vary from industry to industry.
All that being said, the idea of highlighting the important and interesting questions to be answered is slightly problematic. Research typically isn’t about “problem solving” (taking a known problem and finding how to solve it), but “problem finding” (coming up with an unknown problem). The seminal papers on ESG were written before ESG became popular and before anyone outlined ESG as research topic to be analysed. This also has implications for research funding bodies. Often funding bodies (e.g. National Science Foundation, European Research Council) require you to come up with a research proposal, then they approve the proposal and then you do the research. This is not how the most innovative research works. The way funding bodies are set up prioritises non-innovative research, as only such research can be clearly specified from the outset and evaluated by outsiders.
 At COP26 UK Chancellor Rishi Sunak has just announced the complete “rewiring” of the entire global financial system for net zero. This smacks somewhat of the Emperor’s new clothes but are companies and shareholders going to be happy with this mandated redirection of corporate strategy and presumably corporate governance?
I have not studied Sunak’s announcement in detail, but have studied his Greening Finance: A Roadmap to Sustainable Investing. The intent is positive, but the devil really is in the detail – it’s very difficult to define what “net zero” actually means due to second- and third-order effects. Moreover, the biggest thing that will move the needle is for governments to coordinate to have a global carbon tax (or as close to this as possible), and the government’s self-congratulation is unwarranted when they will not undertake the most effective remedy. For further detail of these concerns, please see the article “Green Finance Roadmap Still Missing Key Details”.
On “mandated redirection of corporate strategy”, I can comment on this as it’s not specific to Sunak’s announcement. The danger of such prescriptive approaches is they are one-size-fits-all. Instead, companies should be allowed to decide what is the best approach for their particular situation. This is why a carbon tax is the optimal solution – it leads to companies internalising their externalities, but a company might still choose to pollute if the social benefit of doing so (captured by the prices customers are willing to pay for its products) exceeds it.
 In theory govs could use taxation as a mechanism for correcting “some” inequality, however, in practice (thanks to Mr. Assange and similar) it’s obvious that is middle class and lower classes that end up paying the bulk of taxes. So. not effective at all (however the available tool).
Thanks for your question, but I view this differently. I’m not sure what the evidence is that taxes are “not effective at all”, nor whether it is “obvious” that middle and lower classes end up paying the bulk of taxes. Certainly, there are ways that you can legally avoid some taxes, but things like income tax are very difficult to avoid as they’re deducted at source.
Moreover, the problem of inequality is a systematic problem, not one that’s restricted to CEOs. Any scalable skill – not just managerial talent – enjoys outsized returns in a global economy. JK Rowling is not clearly more talented than Jane Austen, but is wealthy since her books can be sold around the world and turned into films. The same is true with other scalable skills, e.g. hedge fund managers, private equity investors, actors, musicians. For further details, please see the article “Why has CEO pay risen so much faster than worker pay?”
Thus, inequality is best addressed by an income tax as this tackles inequality from all these scalable jobs. This is over and above the point that I made in the Q&A, which is that different citizens have different views on inequality, and the democratic process allows them to elect a government that best reflects the views of the electorate as a whole.
 Thanks for these remarks, Alex. Really appreciate them and your book more broadly. In addition to confirmation bias, can you comment on survivorship concerns. Examples of companies prioritizing ESG and not only failing to grow the pie but hurting the business and therefore shareholders and stakeholders—how large is that cohort?
In the Q&A I referred to Danone, which may have been so focused on ESG (and, more specifically, making public pronouncements about ESG rather than actually delivering ESG) that it forgot that its primary responsibility is to be a business – to generate long-term sustainable value. By failing in its primary responsibility, it ended up hurting stakeholders – its financial underperformance forced it to axe thousands of jobs. For further detail, please see the article “Don’t shed too many tears for Emmanuel Faber” by my colleague Tom Gosling.
 I do believe that your idea of intrinsic motivation and growing the pie is right. My question however is how to work with the term of intrinsic motivation in a Board of Directors or TwoTier-System Management Board or even a General Meeting. In other words: Do you inductively attribute the CEO’s, CTO’s etc. motivation as a “motivation of the board” or do you deductive define the intrinsically motivation of a company by its corporate culture or the official catalogue of values?
Companies don’t have intrinsic motivation; people do. For investors to ascertain whether companies have intrinsic motivation, they should try to meet the relevant people. Certainly, the management team and board are important, because they set the tone. However, meeting employees are also valuable, because that will help discern whether purpose is shared throughout the organisation. If investors can’t gain access to employees, they can ask management about how they sought employee input into the formation of their purpose, and how they are ensuring that purpose flows throughout the organisation. Chapter 8 of Grow the Pie discusses several tools that companies can use to put purpose into practice that investors can ask about.
 How do you feel about companies partnering together on innovative/responsible approaches? How do companies keep the greater good in mind, but also their own individual survivability in terms of separating themselves from their competitors?
Companies should always be open to partnerships. The pie is not fixed, so helping your competitors needn’t necessarily hurt you; your rivals may be partners in growing the pie. A recent study shows how collective engagement between investors creates value by achieving outcomes that investors may have been unable to achieve individually. However, like with most things, partnerships aren’t a panacea. For example, some investors may justly feel that their analysis of a company’s areas of improvement are their own intellectual property that others shouldn’t free ride off. A partnership is only win-win if both sides are making significant contributions.
About the Speaker:
Wei Jiang is Arthur F. Burns Professor of Free and Competitive Enterprise at Columbia University. She is a Senior Fellow at the Program on Corporate Governance at Harvard Law School, a Research Associate of the NBER—Law and Economics, a member of the Committee on Capital Market Regulation, and a member of the Academic Advisory Council of the Managed Funds Association. She is currently the Vice President of the Society of Financial Studies (SFS).
Professor Jiang’s main research interests include corporate governance, institutional investors, and how technology reshapes the financial markets. She has published extensively in top finance, economics, and law journals, and her research has been frequently featured in major media. She received numerous awards for research excellence, including the best paper prizes from all top-three finance journals. She served as editor of Review of Financial Studies and Management Science, associate editor at the Journal of Finance, and board member of the American Finance Association. She was named the Fellow of the Financial Management Association (FMA) in 2018.
Professor Jiang received her BA and MA in international economics from Fudan University (China), and PhD in economics from the University of Chicago in 2001.