The ESG Information System

The mounting focus on ESG has forced internal corporate decision-making into the spotlight. Investors are eager to support companies in innovative “green” technologies and scrutinize companies’ transition plans. Activists are targeting boards whose decisions appear too timid or insufficiently explained. Consumers and employees are incorporating companies sustainability credentials in their purchasing and employment decisions. These actors are asking companies for better information, higher quality reports, and granular data. In response, companies are producing lengthy sustainability reports, adopting ambitious purpose statements, and touting their sustainability credentials. Understandably, concerns about greenwashing and accountability abound, and policymakers are preparing for action. In this Essay, we show how the ESG information system modeled itself after the key corporate governance innovations of the last fifty years. We start with the introduction of the monitoring board in the 1970s, which paved the way for the rise of independent directors in overseeing company activity, providing a counterweight to management, and increasing responsiveness to investor concerns. We argue that ESG’s insistence on board oversight, diversity, and expertise reflects a similar intuition that board members with special expertise can have valuable contributions to decision-making.19 We then turn to the next wave of corporate governance reform, formalized in the Sarbanes-Oxley Act of 2002 (SOX), which made practices already common in the market mandatory and introduced others. With its emphasis on disclosure accuracy, SOX served as the prime archetype for the ESG information system. The global effort to standardize ESG echoes SOX’s emphasis on standardization, either through market-led initiatives like the Sustainability Accounting Standards Board (SASB) or through government-supported bodies. Similarly, SOX’s reliance on auditor certifications of internal controls a measure heavily criticized by many as overly costly is reproduced through market demands and regulatory mandates for assurance. Finally, the buildup of sustainability departments emulates SOX’s efforts to boost the independence of internal controls. Finally, by examining ESG disclosure in practice, we show that it offers managers and directors vital information about the social impact of their decisions. This perspective sheds light on the ESG disclosure debate, highlighting it as a logical evolution of (rather than a threat to) traditional corporate governance systems that enhance information flow to managers and the board.