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The most important phenomenon in the corporate world today is the swift and dramatic rise of the Environmental, Social, and Governance (“ESG”) movement. Commentators have tried to fit this development into familiar frameworks of shareholder value or management entrenchment. In contrast, in this Article we develop, for the first time, a theory of ESG as a product of social demand. Our framework shows that increasing demand for socially responsible corporate behavior, originating in but not limited to the millennial generation, has created powerful incentives for corporate managers to promote ESG goals.

We identify and analyze five specific channels of social demand that pressure CEOs to promote ESG. First, markets – consumers, employees, and investors - may reward firms for promoting ESG. Second, and more important, risk averse CEOs may rationally invest corporate money to minimize personal risk from boycotts and walkouts. Third, large index fund managers, have responded to social demand by embracing ESG activism to lure investors. Fourth, activist hedge funds target firms with ESG vulnerabilities, to later leverage them in their fight for board seats. Fifth, social demand could facilitate ESG regulation by pressuring firms to reduce lobbying activities that are not aligned with ESG goals and by tilting regulatory cost-benefit analyses in favor of ESG rules. As a result, we argue, CEOs face overwhelming, perhaps excessive, pressure to deliver on ESG goals or face career-limiting consequences.

Our framework has important implications for the ESG and stakeholderism debates, for the future and desirability of ESG, and for corporate and securities law.

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