Environmental, social and governance investing is not quite like that: ESG criteria tend to be imposed by shareholders, so a company that pursues ESG goals is giving (many of) its shareholders what they want. Still, to the extent there are trade-offs between financial returns and ESG criteria, the directors and executives, rather than the shareholders, will often in practice be the people making those trade-offs. “We decided to abandon a profitable project we didn’t like because it was bad ESG,” the board will say, or “we decided not to abandon a polluting project that we did like because it was good for profits.” Shareholders can of course push back — ESG-focused shareholders can say “no, abandon that polluting project, it’s bad for ESG,” or non-ESG-focused shareholders can say “no, keep the polluting project because it’s profitable” — but the board (1) gets to decide and (2) can always point to some shareholder-friendly rationale for whatever decision it makes.
What this means is that, in hostile M&A, a board can now reject an offer not only on the grounds that it is too low, but also on the grounds that it not ESG enough….
Source: ESG M&A – Bloomberg
