Market Forces Already Address ESG and “Stakeholder Capitalism” Concerns (ESG: Myths and Realities)

If you follow the news, you’ve likely heard of something called ESG investing, an acronym meant to spell out a set of behavioural standards for firms.

But competitive market forces are likely to be more effective and efficient than externally imposed “top-down” governance structures with catchy names like stakeholder capitalism, or ESG, which are rife with unintended consequences.

In fact, ESG activism is likely to accomplish more by working through consumer tastes than investor tastes. Each consumer can react to each ESG action taken by a specific producer or manufacturer according to their tastes.

For example, if consumers opt for free-range chicken and beef, which is more expensive to produce than if the farmer uses alternative and possibly less humane production techniques, firms will provide free-range poultry and meat without being directed to do so through government regulations. Consumers vote at the checkout line and the economy produces the “right” amount of free-range poultry and meat. By responding to consumers’ preferences, firms operating in competitive markets already provide solutions to many environmental and social problems.

Generally, bottom-up market forces, while imperfect, better address the issues raised by proponents of stakeholder capitalism and ESG than top-down government initiatives.