Currently, despite the increasing pressure on corporations to account for Environmental Social Governance (ESG) factors in their disclosures and actions, a lack of clarity on the meaning of ESG persists. ESG might be equivalent to stakeholderism, in which companies can sacrifice firm or shareholder market value to serve non-financial values. A second meaning would permit companies to pursue ESG only if it advanced the firm’s financial value. The second meaning poses no new challenges for corporate law.

This Article will address how the lack of clarity on ESG makes it difficult to assess whether a provision in a contract of a firm mandating the pursuit of ESG would violate the mandatory fiduciary duties of managers. That lack of clarity might also render the provision unenforceable under contract law, even if corporate law typically defers to private ordering by firms.

The ambiguity of an ESG-contract term governing management must be considered in conjunction with the central problem: that of addressing the ESG class of firm externalities. The relative analytics of deploying the agency contract-like fiduciary performance obligation, when contrasted with other private and interventional alternatives, to deal with firm externalities should be central to the analysis. Evaluating the inclusion of a mandated pursuit of ESG in a contract requires assessing not only whether ESG is a permitted objective of a corporation, but also, if ESG is a permitted objective, whether a contract provision would be enforceable and whether mandating the pursuit of ESG in a contract of a firm would best address the ESG class of firm externalities. Finally, would it impose hidden costs on the governance of firms that should be avoided?


Environmental, social, and corporate governance (ESG), financial value, externalities, private ordering and costs of ownership and undifferentiated investors

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74 Case Western Reserve Law Review (forthcoming 2023)