US ESG Regulation in Transnational Context

In recent years, demand for investment products that take account of climate risk and other ‘environmental, social, and governance’ (ESG) factors has risen exponentially, raising greenwashing concerns among regulators and spurring efforts by governments worldwide to improve investor access to ESG information.  The European Union and the International Sustainability Standards Board have already introduced sustainability disclosure standards to help achieve these goals.  On March 6, the US Securities and Exchange Commission followed suit, adopting final rules to require corporate climate disclosure in the US capital markets.

Internationally, ESG regulatory initiatives are even more wide-ranging in their scope and ambition. They are directed at both the corporate and shareholder levels, including measures targeting asset managers and other financial intermediaries, as well as specific investment products, funds, and activities. Many contribute to broader efforts to ‘green’ financial systems, allowing capital to be directed more efficiently to achieve the Paris Accord targets.  ESG regulation therefore pushes against long-standing regulatory silos and raises questions in many jurisdictions about the authority and capacity of financial regulators to adopt rules that relate to climate, environmental, or workforce-related matters.

These efforts have, therefore, become increasingly controversial, particularly in the US, where intense public debate over ESG mainstreaming and the advance of pro-ESG regulation has further complicated regulatory efforts at all levels. In some cases, the underlying concerns resonate outside the US, but in many respects, the US debate is being driven by issues that are linked to unique aspects of its domestic legal and political landscape.

In a book chapter entitled ‘US ESG Regulation in Transnational Context,’ forthcoming in the edited volume Corporate Purpose, CSR and ESG: A Trans-Atlantic Perspective (Jens-Hinrich Binder, Klaus J. Hopt, & Thilo Kuntz eds. (Oxford 2024)), I identify some of the legal, institutional, and political factors that are fueling the controversy over US federal and state ESG (and anti-ESG) regulation.  Given the pace of new developments, it does not attempt to do so comprehensively, but the chapter seeks to explain to readers on the other side of the Atlantic and elsewhere why US reform efforts to integrate ESG concepts in new or existing legislation lag behind international developments. Understanding this context may also help clarify where ESG integration can advance in the US, as well as where it might require more fundamental normative shifts or legislative reform.

I argue that a core corporate governance question lies at the heart of the US ESG debate: ‘Whose voice should count?’ Shareholders or directors? Shareholders or stakeholders? Which shareholders—institutional or retail, short-term or long-term, present or future? Since tradeoffs are inevitable, answering these questions will also determine which ESG issues take priority within firms and across sectors. Few of these choices are as stark as current debates seem to assume. But again, how these questions are answered depends on fundamental normative positions about how corporate purpose, board and investor fiduciary duties, and managerial incentives should be understood and reflected in law. The chapter also emphasizes that in the US context, ESG regulation also raises significant institutional and even constitutional questions about which of these many issues are properly resolved at the federal or state levels and which should be left more fully to the market. It is therefore not surprising that diverse regulatory approaches to ESG are emerging on both sides of the Atlantic. Regulation in the US must respond to these domestic challenges, while also taking account of a rapidly changing transnational regulatory context.

The author’s book chapter can be found here.

Virginia Harper Ho is a Professor of Law at CityU School of Law.