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Risa Goluboff, Quinn Curtis and Paul Mahoney with an image of a tree growing among money

S6 E3: Why ESG Investing Is at a Turning Point

The practice of investing in funds and companies that pay attention to environmental, social and corporate governance issues could be at a turning point, say UVA Law professors Quinn Curtis and Paul G. Mahoney.

Show Notes: Why ESG Investing Is at a Turning Point

Quinn Curtis

Quinn Curtis joined the law faculty in 2011. He teaches courses on corporate law, securities and venture capital. His research focuses on empirical law and finance.  He has written extensively on the regulation of mutual funds and retirement accounts, including empirical work on 401(k) plans, mutual fund governance and fee litigation. His other research interests include corporate governance and corporate litigation.   

His publications have appeared, among other places, in the Yale Law Journal; the University of Pennsylvania Law Review; the Journal of Law, Economics, and Organizations; and the Journal of Legal Studies. He is a board member of the Society for Empirical Legal Studies and a research member of the European Corporate Governance Institute, an international nonprofit focusing on major corporate governance issues.

Curtis received his undergraduate degrees in philosophy and physics magna cum laude from Ohio State University, where he was elected to Phi Beta Kappa. He received his J.D. from Yale Law School, where he served as an articles editor on the Yale Law Journal. He received his Ph.D. in finance from Yale School of Management in 2011. Prior to attending law school, Curtis worked as a software engineer at Microsoft Corp.

Paul G. Mahoney

Paul G. Mahoney is a David and Mary Harrison Distinguished Professor and served as dean of the Law School from 2008-16. Mahoney's teaching and research areas are securities regulation, law and economic development, corporate finance, financial derivatives and contracts. He has published widely in law reviews and peer-reviewed finance and law and economics journals. His book, “Wasting a Crisis: Why Securities Regulation Fails,” was published by the University of Chicago Press in 2015.

Mahoney joined the Law School faculty in 1990 after practicing law with the New York firm of Sullivan & Cromwell and clerking for Judge Ralph K. Winter, Jr. of the U.S. Court of Appeals for the Second Circuit and Justice Thurgood Marshall of the U.S. Supreme Court. He served as academic associate dean at the Law School from 1999 to 2004 and has held the Albert C. BeVier Research Chair and the Brokaw Chair in Corporate Law. He has been a visiting professor at the University of Chicago Law School, the University of Southern California Law School and the University of Toronto Faculty of Law. He has also worked on legal reform projects in Kazakhstan, Kyrgyzstan, Mongolia and Nepal.

Mahoney is a member of the Council on Foreign Relations and a fellow of the American Academy of Arts and Sciences. From 2018 to 2022 he served on the Securities and Exchange Commission’s Investor Advisory Committee. He served as an associate editor of the Journal of Economic Perspectives from 2004 to 2007 and as a director of the American Law and Economics Association from 2002 to 2004. He is a past recipient of the All-University Outstanding Teacher Award and the Law School's Traynor Award for excellence in faculty scholarship.

Listening to the Show



Risa Goluboff: Businesses are paying more attention to environmental, social, and governance issues that signal to investors they have certain values, but the practice is facing some blowback. On this episode of Common Law, Quinn Curtis and Paul Mahoney have a free exchange of ideas about what is called ESG, how it works, and whether it can really make the world a better place.

Paul Mahoney: There are dozens of different companies that publish ESG metrics and surprisingly little agreement among them.

Quinn Curtis: The political blowback I think has been quite a bit overstated and it may be that the ESG label's kind of at a turning point.


Risa Goluboff: Welcome back to Common Law. I'm Risa Goluboff, dean of the University of Virginia School of Law. For our sixth season, we are focused on having a free exchange of ideas in each episode. That means we're aiming for lively discussions among faculty of different views about a particular issue. Just like our faculty workshops that happen every week at the law school, we're testing new ideas, but this time, on a podcast. Today, I'm so pleased to welcome two UVA Law faculty members, Quinn Curtis and Paul Mahoney. And I should tell you that Paul was also my predecessor as dean. So I am going to be on particularly good behavior today. Welcome, Quinn. Welcome, Paul.

Paul Mahoney: Thank you.

Quinn Curtis: Thank you.

Risa Goluboff: Quinn, why don't you tell us a little bit about Paul and then Paul, you can tell us a little bit about Quinn.

Quinn Curtis: Of course. So Paul wasn't just the, uh, prior dean. He was the dean who hired me. So I'm very pleased to be on with him today. Uh, in addition to that, he's a highly regarded expert in securities regulation, a course that he teaches here, uh, law and economics, corporate finance, financial derivatives, lots of fascinating topics in law and business. He's the author of the book, “Wasting a Crisis: Why Securities Regulation Fails.” And before coming to the law school, Paul practiced law at Sullivan and Cromwell, flying all over the world to make deals, and clerked for U.S. Supreme Court Justice Thurgood Marshall.

Paul Mahoney: Now, we were – as Quinn mentioned – very fortunate to recruit him  during the time when I was dean. He was one of the first graduates of Yale's Finance Ph.D. program. He also earned his J.D. from Yale. He's an expert on corporate law, securities regulation, and venture capital. He's written extensively on the regulation of retirement accounts and other retail-focused investment funds, including, by the way, ESG funds, which makes him the perfect person to speak to our topic today. He's also somebody who one can always turn to for advice on navigating the investment world because he knows as much about retail-focused investments as anyone I know. He's written a book on the topic, the recently published “Retirement Guardrails: How Proactive Fiduciaries Can Improve Plan Outcomes,” which he co- authored with Yale professor Ian Ayres.


Risa Goluboff: Wonderful. I will say, I always leave a talk by Quinn wondering if I've made all the wrong choices about my own retirement and investments. It is so wonderful, uh, to have you both on the show and we will be right back to talk about ESG funds.


Risa Goluboff: I know I touched on this in my intro, but I thought we would just start with the basics. So what does ESG mean and is it the same thing as corporate social responsibility, which is another phrase that people hear? Or is it something different, and, and what is it?

Paul Mahoney: ESG refers to environmental, social, and governance issues. It covers a broad range of topics, so it can include climate change, board diversity, employee benefit programs, CEO pay, and a host of others. The ones that get the most attention, were also part of the group of issues that used to go under the heading of corporate social responsibility. Now, I think one possible difference is that corporate social responsibility was a specific theory about the role of the corporation in society. It stemmed from a view that corporations owe implicit duties, not just to their shareholders, but to other stakeholders that might include the communities in which they operate. Now, the proponents of ESG argue that corporations should take environmental and social issues into account, but they often argue that doing so is in the shareholder's best interest, so there's no, uh, conflict between what the shareholders want and what society wants. And I think part of what Quinn and I will probably talk about is whether that's a realistic belief or not a realistic belief.

Risa Goluboff: Quinn, do you have anything to add to that? That was really helpful, Paul.

Quinn Curtis: You might have seen advocates of corporate social responsibility advocating for board diversity, saying, “We need to create more equitable opportunities for women and other underrepresented groups to be in corporate leadership.” An ESG advocate's much more likely to frame that argument as, “Hey, we need to have a diverse board at the company because the company has a diverse workforce, it has diverse customers, and a critical business aspect of operating the firm successfully is to ensure that the board of directors brings a variety of perspectives that allow it to navigate those challenges.” And so one is sort of framed as “This is the right thing to do for society.” The other is framed as, “Well, this is the right thing to do to have a successful business.” And ESG makes that argument much more commonly, but it's also the case that I think a lot of ESG advocates are excited about the social goals that are behind a lot of ESG initiatives.

Paul Mahoney: I would just also maybe point out that there may be a little bit of strategy behind the label.

Risa Goluboff: Yeah.

Paul Mahoney: Some scholars, for example, have argued that the reason that governance issues – the G – were added to environmental and social issues – the E and the S –  is that we already have a lot of empirical and theoretical literature giving us strong reasons to believe that good corporate governance is in the shareholders' best interests. And that dovetails very nicely with the desire to say that ESG is just good business decision-making.

Risa Goluboff: Is ESG about finding good investments, or are ESG investors attempting to create social benefits that may be at odds with, you know, the best returns?

Quinn Curtis: That's the multibillion-dollar question, right?

Risa Goluboff: That's why you guys are here to answer that question, yeah.

Quinn Curtis: Yeah, so, what I think we can say with a lot of confidence is that you will not find many ESG investors saying, “Come invest with us, we're going to sacrifice a little bit of returns and do good for the world.” That's almost unheard of, maybe actually unheard of in, in sort of the ESG mutual fund space. The strategy is generally framed as, “Look, we have an investment strategy that will do good for the world and it's going to do well for your assets too. You don't have to make that trade-off.” And so I think by and large, the pitch for ESG is, “Hey, that trade-off isn't essential. You can do both.” Whether that's empirically true, uh, is a really challenging question, right? This is all relatively new. A lot of the ESG pitches, like:  in the long term, companies that control their carbon emissions are going to do well as we transition to a lower-carbon economy. That's a difficult proposition to test. And so how do we assess whether those claims are true? That's tricky. But I think, in terms of how ESG is as an investment strategy pitch to investors, it's really, “No, you don't have to make that choice.”

Paul Mahoney: Yeah, I, actually agree with everything that Quinn just said, but I, I do want to add on a couple of additional points. Not only is there a challenge in empirically assessing whether you really can, uh, do good for the society and do good for yourself, it's not just a challenge that ESG is a new phenomenon, at least as so stated. The term itself is less than 20 years old. But it's also true that there are dozens of different companies and nonprofit organizations that publish various ESG metrics and assign rankings or scores to companies, and there's surprisingly little agreement among them. So any given company can look good on one metric and bad on another. I think an even more profound challenge is that these ESG scores tend to be bunched by industry. So, information technology companies tend to get good ESG scores. They’re, they’re not manufacturing things, for example, and so they're not, they're not burning as much, uh, fossil fuel as, uh, an automobile company or a manufacturing company. Traditional energy companies, on the other hand, get fairly uniformly low ESG scores for obvious reasons.

Risa Goluboff: Right.

Paul Mahoney: It so happens that during most of the period that people have really been talking about ESG, information technology companies did really well, and energy companies didn't do so well. But since the start of the Ukraine war, energy companies have done really well. And not coincidentally, for the first time we've seen outflows from ESG funds.

Quinn Curtis: There's an even more fundamental question that ties in to Paul's note about these ESG scores, right? And that question is, when I say, “Hey, I'm doing ESG investing,” what does that mean?

Risa Goluboff: Mm-hmm.

Quinn Curtis: And it can mean a lot of different things. Even if we agreed on what goals ESG is oriented around, right? So suppose we both decide that board diversity is the ESG strategy that's important to us. So one thing you might do is look for companies that have very diverse boards, and allocate your money to those companies. Another thing I might do is look for companies that have an obvious lack of diversity on their boards, put my money there and start agitating to get those companies to diversify, right? A sort of impact investing thesis. You also have big index managers like BlackRock and State Street and they sell funds that just mirror the entire market. They're not really making choices about which companies to hold; they just hold everything in the S&P 500 or whatever index we have in mind. And they say, 'Well, look, we can't pick and choose stocks. That's not in our business model. But we get to vote, and we have an awful lot of shares,” because they are very, very large asset managers. ‘And we're going to vote in ways that put pressure on companies to promote these goals.’ And so even if we agree, right, on what ESG is about, which we don't – I don't even mean Paul and I, I just mean …

Risa Goluboff: The world.

Quinn Curtis: … the universe of investors. What it means to implement an ESG strategy can also come in different approaches. One approach is to look at these scores and try to tilt our assets towards these companies that look good on these metrics. But as Paul says, right, those metrics, it's been pointed out, the correlations maybe aren't as high as we'd hoped they'd be. Others have pointed out, well, you know, how much does it even really do to not buy the stock of an energy company when there's plenty of other investors who will? Does that actually sort of nudge them in any productive direction? And so one of the challenges in discussing ESG is it embodies a lot of concepts in terms of environmental, social and governance, having a lot of components. It also embodies a lot of methods that one could use, and so to talk about it, as we often do, as this nebulous entity of ESG, you very quickly get down to, okay, well, we need to sort of drill down a little bit and talk about what specific type of ESG investing we're thinking about.

Paul Mahoney: And I think, by the way, that that point is responsible for a lot of the controversy over ESG. If you're an index fund, many of your shareholders care about risk-adjusted return and that's it. And so your pitch to them, which is: “We can improve the world and give you good returns,” had really better be right because if it isn't right, then you're actually, in some sense, taking advantage of the people who have invested money with you.

Risa Goluboff: Right. You have a recent piece about this, Paul, where you articulate the gap between what those large investors – what their goals might be and what the goals of the folks who have their money held by those large investors might be.

Paul Mahoney: Right, and that is certainly not just an ESG issue to, you know, make the obvious point. Um, the money manager is in business to make money managing other people's money.

Risa Goluboff: Right.

Paul Mahoney: The investors hand their money over because they think, on the whole, that manager is going to do a better job for them than other alternatives. And they’re reasonably well-aligned, but they're not perfectly aligned. And especially in a situation where the manager says, “I can get some public relations or political benefit from seeming to be solving a societal problem.” They may be willing to sacrifice return in a way that, of course, the investors might not be.

Quinn Curtis: So this is a point that Paul and I have both weighed in on, the sort of incentives of large, indexed asset managers when it comes to how they want to approach their portfolio. The dynamics here are interesting, I think, because remember, you're indexed. I'm just selling you the market at the lowest possible price and the returns you're going to get if you buy a BlackRock index fund or a State Street index fund or Vanguard index fund are exactly the same because you're buying exactly the same stock except for the difference in fees.

Risa Goluboff: Which are important. I've learned that from you. The fees are the whole, the whole thing.

Quinn Curtis: The fees are indeed very important, as I have written about many times. But the good news on fees is they've cut fees down to a level that is both extremely low, and extremely competitive

Paul Mahoney: And by the way, that is in part because people like Ian Ayres and Quinn Curtis have really focused a lot of attention on the difference that those fees make.

Risa Goluboff: That's a great point, Paul.

Quinn Curtis: I'm not going to personally take credit, but I will …

Risa Goluboff: Oh, take credit! Take credit. You’re so modest, Quinn.

Quinn Curtis: But, um, so if I'm Vanguard or I'm BlackRock, let's say BlackRock, because they've been really at the forefront of a lot of stuff, I'm looking around, my fees are probably below 10 basis points, well below 10 basis points. And I can't compete anymore on that. I mean, I, I'll, I'll compete as much as I can, but I'm looking around, “Okay, how am I going to attract assets?” And say, well, look, I'm sitting on this enormous pile of money. I think BlackRock manages $4 trillion dollars. And I get to vote these shares every year at the company meeting. And I want to vote those shares in a responsible way. But I also see an opportunity, right, that I can vote shares in ways that are pleasing to the people who invest money with me and perhaps make myself a differentially attractive asset manager as compared with my competitors who are selling the exact same thing at more or less the exact same price.

And so, one lever that these index funds have to pull is to engage on these salient issues in the hopes of making themselves attractive in a very competitive market for asset management. And Paul kind of characterized this as a gap in the incentives. I think, though, that that ought to be a mostly positive incentive, in the sense that we're operating in a market where there's a number of interchangeable low-cost asset managers I can pick from and the main audience for my engagement on these issues should be the people considering investing money with me. You know, the big push initially was board diversity. There was some competition between BlackRock and State Street. State Street put up the “Fearless Girl” statue on Wall Street. And It feels like a sort of wholesome competitive dynamic in which they might be able to offer potentially different approaches to asset management, or at least voting those shares to their potential customers.

Paul Mahoney: This is probably the place where Quinn and I have the most basic disagreement. My view of this would be, let's imagine that, say, 20% of your investors care about a particular issue. Let's just pick board diversity as an example. And let's just for the sake of argument, let's say that it turns out that pushing companies to have more diverse boards, leads to some loss of value. Maybe it's just because managers are spending time trying to recruit people when they might be spending it doing something else. But for whatever reason, let's just imagine, for the sake of argument, that it destroys some amount of value. Well, it still makes perfect sense to try to attract the marginal number of person from that 20% to invest with you because if the returns on that company fall, I'm BlackRock and my returns go down, but Vanguard's returns go down as well, and State Street's returns go down as well because they’re – we're all invested in exactly the same thing. So in some sense, there's zero cost to me. So if there's any benefit at all, I may as well do it.

Quinn Curtis: I think Paul's right that there's a risk there, right, that these competitive dynamics don't line up perfectly with the investors who might not care about some of these issues. Now, a critical ingredient there isn't just that a bunch of investors are indifferent to the particular ESG initiative. It's also got to be that particular ESG initiative is value-depleting, right?

Risa Goluboff: Right.

Quinn Curtis: And I'd argue, you know, okay, so if I'm BlackRock and I'm looking at my menu of potential initiatives, I'd have some incentive to avoid value-depleting ones because I do care about the assets under management, which would ultimately be affected. Now it's going to affect my competitors too, but at the end of the day, there's at least a second order effect; my fees are tied to the ultimate performance of these companies. I and our mutual colleague, Michal Barzuza, have, have pointed out, right, that these incentives, at least in some circumstances, create a risk of overinvestment in ESG. But that's got to be set against the historical tendency of firms to pursue profit at the expense of externalities that cause social harm. And so if I'm trading off, well, is BlackRock going to push ESG initiatives with some risk of overinvestment against the risk of social harms from externalities at those firms? I could see that this type of investment in ESG could sort of nudge firms in a productive direction off the sort of historical equilibrium. But I think, and I've said in writing that we do need to keep an eye on precisely the problem that Paul's pointing out because there's no natural – or at least complete – counterincentive to overinvestment. And we've pointed out, look, the CEOs are getting this from the asset managers. They're getting it from their employees.

Risa Goluboff: When you say it, you mean pressure to …

Quinn Curtis: Pressure to embrace ESG from employees, from asset managers. Increasingly hedge funds are leveraging these issues in proxy contests. Customers care about these issues and CEOs have career incentives that are also not perfectly aligned with shareholder value as we well know. And so a shift in pressures in the direction of more pro-sociality, is probably not going to lead to overinvestment right away, but it is structurally a risk of these dynamics.

Risa Goluboff: I'm curious about the empirical question. Will we ever be in a position to answer it, or is the noise of all of the other variables that go into investing, it just seems impossible, like – you’re smiling, Paul – are these things knowable and how could they be knowable?

Paul Mahoney: One of my favorite areas of research in finance is there's a body of research that observes that once a particular market anomaly is pointed out, it tends to disappear because arbitrageurs then understand, “Wow, I can make money by buying this thing and selling this thing.” So once there was a body of academic research showing that certain governance practices were good things, the evidence in favor of them started to dissipate because everybody just adopted the practices that were good. And I think that's going to be an ongoing challenge for answering these questions. Um, the, the most optimistic story that one could possibly tell, I think, about ESG, is that managers of corporations and managers of money were insufficiently attentive to a certain constellation of issues that might have included climate change, that might have included board diversity. And you could actually make money by focusing on those things. Now, whether I think that's a compelling story or not, it is a possible story, really optimistic story. But even if it's true, that would suggest that that opportunity is only going to be there for a short while.

Risa Goluboff: Do you find it a compelling story?

Paul Mahoney: I'm somewhat skeptical that anyone, whether it's a nonprofit providing an ESG rubric or an academic writing papers, or three people on a podcast, can say, “Here's the specific risk that everybody ought to be prioritizing over all others.” I think once you start doing that, you are substituting judgment that is, uh, remote from judgment that is on the ground.

Quinn Curtis: Reflecting on Paul's earlier comment about the G and the governance, which has had historically some empirical evidence to support the impact of certain governance reforms as value creating, the trend over the last five to 10 years has been for a lot of those results to be called into question. As we've gotten better data, we've seen that some of the things we thought we knew about corporate governance in terms of, hey, if you have a certain board structure, your firm is going to perform a little bit better. Stuff that's kind of intuitively attractive but empirically hard to test. We've sort of taken a second look at a lot of those results and concluded, actually, we don't see, those effects in evidence. And so even in the sort of firmer ground of the G, a lot of challenges have arisen, and as we sit here today, I don't know that we know a lot about optimal corporate governance. Now, notably, as some of those results have been questioned, you don't see the shareholders saying, “Oh, you know, we used to think that giving a lot of power to shareholders made firms more valuable. That turns out to maybe not be the case. We're going to go ahead and relinquish some of the, the governance benefits we got.” They're not ready quite yet to just hand the reins back to managers and leave them less accountable. And so that just shows what the challenge is of trying to evaluate these strategies.

Risa Goluboff: So let me ask a question about the E. To what extent does climate change create financial and operational risks for companies and to what extent should they be paying attention to those risks?

Paul Mahoney: They absolutely ought to be focused on climate change as a source of risk. I think the level and the way in which climate change is going to affect different companies varies quite a lot, and I would be inclined to be more agnostic about how great is the risk for any given company, and rely more on the general principle that companies really need to be focused on whatever management thinks are the most important risks facing them. That's why they get hired to manage the firm.

Quinn Curtis: Yeah, there's a real trade-off here when it comes to disclosure. Often when a new disclosure element is discussed, as with these new climate disclosures that the SEC is looking at, management will say, “Well, look, if we thought it was material, we'd already be disclosing it.”

Risa Goluboff: Okay.

Quinn Curtis: And there are costs to mandating disclosure. On the other hand, we don't just say, “Hey, firms tell the market what you think is material,” right? There's a structure and required elements to securities disclosures that have a reasoning behind them. Sometimes that reasoning is we want standardization. We all agree this is kind of important, but if everyone kind of does it their own way, that's going to be difficult. Sometimes imposing certain structure on the information enhances comparability. Sometimes it means that firms have less capacity to obfuscate. And so there are reasons, right, to impose a particular requirement. Another one might be, you know, all corporate managers might not come to the same conclusion as their shareholders about which climate risks are material. And maybe sometimes we want to put a thumb on the scale of, you know, we don't want to leave this in management's hands to make the call. We're just going to say this is important. Tell us about it. And that is going to come at a price of some things that are genuinely not important being communicated in a way that's costly to aggregate that information. But there's another element to climate disclosure, which is your firm's own contribution to emissions, right? And that's a hotter disputed topic.

Risa Goluboff: So, say more about that, Quinn.

Quinn Curtis: So it's one thing to say, “Hey, you should be telling shareholders if you operate a facility that's in an area that's supposed to be underwater – a certain level of sea-level rise – in the coming decades.” Shareholders might want to know that. If I tell a firm, we want to know what your emissions are. How many tons of carbon are you putting out of your smokestack? How many kilowatt hours of electricity are you buying? And then most controversially, what we call Scope 3 emissions. What are the emissions associated with the products on your shelves, everything up and down your supply chain? I think there's a dispute about whether that's information that investors care about because it's financially materially to the firm. And there's an argument to be made there that, hey, we have the Paris Accords, we have a lot of initiatives in the government to try and reduce emissions. It might be important to me as an investor to understand that one of the companies in my portfolio has twice the emissions as a similar company doing more or less the same thing like, oh, that's a risk I might want to take into account. On the other hand, there's an argument that, well, is this just naming and shaming? Are we trying to publicly pressure firms? And that's perceived to be a less, legitimate use of securities disclosure. Um, so on the question of should firms be telling shareholders what risks they face? We have the sort of standard trade-off. Is it worth requiring this disclosure in a standardized way? That's somewhat costly, but it gets transparency and consistency. On the other element of the firm's emissions themselves, I think the question is, well, why is it that you want to do that? Is that because you think investors care about it to make money, or is it that you are just trying to put public pressure on these firms?

Paul Mahoney: And now that we've, uh, raised the question of the SEC's proposed climate disclosure rules …

Risa Goluboff: Can you say what they are before you make your point?

Paul Mahoney: Absolutely. So, I would say that, roughly speaking, the proposed disclosures fall into three categories. One would be a process focus. So companies are going to be required to disclose how the board and how management oversees climate-related risks, identify any targets or goals they've set and how it measures its progress towards those goals, identify any energy transition plans the company has adopted and so on. Then a second category is they will tell the company to identify the specific climate-related risks that management thinks are going to be material to the company and how they're going to potentially affect the company's operations and its results. And then we get to the controversial part, which is the mandatory emission disclosures. So there would be the direct, or Scope 1, emissions. There would be the indirect emissions from purchased energy, which are known as Scope 2. And then, as Quinn noted, there's the emissions all up and down the supply chain, which is Scope 3. So that's what the rules say. Now, the third part, and particularly the Scope 3, is quite controversial, and I think for good reason. They are, as Quinn noted, really more about the company's contribution to climate change, not the risks that climate change poses for the company. As such, I think, at least arguably, they are outside the SEC's statutory authority, because their authority is to adopt rules for the protection of investors, not for the protection of the climate. There's certainly a departure from traditional practice, not that that practice is mandated, but it is long standing in which the vast majority of disclosure requirements are modified by some language like, “to the extent material to the company,” “to the extent material to financial results,” et cetera. That language is in the Scope 3 disclosures, but not in the, the Scope 1 and Scope 2 disclosures.

Quinn Curtis: So let me give sort of two pitches for why I think this is a defensible rule in the form of a pair of thought experiments. Imagine you were evaluating the advisability of two investments, two companies that both make electric cars. And their conventional financial metrics look more or less the same, their prospects look more or less the same, their current share prices are more or less the same. If you were to learn that one of those companies had emissions at its factories that were 50% higher than the other, and that it purchased the lithium for its batteries through a supply chain that also had significantly higher emissions, I think there's only one way that could move your assessment of that company's stock price, and that would be down. Like, I'd rather have the company that's more efficient along both those dimensions. So I think there's an argument that, in circumstances like that, a company's emissions could be financially material. The other thought experiment is to imagine that – in fact, this is based on a real proposal – imagine that the SEC adopted this rule, but said to the shareholders of these companies, “Hey, if you want to opt out of this disclosure by a majority vote of the shareholders, go ahead. We'll leave it up to you.” I think for Scope 1 and Scope 2, the opt-out rate for that would be extremely low. And it's the shareholders who bear the cost of these rules, so that suggests, if that assessment is right, that this isn't such a bad approach. In fact, lots of companies are already voluntarily producing this information. That's my argument for why I think – even though, as Paul points out, this is an unusual type of requirement, it doesn't go to dollars in the way that almost every other aspect of securities regulation does – it nevertheless gets at something that I think investors care about.

Paul Mahoney: I just want to mildly push back by saying there is a certain degree of circularity in the analysis. And what I mean by that is, I completely agree, the opt-out rate, if you said to shareholders, do you want to opt out of these disclosures, the opt-out rate would be really low. But let's note that for most of the Fortune 500, a substantial portion, if not a majority of the shares are owned by the largest asset managers, and they have their own potentially self-interested reasons to want to be seen as being on the right side of a variety of these issues. It's otherwise, I think, hard to square what we see in what shareholders say – again, mostly large institutional asset managers – and what voters say when some of these issues are put to them, um, and certainly, it does not appear that many voters are willing to make substantial sacrifices for a number of the environmental proposals. Now, it's easy to say that's short-sighted, it's wrong-headed. I, I might even agree with some of that. But, you know, those are sort of the facts on the ground. And I think if you polled the people who hold retirement funds through Vanguard and State Street and BlackRock and so forth and said, “Is this important to you?” Again, for better or worse, I think a lot of them would say, “No, it's really not very important to me.”

Quinn Curtis: I suppose the question though is, you know, what's the actual cost of implementing this disclosure. If this – especially for Scope 1 and 2 – is a relatively bearable or even tiny disclosure cost for firms to take on, then there's not much of a trade-off.

Risa Goluboff: ESG is coming under attack from lots of different quarters and there are some who charge companies with greenwashing, right, that they're making claims that they are operating in environmentally friendly ways for the publicity, but they're really not, so how sincere is ESG? And then – I don't know if this is the other side or some of that critique is coming from the same side – but, you know, there's been a political backlash, I think, against asset managers taking ESG factors into account in making investment decisions. And so, I'm curious, you know, what is the state of play, kind of, in public discourse and, and in politics, at the moment?

Paul Mahoney: I think a part of this backlash stems from the implications for pensions. And Quinn and I haven't talked about this and so I'm really eager to hear what he has to say about this because he's the expert. But I'll just note that workers do not have complete control over how their retirement money is invested. And my impression is that the strong performance of traditional energy companies over the past two years that I mentioned earlier may have opened some workers’ eyes to the fact that their employers may have self-interested reasons to make the retirement portfolios it sponsors look more green, even if the result is to reduce returns. I don't know, but I have a suspicion that that accounts for at least part of the backlash.

Quinn Curtis: Well, I've seen one – at least one – 401(k) lawsuit, arguing that a plan impermissibly weighed, uh, ESG factors. But the role of ESG in pension and retirement plans is actually pretty constrained by ERISA. And you will not find funds that say, “We're a green fund, we don't hold fossil fuels in significant numbers” in ERISA-regulated plans, including 401(k) plans, private pension plans, because of the legal risk associated with any suggestion that you might be discounting returns or taking additional risk. I think the number's well south of 1% the last I looked. This has been a little bit of a source of frustration for me. I, uh, used to serve on the board of my kid's little preschool. It was a Montessori school. And I was told that whoever was running their retirement plan, which is also quite small, had advised taking out any funds that had an explicit ESG bent, because they felt it created a regulatory risk, wasn't a best practice. Uh, and I, I just thought, they're Montessori teachers, like, of all the people who would voluntarily give up a little bit to make the world a better place. But that rule is kind of binding. And so what's interesting is the political blowback, in terms of the actual teeth of the rules that have been passed, I think has been quite a bit overstated. You know, ERISA was already doing a lot to constrain explicit ESG strategies, again, the kind where you're, you're leaving out fossil fuels altogether. But that said, what is new and what has come out of this is the notion of ESG as a politically divisive concept. And that, I think, was kind of inevitable, right? You know, our students are super-excited about this stuff. They like the idea that you can do good in the world in asset management.

Risa Goluboff: Right.

Quinn Curtis: And so sometimes I feel like I need to push back a little bit, get them to think it through. And one of the things I've said is, “It would be a little strange if in the year 2022, we discovered that the optimal way to run every company just turned out to align really well with a particular set of political views.”  And I think we're at a really interesting moment for ESG. We've had a year in 2022 of lagging returns as ESG funds struggled a little bit. You'd still come out ahead, I hasten to add if you had gotten in in 2017, I've been doing a little work on this. But the idea, I think, that might be new to some of these investors, yeah, these funds carry much the same risk as every other kind of mutual fund and every other kind of investing strategy. And you layer that on then with the overall political divisiveness in the culture, and it may be that the ESG label's kind of at a turning point, that it no longer makes sense to sort of embrace that brand and look instead to climate and diversity and some of the individual issues as more promising. We'll have to see what the future holds, but I think there’s, there’s every reason to think that five years from now, this market's going to look a little different than it does right now because of this turmoil around the politics of ESG.

Paul Mahoney: Very nicely summarized.

Quinn Curtis: All right.


Risa Goluboff: Well, I have learned a lot and it was a pleasure, as always, talking to both of you and to see you talking to each other. So, thank you so much for joining us today.

Paul Mahoney: Thank you. My pleasure.

Quinn Curtis: It was great. Thanks so much.


Risa Goluboff: That wraps up this episode of Common Law. If you want to find out more about Quinn Curtis's or Paul Mahoney's work, visit our website, Common Law Podcast dot com. There, you'll also find all of our previous episodes. We hope you'll join us next time to hear another free exchange and more explorations of how law shapes our lives. I'm Risa Goluboff. Thanks for listening.


Credits: Do you enjoy Common Law? If so, please leave us a review on Apple Podcasts, Stitcher, or wherever you listen to the show. That helps other listeners find us. Common Law is a production of the University of Virginia School of Law and is produced by Emily Richardson-Lorente and Mary Wood.