Valuing ESG

Authors

Aneil Kovvali
Yair Listokin

Abstract

Corporate environmental, social, and governance (ESG) commitments promise to make capitalism better. Unfortunately, ESG has become a hotbed of hype and controversy. The core problem is that ESG mixes vague environmental and social goals with a profit maximization goal and does not provide a framework for resolving the conflicts that exist between them. The result is confusion that invites deception and cynicism. This Article proposes a mechanism for resolving conflicts between goals by translating them into the common language of money. Once nonpecuniary environmental or social goals are translated into dollar values, they can provide clear and actionable guidance for firms and investors, enabling ESG to fulfill its promise.

To achieve this, corporations and institutional investors that claim to be ESG-friendly should publicly commit to specific valuations for ESG issues. For example, a company or mutual fund concerned with both climate change and profit might commit to valuing a metric ton of carbon emissions at $100 in its charter. The company would use that valuation as a metric in its assessment of projects, pursuing only those projects that would remain “profitable” after adjusting its forecasted cashflows by subtracting $100 for every ton of additional carbon emitted. A mutual fund would use the valuation when voting on climate-related governance issues or investment decisions. For example, the fund would back a shareholder resolution supporting lower corporate carbon emissions so long as the resolution would not reduce profits by more than $100 per ton of carbon saved. Similarly, the fund might pick stocks for investment based on potential profitability at a carbon price of $100. In effect, companies and investors would bid on their valuation of ESG impacts relative to ordinary profit maximization, sending clear and actionable signals on actual and desired behavior. By providing concrete standards and a sorting mechanism for making sense of competing goals, valuation would help realize the potential of ESG investing.

Rights

© 2024 Brigham Young University Law Review

Recommended Citation

Aneil Kovvali and Yair Listokin, Valuing ESG, 49 BYU L. Rev. 705 (2024).
Available at: https://digitalcommons.law.byu.edu/lawreview/vol49/iss3/7