Page 25 - Delaware Lawyer - Fall 2022

Sam Hirzel, Kurt Heyman, Tricia Enerio, Elizabeth DeFelice and Dominick Gattuso of Heyman Enerio Gattuso & Hirzel LLP
closures and legal standards evolve, litiga- tion will likely ensue in Delaware courts. To what extent, if any, will ESG concerns affect the long-standing Delaware doctrine of shareholder primacy and board focus on wealth maximization? The available statu- tory and decisional evidence suggests that any change will be evolutionary, not revo- lutionary.
ESG: Terminology and Historical Background
Advocates of an ESG investment strat- egy believe that corporations should en- gage in sustainable business practices. The term “sustainable” has no fixed definition, but it generally connotes concerns relating to the environment, social welfare and the economy writ large: “A sustainable busi- ness strategy requires a plan to create long- term value by managing both the business’ financial and non-financial capital.”2 Put
differently, a business practice is deemed sustainable or unsustainable by reference to its effect on maintaining the supply of several “vital capitals.”3
Next, the concept of “corporate so- cial responsibility” (CSR) is a qualitative, process-oriented idea that comprises “the activities companies maintain to have a greater global positive impact,” such as lower carbon footprints, buying fair trade products, corporate charitable activity and updated labor practices.4 CSR strategies, if done properly and reported accurately, can enhance a firm’s business reputation and encourage investment.
In recent years, CSR has evolved into ESG, a more quantitative concept based on the development of a comprehensive set of “metrics — assessing the company’s actions and providing a system to ensure accountability.”5 This involves creating methods to measure companies’ impacts on non-financial capitals, such as labor, the environment and human rights. Inves- tors increasingly demand ESG investment products, and not only for moral or social reasons: they perceive that firms pursuing ESG goals may actually achieve “sustain- able long-term value or higher risk-adjust- ed returns for shareholders.”6
ESG investing has an international pedigree. In early 2005, former United Nations Secretary General Kofi Annan convened a global group of major insti- tutional investors, as well as experts from the investment industry and governmental organizations, to discuss adopting princi- ples of sustainable investing. In 2006, the Principles for Responsible Investing (PRI) were promulgated, and a related investor group was formed. The six Principles con- stitute collaborative pledges by member organizations to incorporate ESG issues into investment analysis and decision- making practices as well as ownership poli- cies.7 Another institution, the UN Global Compact (UNGC), describes itself as “the world’s largest corporate sustainability ini- tiative.” The UNGC encourages firms to comport with its Ten Principles on human rights, labor, environment and anti-cor- ruption issues.8
ESG Investing: Growth and Performance
ESG investing, spearheaded by in- vestment giants like Vanguard, Black Rock and T. Rowe Price, has become increasingly popular with investors who share ESG policy objectives or believe that such investing will result in long-term value enhancement — or both. By the end of 2021, assets of global exchange-traded funds with ESG investment objectives exceeded $2.7 trillion. Over $143 billion of new capital was invested in ESG funds dur- ing the fourth quarter of 2021 alone.9
Although the magnitude of ESG investing has increased, the jury is still out on how such investments have per- formed financially, whether viewed in isolation or by comparison with diver- sified investment portfolios. One ana- lyst concluded that ESG investments “have consistently ranked around the middle of their peer groups” in terms of both risk and return.10 Another was more pessimistic, stating that an ESG investment focus is “redundant” be- cause “in competitive labor markets and product markets, corporate man- agers trying to maximize long-term shareholder value should of their own accord pay attention to employee, customer, community and environ- mental interests.”11
While more research is needed, one “meta analysis” of over 1,000 ESG investment studies conducted over a five-year period resulted in a num- ber of interesting “takeaways.” First, ESG financial performance may be better over longer time horizons. Sec- ond, ESG investments may provide “downside protection” during times of social or economic crises. Third, corporate sustainability initiatives may drive financial performance due to innovation and better risk manage- ment. Fourth, managing business for a low-carbon future improves financial performance. Fifth, ESG disclosures in corporate reports do not of them- selves drive financial performance.12
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