A response to Colin Mayer’s ‘ESG is Dead, Be True and Fair Instead’

Colin Mayer writes that ESG is dead. However, his proposal that companies should focus on problem solving and ‘true and fair’ accounting does little more than recast its core argument. Both it and ESG build on the same premise that free and efficient markets are the best and only way to address problems with firms, markets and sustainability. 

Mayer is unfair to ESG when he says that it has had “too much emphasis on risk, regulation and costs, and not enough on value creation and profit, and the commercial opportunity that comes from solving problems.” He misses that leading best practices and frameworks for sustainable business are converging to focus not only on financial and non-financial risks but also on opportunities, dependencies, and impacts. The latter are easily consistent with a focus on genuine value creation and true value accounting. 

The aim of this convergence – like Mayer’s proposal – is to help private actors distinguish between companies who ‘really’ maximise value and those that inefficiently appropriate value from other parties. Another similarity is that Mayer’s proposal also relies on state regulation. As he writes in Capitalism and Crises, his ideas on company purpose, director’s duties and true accounting can only be effective when they are adopted by all states as a universal ‘Moral law’.

A more fundamental issue with Mayer’s proposal, and ESG in general, is the belief that the true costs of company activity can be measured and accounted for. The Achilles heel of this viewpoint is that money is not a universal measure of truth but a social convention and governance tool (as demonstrated by historians and anthropologists). 

Prices are a complex manifestation of personal values, subjective beliefs, state policy, market conditions, and commodity availability. There is no robust evidence to suggest that they can objectively or effectively represent the extent to which company activities are ‘good’ or ‘bad’ (i.e. solving problems or unfairly appropriating). The fact that firms may profit from harmful activities is not a call for more efficient, moral markets and prices but for better governance to address the viability of harmful business models. 

Ultimately, a belief in true cost accounting is an expression of faith in the perfectibility of free and efficient markets. It is only when market actors are perfectly informed, and when there are no transaction costs or market failures such as externalities, that it is (theoretically) possible for ‘true’ prices to manifest. Put differently, it is only when market actors are omniscient and omnipotent – with divine knowledge and freedom of action – that perfect prices emerge.

The impossibility that underpins true cost accounting – that we can solve all problems by empowering individuals with God-like powers – is foundational to the common view that the ‘right’ approach to CSR, ESG and corporate purpose can unlock win-wins for all stakeholders, society, the economy and the environment. Promises of such win-wins appear not only in Mayer’s work but also in that of others such as Porter and Kramer, Freeman, Elkington, Eccles, Edmans, Henderson and Serafeim – each of them offers a different flavour of heaven on earth. 

It is not plausible to imagine that we can solve sustainability problems by effectively addressing market failures and achieving true pricing. Yet it is exactly this mechanism – perfecting markets via the divine optimisation of individual rationality – that Mayer and others rely on as a means to distinguish between good and bad firms, and to realise win-wins. This economic line of reasoning has long been identified and criticised (Hayek, Coase and Demsetz) as a ‘Nirvana fallacy’. It is troubling to see that this fallacy is so prevalent in research on sustainable business. 

Lost in the comparison of Nirvanas is that there is no universal measure of value to enable win-win outcomes. Despite the utopian economic promise that we can use utility or prices, research clearly demonstrates the existence of legitimate, competing values and that there is no singular, universal, and transcendent measure of the Good. 

Conflicting values make it wishful thinking to suggest, as Mayer does, that shareholders could be effective in a role to ensure that companies do not profit from harm. Their information can only ever be imperfect, their powers less than ideal, and their decisions moulded by commercial concerns. This does not make them evil or immoral but underscores that they act on the basis of human values and within human constraints. These preclude them from being ideal stewards to ensure that companies do not profit from harm. Similarly, it is wrong to imagine that directors can report on true costs and fair profits when markets are not divine, money does not measure morality, and their first loyalty is towards business continuity. 

There is no evidence to suggest that people in particular roles – such as consumers, directors, shareholders, etc. – can be informed and empowered to the extent that they will realise a divine and universal rationality (of whatever flavour). Instead, the reality is that human existence is constituted by conflicting values and less-than-perfect conditions. This obviates the possibility of win-wins and dictates that we must make difficult choices between different, non-ideal pathways of human development. 

In terms of governance, this means that sustainable business is not about one ‘right’ approach to economic efficiency but about the formulation of effective and coherent industrial policy. It is only once we recognise this, and abandon wishful thinking about creating perfect free markets, that there will be scope for a genuine, transformative discussion on business sustainability. Only then will ESG be dead, and good riddance. 

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Constantijn van Aartsen is Lead Researcher for the Beyond Governance Project, a Research Fellow at the ICGI and METRO research institutes, a Professional Support Lawyer at Van Doorne Advocaten, and a Research Fellow at Maastricht University.

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