For some years now, many businesses have attended carefully to their performance on environmental, social, and governance dimensions. Some investment banks have established funds composed of securities issued only by companies with suitable ESG performance. Some institutional investors, like pension funds, have insisted that their portfolio only include stock in corporations with high ESG ratings. That, of course, has led corporations to look for ways meet that investor demand.

The theory behind attention to ESG—like the theory behind attention to “sustainability” of the past several decades—is that conventional financial accounting gives short shrift to risks and opportunities posed by long-run environmental, social, and governance issues, often treating them as externalities. Using conventional measures, a business may not be able to account currently for longer run risks of climate change and greenhouse gas regulation, cleanup liability for presently unregulated chemicals it uses, disruptions due to social inequities in its labor force or communities, and the like. Accordingly, so the theory goes, measuring and reporting performance on those sorts of dimensions has value to management, to investors, to employees, to customers and to other stakeholders.

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