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E-MailZohar Goshen is Jerome L. Greene Professor of Transactional Law at Columbia Law School, Assaf Hamdani is Professor of Law at Tel Aviv University, and Alex Raskolnikov is Wilbur H. Friedman Professor of Tax Law at Columbia Law School. This post is based on their working paper.
The failure of the U.S. political system to adequately address climate change has shifted focus from public to private action. Driven by the Environmental, Social, and Governance (ESG) movement, investors pressure corporations to adopt climate policies to reduce carbon emissions. Today, many view ESG as a market-based solution to a public policy failure. Where Congress failed, ESG will succeed.
In a recent paper, we argue that even if ESG-driven climate stewardship were to achieve the scale necessary to have a real impact on global warming, it would also have a disproportionate impact on low-income households and displaced workers. Curbing global warming is fraught with difficult distributional challenges that corporate ESG measures will neither solve nor circumvent. Interventions to combat climate change are nearly always regressive, with the costs of such policies impacting those with the least, the most. ESG implemented at scale will inevitably replicate the regressive effects of various legislative interventions on which all ESG carbon-reduction strategies are based. But, in contrast with congressional action, ESG solutions will not raise any revenue that could be used to offset ESG regressivity.
Government policies that reduce carbon emissions are regressive due to their disproportionate impact on low-income households. For example, a carbon tax leads to higher energy prices. This price increase affects low-income households the most, as these households allocate a larger portion of their income towards energy-related expenses and are less likely to afford energy-efficient alternatives. Similarly, the increase in gasoline prices further burdens low-income households, who often own fuel-inefficient cars and may live in areas with limited public transportation. Rising prices of goods resulting from higher energy and transportation costs also have a disproportionate impact on low- and middle-income households, which already allocate a significant portion of their income to essential goods. Moreover, the fossil fuel sector’s expected shrinkage could result in significant job losses, particularly affecting low-income individuals and leading to unemployment concentrated in specific geographic areas.
As climate stewardship policies invariably resemble different forms of environmental regulations, these policies will inevitably replicate the well-known regressive effects of these regulations. Overall, the more effective ESG measures become in reducing carbon emissions, the greater the economic burden these measures will impose on the poor. In theory, companies may avoid this outcome if they not only adopt climate-friendly policies but also accompany them with offsetting compensatory measures. But, unfortunately, there will be no such offsetting adjustments in practice. While it is conceivable that some firms may try to pursue both environmental and distributional goals, we have serious doubts about the effectiveness of a general strategy that relies on private firms to redress the disproportionate impact of their climate policies on economically vulnerable Americans.
While private firms cannot redistribute effectively, Congress surely can. Could the regressive effects of private-sector ESG policies be counteracted through a new division of labor of sorts? The private sector would combat global warming through ESG while Congress would protect low-income Americans from ESG regressivity.
While facially plausible, this is not a viable solution. Relying on Congress to remedy regressive ESG policies belies the realities of congressional (in)action over the past fifty years. During that time Congress has found it much easier to enact economic legislation than to pass measures addressing the country’s ever-increasing inequality. To make things worse, private ESG initiatives could provide Congress with a pretext not only to avoid implementing its own climate-saving measures but to ignore the regressive effects of ESG policies as someone else’s problem.
In contrast, Congress is far better incentivized to provide compensating adjustments when its own actions impose new burdens on the poor. Despite its disappointing record, Congress remains a political body with exposure to the views of Americans with different levels of income and the means to redistribute. Corporate boards, in contrast, possess neither of these attributes. Moreover, in contrast with congressional action, ESG solutions will not raise any revenue that could be used to offset ESG regressivity.
ESG solutions are attractive in large part because they seem to avoid the contentious politics of redistribution, clearing the way for private sector agents to effect policies that stall in Congress. But as the backlash against ESG vividly demonstrates, opponents will seize every opportunity to remind voters—particularly middle- and low-income voters—of the job losses and increased energy costs that will follow ESG policies aimed at curbing carbon emissions.
If one cares about both the planet and the welfare of economically vulnerable Americans, one must acknowledge the significant shortcomings of ESG and advocate for congressional action to tackle global warming. And to increase the likelihood of congressional action, we argue that institutional investors should channel their resources toward ensuring that their portfolio companies’ lobbying efforts are aligned with their pledges to protect the environment.
