A Comment by Colin Mayer on Constantijn van Aartsen’s Blog

This blog is a rebuttal in an ongoing exchange of views on the evolving role of ESG, corporate purpose, and market mechanisms in addressing sustainability challenges, sparked by Colin Mayer’s ECGI blog post, ESG is Dead, Be True and Fair Instead.

I would like to thank Constantijn van Aartsen for raising an important question about whether recent suggestions about sustainability, including my ECGI blog, are adopting “the utopian economic promise that we can use utility or prices” to “solve sustainability problems by effectively addressing market failures and achieving true pricing”. He sees this as “wishful thinking” requiring problems to be solved “by empowering individuals with God-like powers” and “perfecting markets via the divine optimisation of individual rationality”.

His blog allows me to clarify that this is not what I, or probably most of the other people he cites in his blog, are advocating. On the contrary, my critique of environmental, social and governance (ESG) factors is that they are indicative of the inadequacies of solving sustainability problems through the lens of market failures and prices. 

Instead, what is required is a recognition of the role of corporate purpose of profiting from solving not creating problems for others in aligning the interests of business with those of the economy, environment and society.  This is not about determining prices to remedy market failures but the way in which the ownership, governance, culture, and organization of companies assist companies in determining strategies and processes to achieve this.

Accounting and reporting for true costs and fair profits are the outcomes not the drivers of problem-solving corporate purposes. They are based on actual not hypothetical costs and revenues. They do not rely on God-like powers or divine rationality but on much more mundane management processes and systems that many well-run companies employ all the time.

Sustainability in this context is associated with investors earning long-run returns on capital by investing in activities that benefit not harm others. This means that it is in their interest, as much as it is in their customers’ and communities’, to ensure that companies do not profit from harm.

“The effective and coherent industrial policy” to which Constantijn refers at the end of his blog is an important part of this because business on its own cannot necessarily capitalize on the benefits it confers on others. The interest of businesses in profiting from solving not creating problems creates a natural alignment with that of governments and public sectors in addressing environmental and social issues. But if companies profit from harm, then, as we have recently witnessed around the world, public-private partnerships fail, and businesses undermine democratic as well as economic systems by lobbying governments for their own ends.

So, while Constantijn sees a sharp contrast between his concerns about using prices to solve market failures and his advocacy for industrial policy instead, and mine about the failures of ESG and the role for problem solving corporate purposes, there is in fact a close parallel. In both cases, they reflect an acknowledgement of the limitations of conventional economic policy and a need to recognize the significance of value creation through outcomes and impacts. 

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Colin Mayer is Emeritus Professor of Management Studies at the Blavatnik School of Government and Saïd Business School at the University of Oxford, a Fellow of the British Academy, CEPR, and an ECGI Fellow and Research Member. 

The ECGI does not, consistent with its constitutional purpose, have a view or opinion.

Explore the evolution of the discussion through the earlier contributions below ↓ 

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