The ESG Gap

The corporate world is undergoing a transformation: there has been a dramatic influx in demand for companies to promote environmental, social, and governance (ESG) values. Yet these preferences do not necessarily translate into effective corporate actions. In this Article, we underscore the structural problems that prevent such preferences from steering the corporate ship full steam ahead toward ESG goals. We analyze the central actors in the corporate sphere that can potentially bring about such change on the ground: managers, institutional investors, and activist hedge funds.

We demonstrate that none of these actors have the two central elements required for promoting ESG goals: motivation and competence. We refer to this problem as the ESG gap. We then suggest bridging the gap by forming a new entity, the Activist ESG Fund (AEF). The AEF would be an exchangetraded, closed-end mutual fund, uniquely designed for targeted activist investment.

The closed-end traded fund structure would enable the fund management to focus on the long run by attracting patient money while permitting impatient investors to sell their shares on the highly liquid stock exchange. The establishment of AEFs can be a turning point in corporations’ and society’s effective promotion of ESG goals.