ESG refers to a broad framework for addressing environmental, social, and governance issues in the context of business and investment. While the acronym itself is widely recognized, the concept lacks a single, fixed legal definition.
Scholars have identified four common uses of the term since the term’s inception in 2004:
- Investment Analysis Framework: The initial use of the term was as an investment analysis framework. Under this framework, each ESG factor was considered independently when evaluating investment risks and opportunities. This use can be understood as an investment tool rather than any ethical commitment on the part of businesses.
- Risk Management Tool: A second use of ESG concerns managing risks identified by stakeholders. In this view, ESG values are not derived from abstract moral considerations, but are the result of consultations with stakeholders.
- Synonym for Corporate Social Responsibility: A third use of ESG is as a synonym for Corporate Social Responsibility or sustainability, which envisions moral and ethical commitments on the part of businesses. Under this conception, ESG is a shorthand for a company’s commitment to ethical behavior and aligning with wider community values.
- Ideological Preference: ESG is most controversially interpreted as an effort to align business or investment activity with certain personal or collective values. This understanding views ESG as a vague tool for influencing issues beyond strictly financial concerns.
Because ESG lacks a fixed legal definition, the term has given rise to disputes over the interpretation of parties’ contractual obligations.
See e.g., Tex. Pac. Land Corp. v. Horizon Kinetics LLC, 306 A.3d 530 (Del. Ch. 2023). Judgment entered sub nom. Texas Pac. Land Corp. v. Horizon Kinetics LLC (Del. Ch. 2023), aff'd sub nom. Horizon Kinetics LLC v. Texas Pac. Land Corp., 314 A.3d 685 (Del. 2024).
For more information, see: Proposed Rule for Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices, and Commissioner Hester M. Peirce’s Statement on Environmental, Social, and Governance Disclosures for Investment Advisers and Investment Companies.
[Written in December of 2024 by the Cornell Law School Securities Law Clinic]