Record: 1 Title: The Unintended Consequences o — Mandatory ESG Disclosures. Authors: Oranburg, Seth C. Source: Business Lawyer. Summer2022, Vol. 77 Issue 3, p697-712. 16p. 1 Diagram. Document Type: Article Subject Terms: *Social responsibility o — business *Disclosure laws *Stockholder wealth *Business & the environment Company/Entity: United States. Securities & Exchange Commission NAICS/Industry Codes: 926150 Regulation, Licensing, and Inspection o — Miscellaneous Commercial Sectors Abstract: Corporate social responsibility (“CSR”) is the notion that corporations should do more — or society than simply earn pro — its — or shareholders. This viewpoint is o — ten juxtaposed against the theory that corporations should maximize social value through pure shareholder wealth maximization (“SWM”). Some proponents o —

                                CSR have proposed rules mandating "environmental, social, and
                                governance" ("ESG") disclosures. Mandatory ESG disclosures
                                would require corporations to  --- ile public reports regarding their
                                activity concerning CSR, sustainability, and other ESG issues. The
                                proposal to mandate ESG disclosures stems  --- rom the assumption
                                that these disclosures will lead to more corporations engaging in
                                more CSR activity instead o ---  pure SWM. In other words, the
                                normative goal is to encourage more CSR activity. However, the
                                assumption that mandatory ESG disclosures will lead to more CSR
                                activity is theoretically and empirically unsound. Instead o ---  leading
                                to more CSR, mandating ESG disclosures could lead to less CSR.
                                This paper explains the theoretical mechanism  --- or this
                                counterintuitive result. It then reviews recent empirical studies that
                                tend to show that ESG-related mandatory disclosures are not
                                associated with bene --- icial real-world outcomes. Finally, it considers
                                the cost o ---  mandating ESG disclosures. The conclusion casts doubt
                                upon that argument and argues that the Securities and Exchange
                                Commission should theoretically and quantitatively consider costs
                                and bene --- its be --- ore mandating ESG disclosures  --- rom public
                                corporations. [ABSTRACT FROM AUTHOR]
                                 Copyright o ---  Business Lawyer is the property o ---  American Bar

Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder’s express written permission. However, users may print, download, or email articles — or individual use. This abstract may be abridged. No warranty is given about the accuracy o — the copy. Users should re — er to the original published version o — the material — or the — ull abstract. (Copyright applies to all Abstracts.) Full Text Word Count: 7727 ISSN: 0007-6899 Accession Number: 159203962 Database: Business Source Ultimate The Unintended Consequences o — Mandatory ESG Disclosures

Contents Corporate social responsibility (“CSR”) is the notion that corporations should do more — or society than simply earn pro — its — or shareholders. This viewpoint is o — ten juxtaposed against the theory that corporations should maximize social value through pure shareholder wealth maximization (“SWM”). Some proponents o — CSR have proposed rules mandating “environmental, social, and governance” (“ESG”) disclosures. Mandatory ESG disclosures would require corporations to — ile public reports regarding their activity concerning CSR, sustainability, and other ESG issues. The proposal to mandate ESG disclosures stems — rom the assumption that these disclosures will lead to more corporations engaging in more CSR activity instead o — pure SWM. In other words, the normative goal is to encourage more CSR activity.

However, the assumption that mandatory ESG disclosures will lead to more CSR activity is theoretically and empirically unsound. Instead o — leading to more CSR, mandating ESG disclosures could lead to less CSR. This paper explains the theoretical mechanism — or this counterintuitive result. It then reviews recent empirical studies that tend to show that ESG-related mandatory disclosures are not associated with bene — icial real-world outcomes. Finally, it considers the cost o — mandating ESG disclosures. The conclusion casts doubt upon that argument and argues that the Securities and Exchange Commission should theoretically and quantitatively consider costs and bene — its be — ore mandating ESG disclosures

rom public corporations.

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 698

I. Theoretical Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700

A. The In

ormation Paradox . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 702

B. Theory o

Optional and Mandatory Disclosure . . . . . . . . . . . . . . . . . . 703 II. Empirical Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 704

A. Impact o

Mandatory ESG Disclosures on ESG In — ormation. . . . . . . . . 704

B. Impact o

Optional ESG Disclosure on ESG In — ormation . . . . . . . . . . . 706

1. CSR True Believers: High-Type ESG In

   ormation . . . . . . . . . . . . . 707

2. Greenwashing: Low-Type ESG In

   ormation. . . . . . . . . . . . . . . . . . 708

III. ESG Disclosure Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 710

Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 711

INTRODUCTION The corporate social responsibility (“CSR”) debate asks the — undamental question: what is the role o —

corporations in society? The debate over CSR has proceeded since at least 1932, when two attorneys, Adol — A. Berle, Jr. and E. Merrick Dodd, Jr., publicly debated the — ollowing question: to whom are corporations accountable?[ 1] Berle argued that corporations are accountable only to shareholders, who are a corporation’s owners.[ 2] Berle’s position was adopted by economist Milton Friedman in 1970, who argued in a New York Times article that “The Social Responsibility o — Business Is to Increase Its Pro — its.”[ 3] The Friedman Doctrine, as it came to be known, is also known as stockholder wealth maximization (“SWM”) theory or simply stockholder theory.[ 4] Fi — ty years later, Richard A. Epstein continues to assert that anything but SWM theory would be untenable in practice.[ 5]

Dodd, on the other hand, argued that corporations are also accountable to society.[ 6] This position

avors CSR and is also known as stakeholder theory. CSR scholars responded immediately to the Friedman Doctrine. In 1971, Hein Kroos and Klaus Schwab argued that corporations must serve all stakeholders.[ 7] Fi — ty years later, Lynn A. Stout continued to contest the SWM theory, writing, among other things, a book entitled The Shareholder Value Myth, [ 8] in which she argued that shareholders are diverse groups who cannot have but one value, making SWM theory just an untenable as Epstein claims CSR to be.

The Berle-Dodd SWM-CSR debate still

rames today’s ongoing discussion about the proper — unction o —

corporations. And now, the discussion includes the concept o

mandatory environmental, social, and governance (“ESG”) disclosure. Mandatory ESG disclosure would require corporations to publicly address ecology, culture, politics, and economics.[ 9] Proponents believe that mandatory ESG disclosure will make corporations more accountable to society, and thus increase CSR.[ 10] SWM proponents counter that corporations already are accountable to society, through consumer and supplier reputation and the stock market; moreover, ESG imposes a uni — orm view o — what corporations should do about social issues, which destroys business diversity and may not — ocus e —

orts on the right issues.[ 11]

This paper does not contribute to the great debate o

whether corporations should engage in CSR or SWM. Rather, it o —

ers a narrower and more technical — ocus. Proponents o — ESG believe that mandating ESG disclosures will result in more ESG activity.[ 12] This theory is based on the notion that you get what you measure. However, mandating more disclosures about ESG activities may not lead to more ESG activities. Mandating ESG disclosures could actually lead to less CSR, at great cost to society.[ 13] This paper aims to prevent such an expensive regulatory blunder by cautioning against mandatory ESG disclosures.

This is not necessarily an anti-ESG or pro-CSR position. As this paper will show, opposing mandatory ESG disclosures makes sense — rom both a CSR and an SWM perspective. CSR proponents want more CSR. For the CSR proponents, this paper’s theorical and empirical analysis o — how mandatory ESG disclosures have unintended consequences that lower CSR activities might give CSR proponents pause be — ore pushing on with mandatory ESG disclosure proposals.

SWM proponents generally want less CSR. For most SWM proponents, mandatory ESG disclosures make no sense already, because their goal is not to incentivize CSR anyway. Ironically, they may — lip and support ESG mandates a — ter reading this article. However, ESG mandates are costly. Such costs may exceed their bene — its, contrary to the pre — erences o — SWM and ESG proponents.

I

neither side o — this ninety-year war — inds it gets what it wants through mandatory ESG disclosures, then the battle on mandatory ESG disclosures could end in a mutual surrender, with both sides abandoning the mandatory ESG disclosure regime. E —

orts could then be spent elsewhere in a grand battle to de — ine corporations under capitalism.

This paper proceeds in three parts. Part I explains the theoretical mechanism

or the counterintuitive result that more ESG disclosure may yield less CSR activity. Part II analyzes the recent empirical studies on the e —

ect o — ESG disclosures on CSR activity, which tend to show that ESG-related mandatory disclosures are not associated with bene — icial real-world outcomes. Part III considers the cost o —

mandating ESG disclosures. The conclusion casts doubt upon that argument that the Securities and Exchange Commission (“SEC”) should mandate ESG disclosures — rom public corporations.

I. THEORETICAL MODEL A corporation takes actions to attract investors. These actions include disclosing to the investor certain material — acts about the corporation that help the investor decide whether to invest in the corporation.[ 14] For example, a corporation could disclose its quarterly earnings reports or how many trees it planted in Sri Lanka. Investors who care only about SWM might disregard the disclosures regarding the trees, while investors who care about CSR might — ind this in — ormation helps them decide to invest in the — irm.

At the outset, it must be clear that disclosures

rom public corporations, whether about earnings or trees, must be made publicly.[ 15] Regulation Fair Disclosure (“Reg FD”) saw to this in 2000.[ 16] Consequently, a company cannot selectively disclose earnings to SWM investors, then make a di —

erent selective disclosure about the trees to CSR investors. Both disclosures must be publicly — iled where all can see and evaluate them.[ 17]

In 2005, Anil Arya, Jonathan Glover, Brian Mittendor

, and Ganapathi Narayanamoorthy published Unintended Consequences o — Regulating Disclosures: The Case o — Regulation Fair Disclosure. [ 18] Their analysis concluded that Reg FD inhibited the very disclosures it was intended to widen.[ 19] It is use — ul to consider that counterintuitive result and to consider whether other disclosure regulations (such as mandatory ESG disclosures) may also inhibit what those regulations were intended to widen.[ 20]

In both the case o

mandatory Reg FD disclosures and mandatory ESG disclosures, an investor — aces a binary choice: to invest or not to invest in a given corporation.[ 21] To render this decision, the investor obtains in — ormation about the corporation in question.[ 22]

How that investor obtains in

ormation depends on how corporate in — ormation is disclosed, which in turn depends on whether there is a mandatory disclosure regime.[ 23] Without a mandatory disclosure regime, corporate in — ormation regarding ESG is either disclosed voluntarily or not disclosed at all.[ 24] Under a mandatory disclosure regime, the corporation has only one choice-disclose the ESG in — ormation pursuant to the regulatory mandate.[ 25]

Even though investors can access and analyze ESG in

ormation themselves, most investors generally rely on analyst reports when making investment decisions.[ 26] Each analyst chooses whether or not to analyze a given company, based on its prediction o — how valuable the resulting report will be, and then sells reports to investors. The analyst thus plays a critical role in the dissemination o — quality ESG in — ormation.

Note that, in the presence o

regulatory mandates — or ESG disclosures, this collapses the corporate decision matrix into a Hobson’s choice: to make mandatory ESG disclosures, or to — ace regulatory — ines and reputational penalties.[ 27] To put this another way, there is some lost in — ormation (regarding whether a corporation chooses to disclose or not) in the presence o — a mandate to disclose, which contravenes some o — the in — ormation gained — rom a mandate to disclose.[ 28] The essential question is: which regime produces higher quality in — ormation and better real-world results?

Extrapolating this essential question: How will the presence or absence o

a corporate decision impact investor decisions? In particular, will this disclosure regime help investors decide whether to invest in CSR- — ocused corporations? Is the value o — in — ormation gained through mandatory disclosure greater than the in — ormation lost by allowing corporations to choose whether to disclose?

A. THE INFORMATION PARADOX Society is awash in in — ormation. Human attention spans appear to have dropped in the — ace o —

overwhelming streams o

constant in — ormation. Not all this in — ormation is relevant or help — ul, or even true. And humans have limited cognitive bandwidth. It becomes harder to discern — ake news, and thus harder to trust real news, as the total volume o — news increases. The result is an in — ormation paradox: A greater quantity o — in — ormation eventually results in a lower-quality understanding o — that in — ormation.[ 29]

This over-in

ormation e —

ect is true even where there are a relatively in — inite number o — people. A rational person will analyze in — ormation only i — it is likely that doing so will be marginally use — ul. Either raising the cost o — analyzing a given set o — in — ormation or lowering the value o — the analysis will reduce the incentives to analyze that in — ormation. When the value is negative, no rational analysts or investors will analyze that in — ormation. Thus, by dumping a large quantity o — in — ormation onto the market, mandatory disclosure regimes can reduce the amount o — quality analysis.

In particular, mandating all

irms to disclose ESG in — ormation may result in a pooling equilibrium where

irms with di —

erent characteristics regarding actual ESG and CSR behavior will choose the same action: disclosure pursuant to the mandate. When such a pooling equilibrium is e —

icient, it actually becomes harder to distinguish — irms with di —

erent characteristics, because all — irms are reporting the same in — ormation.

Charles Cadsby, Murray Frank, and Vojislav Maksimovic studied this topic empirically in their classic paper, Pooling, Separating, and Semiseparating Equilibria in Financial Markets: Some Experimental Evidence. [ 30] First, the authors sorted — irms as type H (high) or type L (low).[ 31] Here, we might likewise separate corporations into type H — or the “CSR true believers” and type L — or the “greenwashers.” [ 32] The researchers approached the problem theoretically, using only mathematical models, to predict how — irms would behave.[ 33] But, according to their models, all three equilibria were theoretically sustainable.[ 34] So, the researchers paid a large group o — subjects to make disclosure and investment decisions.[ 35] In these experiments, parties rapidly or immediately converged on a pooling equilibrium strategy. Even when the researchers disrupted the equilibrium by introducing asymmetric in — ormation, “ [t]he more e —

icient pooling equilibrium was consistently chosen over both other available equilibria.”[ 36]

When asked why the pooling equilibrium dominated the players’ choices, the researchers suggested that investors come into markets with di —

erent prior expectations. Some expect a pooling equilibrium (meaning, they expect mandatory disclosures to produce low quality or no valuable in — ormation), while others expect a separating equilibrium (where “CSG true believer” — irms will reveal themselves, while “greenwashing” — irms will also show their true nature).[ 37] This is why, theoretically, all three types o —

equilibria are sub-game stable. But, in the dynamic real world, the investor who expects pooling is always willing to underpay relative to those who expect separating. In other words, the investors who believe the in — ormation is useless negatively price the value o — the investment. So long as at least two investors who have prior belie — s in pooling are in the market, they will cooperate to drive the market price lower and lower, until all the separating investors are priced out o — the market. Furthermore, in larger markets, where it is very likely that at least two investors have prior belie — s in a pooling equilibrium, the convergence around a pooling equilibrium occurs instantly and reliably.

B. THEORY OF OPTIONAL AND MANDATORY DISCLOSURE Although it might initially appear that available in — ormation will remain the same no matter why it is disclosed, there are reasons to believe that corporations (which we presume to act rationally) will act di —

erently when optionally-versus-mandatorily disclosing in — ormation. By mandatorily, I mean by government regulation or some other public — iat, as opposed to private ordering. Do rational entities have di —

erent incentives regarding the in — ormation to disclose under a mandatory disclosure regime versus a voluntary disclosure regime? Yes. As discussed above, mandatory disclosures tend to create a pooling equilibrium around the choice to disclose. Mandatory disclosures make it costly not to disclose in — ormation; a — ter all, the point o — a mandatory disclosure regime is to — orce nearly all corporations to disclose in — ormation, and governments have the power to levy — ines or shut down operations when corporations — ail to comply with their regimes. Faced with this cost, more — irms will disclose mandatory in — ormation. Knowing this, investors will value corporate in — ormation lower on the basis that the regime results in pooling o —

irms, not separating them. Any — irms that continue to engage in separating behavior will — ind it increasingly costly, and ultimately not bene — icial, to do so, until those — irms — lip to a pooling strategy or exit the market.

Thus, one risk o

a mandatory disclosure regime is that, although there may be more in — ormation, the quality o — that in — ormation-as well as the market’s understanding o — that in — ormation-may be less. Because all — irms must disclose ESG in — ormation, it is hard to distinguish a “true believer” CSR — irm — rom the many “greenwashing” SWM — irms. This is what is meant by a pooling equilibrium. Corporations will — ind it overly costly to distinguish themselves — rom the rest o — the pool, and there — ore, analysts and ultimately investors will likewise be unable to distinguish true belie —

rom greenwashing.

In other words, there is a theoretical risk that mandatory disclosure regimes will incept an in

ormation paradox; that is, requiring disclosure might result in more in — ormation but less quality in — ormation and ultimately less human understanding o — that in — ormation. Thus, disclosure regimes must be care — ully designed to require comparable and measurable in — ormation; otherwise, the result may be a net social cost and not overall real-world bene — its.

II. EMPIRICAL APPLICATION The simple model in Part I highlights a trade-o —

between the value o — in — ormation gained — rom mandatory ESG disclosure and the value o — in — ormation gained — rom observing corporations’ choice whether to make ESG disclosures. For purposes o — comparison, this Part attempts to quanti — y the respective values or at least their overall direction.

A. IMPACT OF MANDATORY ESG DISCLOSURES ON ESG INFORMATION Fortunately, there is some good data regarding the impact o — mandatory ESG disclosure rules on the quantity and quality o — ESG in — ormation. A recent (December 2021) study by the European Corporate Governance Institute (“ECGI”) measured and analyzed The E —

ects o — Mandatory ESG Disclosure Around the World. [ 38] This study incorporated a massive dataset o — all publicly listed — irms in the Worldscope database between 2000 and 2017, which included — i — ty-two sample countries.[ 39] During the relevant period, twenty-nine out o — the — i — ty-two sample countries required some — orm o — mandatory ESG disclosure, and — i — teen o — the — i — ty-two countries required a comprehensive — orm o — mandatory ESG disclosure all at once.[ 40] This provides some basis — or comparison o — ESG regimes through both longitudinal and cross-sectional analysis.

The

irst question regards whether ESG mandates increase ESG in — ormation quantity and availability. To measure this, the ECGI study examined the number o — ESG reports — iled in the Global Reporting Initiative (“GRI”) database and the Asset4 database maintained by Thomson Reuters.[ 41] GRI, a non-pro — it organization, pioneered ESG reporting in 1997 and is today’s most comprehensive ESG reporting database.[ 42] Asset4 is provided by a commercial data vendor that provides ESG reports to investors and analysts on a subscription basis.[ 43] Both GRI and Asset4 provide value-added services including ranking and indexing o —

irms along dimensions o — ESG activity.

ECGI measured the quantity o

ESG reporting in sample countries be — ore and a — ter the introduction o —

ESG disclosure mandates. Perhaps unsurprisingly, ECGI

ound an increase in — irms’ ESG reporting in all countries a — ter the introduction o — ESG disclosure mandates.[ 44] Thus, there is little doubt that mandating ESG reporting increases the quantity o — ESG in — ormation.[ 45] But does it increase the quality and utility o — same?

To measure ESG in

ormation quality, ECGI examined “GRI compliance,” which is a binary value coded

or whether a given — irm reports in — ormation that GRI can index and rank.[ 46] Non-compliant reports are di —

icult to review, compare, analyze, and evaluate. Analysts may choose not to analyze non-compliant reports because it is di —

icult or impossible to estimate or predict corporate ESG activity via a non- compliant report.[ 47] Investors, who are generally less equipped than analysts to made such inter- corporate comparisons, are even less able to discern meaning — ul in — ormation — rom non-compliant reports. The paper employed “GRI compliance” as a proxy — or ESG in — ormation quality.[ 48] A corporation can comply with a country’s ESG disclosure mandates while being GRI non-compliant.[ 49]

The ECGI study

ound no statistically signi — icant evidence that mandatory ESG disclosure a —

ects GRI compliance.[ 50] Hence, the study concludes, ECGI cannot detect that mandatory ESG disclosure regimes improve the quality o — ESG in — ormation.[ 51] The results are consistent with the interpretation that the average corporation produces ESG reports that super — icially comply with minimum standards o —

mandatory ESG disclosure, but the average corporation does not attempt to produce high-quality results that can be evaluated by analysts or investors.[ 52] The data, there — ore, tend to show that mandatory ESG disclosure regimes do increase the quantity o — ESG in — ormation, but do not increase the quality o —

that in

ormation, and, most critically, ESG mandates do not increase the availability o — use — ul ESG in — ormation.[ 53]

B. IMPACT OF OPTIONAL ESG DISCLOSURE ON ESG INFORMATION Optional ESG disclosure is a double-edged sword. On the one hand, optional ESG disclosure could invite greenwashing, which is the corporate practice o — pretending to care about CSR while actually engaging in pure SWM.[ 54] Yet, optional disclosure means disclosure is relatively costly-where some — irms are not spending anything on ESG disclosures, a disclosing — irm bears a relatively higher cost. This could, in theory, have a positive impact on the quality o — the ESG in — ormation that is optionally disclosed.

That theory is not supported by available data regarding the impact o

optional ESG disclosure on investment in — ormation. The ECGI study counted the quantity and measured the quality o — 45,281 ESG reports in the United States, which all occurred during a period where the United States did not mandate ESG disclosures.[ 55] All these disclosures, there — ore, could be considered optional ESG disclosures, as they were not mandated by the government but rather incentivized by some other market pressure. The United States reports constituted 17.45 percent o — the entire sample, making it the single largest reporting country in the sample, even though it was one o — the — ew countries in the study that does not mandate ESG disclosure.[ 56] This shows, at least, there may be other — actors driving ESG disclosure aside — rom mandates. However, questions remain. Are optional ESG disclosures higher quality that mandatory ESG disclosures? Is the quality o — optional ESG disclosures high enough to avoid a pooling equilibrium?

Un

ortunately, there is presently less empirical study regarding the quality o — ESG disclosures in the United States. However, some preliminary data provide a basis — or — urther study. First, as mentioned above, the United States, which has no mandatory ESG reporting, produces the highest total number o —

ESG reports and Japan, which also has no mandatory ESG reporting, produces the second highest number o — reports.[ 57] The simple — act that countries without mandatory ESG disclosure regimes are producing the highest volume o — ESG in — ormation tends to show that there is some mechanism, other than government — iat, incentivizing the production and disclosure o — ESG in — ormation. Nonetheless, questions remain: What is that mechanism? And, does that mechanism produce higher quality ESG in — ormation? These questions require — urther empirical research, which is beyond the scope o — this paper, but this paper will make some e —

ort to positively distinguish between high- and low-type ESG in — ormation. I —

uture studies — ollow this — ramework to distinguish these types o — ESG in — ormation, then those studies could also examine what regime produces better separation between the types.

1. CSR True Believers: High-Type ESG In

   ormation CSR is perceived where corporations engage in social, environmental, and political actions that go beyond their pro — it interests.[ 58] First, it bears mentioning that many scholars believe SWM behavior produces the best outcome — or society, as shareholders may redeploy those maximized corporate pro — its (whether received as dividends or capital gains) to — urther those social, environmental, and political interests,[ 59] making CSR a “myth.”[ 60] On the other hand, some scholars believe that — irms can obtain a competitive advantage by engaging in CSR.[ 61] A primary mechanism — or CSR to create a competitive advantage is through a positive brand association.[ 62]

A recent (2020) study explored

irms in Ghana to measure any correlation between CSR activities and positive brand association.[ 63] The study did indeed — ind a signi — icant positive relationship between CSR, brand perception, and competitive advantage. However, the study has at least two major — laws. First, the study examined the developing nation o — Ghana, and so its results may not be generally applicable to developed economies, like that o — the United States. Second, and perhaps more troubling, the Ghana study measured CSR based on CSR reporting. In other words, the study con — lated the chicken with the egg. While CSR reporting may result in socially bene — icial action, it might also be a rotten egg that results in nothing socially bene — icial-greenwashing.

In

act, the problem with many existing CSR studies is one o — measurement. How does one identi — y and measure CSR behavior? How does one distinguish the limits o — a — irm’s pro — it interests?

There

ore, even i — there are theoretical reasons — or — irms in a competitive marketplace to engage in CSR, it is not yet clear how to identi — y and measure CSR contributions by those — irms. As discussed above, increasing ESG disclosure does not necessarily increase CSR activity. ESG disclosures are not a proxy

or CSR activity, especially where ESG disclosures are mandatory. Any — uture study that seeks to quanti — y the relationship between ESG disclosure and CSR activity will — irst have to establish a credible and reliable method — or measuring CSR. Otherwise, the study might con — late true CSR activity with mere greenwashing.

1. Greenwashing: Low-Type ESG In

   ormation Greenwashing occurs when corporations disclose positive environmental and ecological activities that tend to obscure, mask, or distract — rom more signi — icant negative activities.[ 64] As mentioned above, even CSR researchers seem to — all into the trap o — con — lating ESG disclosure with CSR activity. This is a problem because — irms can use ESG disclosure to mask anti-CSR activities. Magali A. Delmas and Vanessa Cuerel Burbano developed the — ollowing matrix to explain how communication about CSR does not necessarily relate to CSR activity:[ 65]

Optional ESG disclosures-where

irms decide whether, when, how, and how much to disclose about ESG activities-are rightly viewed through the skeptical lens o — greenwashing. But how much greenwashing occurs as a direct result o — the lack o — mandatory ESG disclosure? Organization Science published a global study o — greenwashing,[ 66] which, based on a study o — thousands o — public companies headquartered in — orty- — ive countries, ultimately concluded that corporations that are more likely to cause environmental damage were less likely to make optional ESG disclosures.[ 67] This study, the largest scale to date, suggests that optional ESG disclosure does not necessarily lead to greenwashing, and, contrapositively, that mandatory ESG disclosure does not necessarily prevent greenwashing.[ 68]

A recent (2020) study, Greenwashing in Environmental, Social and Governance Disclosures, [ 69] examined the circumstances under which corporations engage in greenwashing. It de — ined “greenwashers” as “ — irms which seek to create a very transparent public image by revealing large quantities o — ESG data but per — orm poorly in ESG aspects.”[ 70] The de — inition alone belies the result: international researchers already associate over-disclosure with greenwashing.

The Greenwashing researchers measured greenwashing with a peer-relative greenwashing score, which is a normalized measure representing a — irm’s relative position to peers in terms o — its Bloomberg ESG Score minus its Asset4 ESG Score as described above.[ 71] The Bloomberg ESG Score only re — lects a

irm’s quantity o — ESG in — ormation, whether positive or negative. The Bloomberg ESG Score is essentially a word count o — ESG-related terms in public disclosures, as calculated by a proprietary algorithm.[ 72] Thus, it is a good proxy — or how many “green” words a company produces. The Asset4 ESG Score, meanwhile, attempts to measure ESG activity, as opposed to mere verbiage.[ 73] The di —

erence between the Bloomberg EST Score and the Asset4 ESG Score, there — ore, represents a proxy — or that — irm’s level o — greenwashing (that is, the extent o — the di —

erence between how many ESG words the company issues versus how much ESG activity the company per — orms).[ 74] Although this proxy is imper — ect on many levels-including the — act that Asset4, an algorithmic product o — a — or-pro — it corporation, determines what counts as ESG words and what counts as ESG actions-at least it provides a stable coe —

icient to evaluate relative per — ormance along some metric that can be subject to regression analysis against others.

The study o

1,925 large-capitalization companies headquartered in — orty-seven countries — ound no signi — icant correlations between countries that mandated ESG disclosures and greenwashing.[ 75] In other words, the best empirical evidence to date shows no relationship between mandatory ESG disclosures and less greenwashing. This makes sense theoretically. Given that greenwashing is, by de — inition, over-disclosure, is a disclosure regime likely to increase or decrease greenwashing? Theoretically, it seems that mandatory ESG disclosure regimes are more likely to produce ESG disclosures than to produce ESG activity. There is no empirical evidence yet that shows statistically signi — icant relationships between mandatory ESG disclosures and increases in real-world bene — icial activities. On balance, the theoretical argument runs against mandating ESG disclosures i — the goal is to increase ESG activity-and that is without considering the cost o — losing optional ESG disclosures.

III. ESG DISCLOSURE COST Despite the signi — icant scholarly interest in CSR activity and ESG disclosure, there is surprisingly little in — ormation about the costs o — a mandatory ESG disclosure regime. This is a limiting problem, because the SEC is legally required to consider the costs and the bene — its o — any new regulation, including mandatory ESG regulation.

Cost-bene

it analysis (CBA) is a standard and well-recognized approach to evaluating — inancial regulation.[ 76] While there is some debate as to whether CBA should be qualitative[ 77] or quantitative,[ 78] there appears to be — ew who argue that — ederal agencies should totally ignore the likely impact o —

proposed or current regulation. Regardless o

whether agencies should take a conceptional or mathematical approach to CBA, — ederal law, including the Administrative Procedure Act,[ 79] prohibits any — ederal administrative agency, including the SEC, — rom producing any “arbitrary [or] capricious” regulation.[ 80] Any regulation promulgated by a — ederal agency, like the SEC, must be supported by “substantial evidence.”[ 81] Such statutorily required evidence o — ten comes in the — orm o — a detailed — inal rule that includes detailed analysis.

The SEC is also speci

ically required by statute, when engaging in rulemaking, to consider or determine the public interest, the protection o — investors, and whether the action will promote e —

iciency, competition, and capital — ormation.[ 82] Statutory law prohibits the SEC — rom making rules that impose a burden on competition not necessary or appropriate in — urtherance o — the purposes o — the Securities Exchange Act o — 1934.[ 83] These statutes e —

ectively require the SEC to evaluate the costs and bene — its o — any — inancial regulation it proposes or en — orces.[ 84]

It is there

ore beyond doubt that current law requires the SEC to conduct CBA, at least on a conceptual level, when promulgating — inancial regulations. There — ore, — urther research regarding mandatory ESG disclosure regulations should estimate the costs and bene — its thereo — .

As this paper has already shown, however, there are serious doubts as to whether mandatory ESG disclosure will have measurable bene — its at all. Whether the bene — its are de — ined as more quality in — ormation about CSR activity, more CSR activity, or greater ease — or investors to distinguish between “CSR true believer” — irms and “greenwashing” — irms, none o — the analysis so — ar has shown that the bene — its are likely to be positive. Meanwhile, the costs o — a new regulatory regime are not likely to be zero or negative. I — there are no tangible social bene — its to a new regulatory regime, then it would likely not pass CBA. CONCLUSION This paper reviewed the theoretical and empirical bases o — mandating ESG disclosures. While there remains a normative debate about whether corporations should be required to engage in CSR or SWM, there is also the question o — how CSR requirements could be implemented in the — irst place. This paper explored whether imposing a mandatory ESG disclosure regime is likely to generate more CSR activity and — ound there is not currently evidence showing this relationship is likely. It also provided a theoretical basis explaining why any such mandatory ESG disclosure regime could have the unintended consequence o — reducing CSR activity and instead increase greenwashing.

It seems that signi

icant additional research shall be required be — ore imposing a mandatory ESG regime on all American public companies. First, scholars must agree on what CSR activity is and how to measure it-a — ter all, it is the socially bene — icial activity itsel — and not merely disclosure about that activity that most CSR proponents ultimately seek to bring about. CSR study thus needs some measurement o —

social bene

it as its starting point. Second, scholars must analyze CSR activity as a — unction o — mandatory ESG disclosure regimes. Because America and Japan do not currently have mandatory ESG disclosure regimes, while many other large economies do, there is a cross-sectional natural experiment waiting to be analyzed. Third, alternative mechanisms — or ESG disclosures, such as reputational markets and greenwashing anti- — raud regimes, should be evaluated theoretically and empirically to see whether they are more or less prone to pooling equilibria. It may turn out to be the case that the public markets are already demanding and obtaining a more optimal level o — ESG in — ormation and CSR activity through private ordering than would occur through a new regulatory regime. Fourth, scholars should estimate the cost o — any proposed mandatory ESG regime to compare it with its bene — its. Such cost is not just a matter o — net dollars but also how such a regime might impact entry, innovation, and competition.

Although CSR has been a popular research topic

or almost twenty years, during which time many nations created mandatory ESG disclosure regimes, the United States has mainly stayed on the sidelines. This wait-and-see approach appears, with 20/20 hindsight, to have been wise. Nations that have instituted mandatory ESG regimes have not necessarily produced social bene — its, despite the costs o — these regimes. Admittedly, it is counterintuitive that a mandatory disclosure regime can result in less use — ul in — ormation, but this paper has shown theoretically and empirically why more disclosure does not necessarily result in better in — ormation or, — or that matter, social bene — its. Accordingly, CSR should be studied more care — ully be — ore any new mandatory ESG disclosure regime is implemented in the United States.

• Seth C. Oranburg, Associate Pro

  essor. University o — New Hampshire Franklin Pierce School o — Law; Co-Director, Program on Organizations, Business, and Markets at the Classical Liberal Institute at NYU School o — Law; JD, University o — Chicago.

Allen Ferrell & Hao Liang, Socially Responsible Firms, OXFORD BUS. L. BLOG ( Jan. 16, 2017) [https://perma.cc/7MDY-JLFP].

1. Adolph A. Berle, Jr., Corporate Powers as Powers in Trust, 44 HARV. L. REV. 1049 (1931); Adolph A. Berle, Jr., For Whom Corporate Managers Are Trustees: A Note, 45 HARV. L. REV. 1365 (1932). 3. Milton Friedman, A Friedman Doctrine: The Social Responsibility o — Business Is to Increase Its Pro — its, N.Y. TIMES MAG., Sept. 13, 1970, at 32 [https://perma.cc/ASZ5-2SH9].

2. See id. (emphasizing that corporate executives only have a responsibility to act as an agent o

   the stockholders, not — or the general social wel — are).

3. Richard A. Epstein, Creeping Coercion Under the “Stakeholder” Banner, HOOVER INST. (Sept. 13, 2021) [https://perma.cc/3VJ6-XQFH] (discussing how ESG would dictate — irm behavior, disallowing the market — rom sorting itsel — out, which ultimately is harm — ul intervention within the market).

4. E. Merrick Dodd, Jr., For Whom Are Corporate Managers Trustees?, 45 HARV. L. REV. 1145 (1932); see also Ferrell & Liang, supra note 1.

5. KLAUS SCHWAB & HEIN KROOS, MODERNE UNTERNEHMENSFU¨ HRUNG IM MASCHINENBAU (1971) [https://perma.cc/S2×4-9MDL].

6. LYNN STOUT, THE SHAREHOLDER VALUE MYTH: HOW PUTTING SHAREHOLDERS FIRST HARMS INVESTORS, CORPORATIONS, AND THE PUBLIC (2012); see Margaret M. Blair & Lynn A. Stout, A Team Production Theory o — Corporate Law, 85 VA. L. REV. 247 (1999).

7. See Lois S. Mahoney, Standalone CSR Reports: A Canadian Analysis,6ISSUES SOC.&ENV’T ACCT. 4, 4-5 (2012) (de — ining CSR, discussing research on standalone CSR reports, and — inding support — or the proposition that — irms issue such reports as a signal o — their superior commitment to CSR).

8. See Jesús García-de-Madariaga & Fernando Rodríguez-de-Rivera-Cremades, Corporate Social Responsibility and the Classical Theory o — the Firm: Are Both Theories Irreconcilable?, 20 REV. INNOVAR J. 5 (2010) [https://perma.cc/8E3Z-GXL6] (discussing — actors stemming — rom the disclosure o —

CSR, including customer satis

action and corporate reputation, which are viewed to increase CSR disclosure).

1. Matthew Lau, ESG Is Unnecessary and Harm

   ul, FIN. POST (Oct. 13, 2021) [https://perma.cc/4KUH- VUJ3] (commenting that business diversity is destroyed as ESG disclosure seeks to impose a wide range o — social views upon businesses, ultimately in — luencing businesses to view these social issues in the same light, e.g., global warming, which is detrimental).

2. See García-de-Madariaga & Rodríguez-de-Rivera-Cremades, supra note 10, at 7 (contrasting the view o — SWM proponents-who believe it is not the individual corporation’s responsibility to better society but rather the jobs o — various social groups-with the view o — proponents o — CSR).

3. See Philipp Krueger et al., The E

ects o — Mandatory ESG Disclosure Around the World 1 (Eur. Corp. Governance Inst., Working Paper No. 754, 2021) [https://perma.cc/FG3D-BAVG] (discussing how mandating CSR disclosure may lead to less CSR as a whole).

1. Rehana Anwar & Jaleel A. Malik, When Does Corporate Social Responsibility Disclosure A

ect Investment E —

iciency? A New Answer to an Old Question, 10 SAGE OPEN 1 (2020) (discussing the wide range o — potential in — ormation that corporations may choose to disclose, such as the quality o — their products and services, along with the social behavior o — companies, because di —

erent investors prioritize those considerations di —

erently).

1. Armando Gomes, Gary Gorton & Leonardo Madureira, SEC Regulation Fair Disclosure, In

   ormation, and the Cost o — Capital, 13 J. CORP. FIN. 300, 301 (2007) (discussing Regulation Fair Disclosure, which requires public disclosure, rather than selective disclosure, o — material nonpublic in — ormation).

2. See 17 C.F.R. §§ 243.100-243.103 (2022) (“Regulation FD”).

3. See id. § 243.100(a) (“Whenever an issuer . . . [selectively] discloses any material nonpublic in — ormation to [one party], the issuer shall make public disclosure o — that in — ormation . . . simultaneously, in the case o — an intentional disclosure . . . .” (emphasis added)).

4. See Anil Arya et al., Unintended Consequences o

   Regulating Disclosures: The Case o — Regulation Fair Disclosure, 24 J. ACCT.&PUB. POL’Y 243 (2005).

5. Id. at 244-45 (discussing empirical data collected to show that selective disclosure aids in limiting herd behavior among investors and also can give investors more in — ormation in the long run because, i —

all in

ormation has to be public, then corporations may not disclose it at all).

1. See id. at 251.

2. See id. at 245 (discussing the impact o

   a corporation’s disclosure policies on an individual’s decision to invest).

3. Id.

4. Id. at 245-46.

5. See id. at 246 (discussing the various disclosure policies a company may establish: no disclosure, voluntary public disclosure, voluntary selective disclosure).

6. Frank H. Easterbrook & Daniel R. Fischel, Mandatory Disclosure and the Protection o

   Investors, 70 VA. L. REV. 669, 680-81 (1984) (discussing how a mandatory disclosure regime would prohibit — irms — rom staying silent along with setting guidelines — or the time — rame and manner o — disclosures).

7. See Arya et al., supra note 18, at 247 (discussing investors’ likelihood to be drawn to analysts’ reports despite the risk o — herding).

8. See Easterbrook & Fischel, supra note 25, at 680-85, 708-09 (discussing how mandatory ESG reporting would limit any corporation’s ability to stay silent on those ESG issues).

9. See Arya et al., supra note 18, at 251 (discussing how mandatory ESG disclosure can lead to analyst herding behavior which results in overlooking some in — ormation that would have been acquired i — there was not a mandatory disclosure regime).

10. Peter Gordon Roetzel, In

    ormation Overload in the In — ormation Age: A Review o — the Literature — rom Business Administration, Business Psychology, and Related Disciplines with a Bibliometric Approach and Framework Development, 12 BUS. RSCH. 479, 483 (2019) (noting that, as the in — ormation load increases, an individual’s ability to understand and internalize that in — ormation decreases because individuals have a limited ability to process in — ormation past a certain point).

11. Charles B. Cadsby, Murray Frank & Vojislav Maksimovic, Pooling, Separating, and Semiseparating Equilibria in Financial Markets: Some Experimental Evidence,3REV. FIN. STUD. 315 (1990).

12. Id. at 319.

13. See in

    ra Part II.B.2 (de — ining and discussing “greenwashing”).

14. Cadsby, Frank & Maksimovic, supra note 30, at 319-22.

15. Id. at 321-22.

16. Id. at 323-24 (discussing the experiment where participants were separated into two groups: investors and — irms; at the beginning o — a round, each — irm selected an envelope by which it was randomly appointed as type H or type L; once aware o — their type, the — irms then determined whether they would undertake the new available project; i — they chose to undertake the project, they would raise the “necessary” — unds — rom the investor).

17. Id. at 332.

18. Id. at 333.

19. Krueger et al., supra note 13.

20. Id. at 11-12.

21. Id. at 2, 5.

22. Id. at 15.

23. Id.

24. Id.

25. Id. at 23, 43

    ig. 2 (discussing and charting the impact o — mandatory disclosure regimes, which predictably increase the quantity o — disclosure).

26. Id. at 24, 46 tbl. 3 (reporting that data reveal positive and statistically signi

    icant coe —

icients, which ultimately show a positive relationship between mandatory disclosure and the propensity to — ile an ESG report).

1. Id. at 3.

2. See id. at 1 (reporting that “institutional investors

   requently complain that the availability and quality o —

irm-level ESG disclosures are insu —

icient to make in — ormed investment decisions”).

1. Id. at 24 (“GRI compliance [is] our proxy

   or the quality o — the — iled ESG reports.”).

2. See id. at 1 (“[S]ome countries may issue disclosure requirements that contain low standards and loose guidelines,” whereas the GRI may have high standards and tight guidelines.).

3. Id. at 2-3 & 23-24 (discussing how, on average, mandatory ESG reporting-while increasing the quantity and, to some extent, quality-does not increase GRI Compliance).

4. Id. at 24.

5. Id. (“[T]he average

   irm initiates an ESG report to ‘super — icially’ comply with the minimum requirements o — mandatory ESG disclosure regulation.”).

6. Id. (“[M]andatory disclosure a

ects the propensity to — ile an ESG report, but it does not increase the average quality o — such reports once they are — iled.”).

1. Magali A. Delmas & Vanessa Cuerel Burbano, The Drivers o

   Greenwashing, 54 CAL. MGMT. REV. 64 (2011).

2. Kreuger et al., supra note 13, at 56 tbl. 1.

3. Id. (reporting 45,281 observable samples

   or the United States).

4. Id. (reporting 37,892 observable samples

   or Japan).

5. See Mahoney, supra note 9, at 4.

6. See Friedman, supra note 3, at 32; Epstein, supra note 5.

7. Deborah Doane, The Myth o

   CSR: The Problem with Assuming that Companies Can Do Well While Also Doing Good Is that Markets Don’t Really Work that Way, 2005 STAN. SOC. INNOVATION REV. 23 [https://perma.cc/57YW-6FA3].

8. Michael E. Porter & Mark R. Kramer, Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility, HARV. BUS. REV., Dec. 2006, at 78.

9. See DAVID A. AAKER, MANAGING BRAND EQUITY: CAPITALIZING ON THE VALUE OF A BRAND NAME (1991). 63. George Ko — i Amoako & Kwasi Dartey-Baah, Corporate Social Responsibiltiy: Strategy — or Boosting Brand Perception and Competitive Advantage, in CSR AND SOCIALLY RESPONSIBLE INVESTING STRATEGIES IN TRANSITIONING AND EMERGING ECONOMIES 65 (Anetta Kuna-Marszatek & Agnieszka Ktysik-Uryszek, eds. 2020) [https://perma.cc/L4NP-NTEU].

10. Delmas & Cuerel Burbano, supra note 54, at 1 (discussing the increasingly typical behavior o

    a — irm misleading consumers and investors regarding its carbon — ootprint in attempt to make it more appealing to consumers and investors).

11. Id. at 67

    ig. 1.

12. See Christopher Marquis, Michael W. To

el & Yanhua Zhou, Scrutiny, Norms, and Selective Disclosure: A Global Study o — Greenwashing, 27 ORG. SCI. 483 (2016).

1. Id. at 483, 491 tbl. 1, 492 tbl. 2, 494 tbl. 3 (charting data that shows a statistically negative coe

icient regarding environmental damage, which indicates that more environmental damage is done by — irms that exhibit less disclosure).

1. Id. at 486, 491-93 (discussing the original hypothesis o

   more environmentally harm — ul — irms will engage in less selective disclosure and the data to support it).

2. Ellen Pei-yi Yu, Bac Van Luu & Catherine Huirong Chen, Greenwashing in Environmental, Social and Governance Disclosures, 52 RSCH. INT’L BUS.&FIN. 1 (2020).

3. Id. at 5.

4. Id. (discussing the research model which essentially measures the

   irm’s greenwashing behavior).

5. Id. (discussing the proprietary calculation, which accounts

   or over nine hundred key indicators, including CO2 emissions, hazardous waste, and total energy consumption).

6. Id.

7. Id.

8. See id. at 6-8.

9. John C. Coates IV, Cost-Bene

   it Analysis o — Financial Regulation: Case Studies and Implications, 124 YALE L.J. 882 (2015).

10. See, e.g., Nat’l Ass’n o

    M — rs. v. SEC, 956 F. Supp. 2d 43 (D.D.C. 2013), a —

‘d in part, 748 F.3d 359, 369-70 (D.C. Cir. 2014) (holding quanti — ication o — costs and bene — its is not judicially mandated when the SEC adopts rules that are humanitarian and not economic), overruled on other grounds by Am. Meat Inst. v. U.S. Dep’t o — Agric., 760 F.3d 18 (D.C. Cir. 2014) (en banc). 78. See, e.g., Bus. Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011) (holding that the SEC must quanti — y costs and bene — its o — proposed rules).

1. Pub. L. No. 79-404, 60 Stat. 237 (1946) (codi

   ied as amended at 5 U.S.C. §§ 551-559 (2018)).

2. 5 U.S.C. § 706 (2018).

3. Id. § 556(d); see NLRB v. Int’l Brotherhood o

   Elec. Workers, Loc. 48, 345 F.3d 1049, 1054 (9th Cir. 2003) (interpreting “substantial evidence” to mean more than a mere scintilla and less than a preponderance, and to also mean such evidence as a reasonable mind might accept as adequate to support a conclusion); De La Fuente II v. FDIC, 332 F.3d 1208, 1220 (9th Cir. 2003) (same).

4. 15 U.S.C. § 77b(b) (2018) (Securities Act o

   1993); id. § 78c( — ) (Securities Exchange Act o — 1934); id. § 80a-2(c) (Investment Company Act o — 1940).

5. Id. § 78w(a)(2).

6. COMM. ON CAP. MKTS. REGULATION,ABALANCED APPROACH TO COST-BENEFIT ANALYSIS REFORM 4 (2013) (arguing-based upon the text and the legislative history o — the National Securities Markets Improvement Act o —
7. Pub. L. No. 104-290, § 106, 110 Stat. 3416, 3416, 3424 (1996) (codi — ied as amended in scattered sections o — 15 U.S.C.) (“To amend the — ederal securities laws in order to promote e —

iciency . . . .”)-that the SEC must conduct CBA based on the statutory requirement that the SEC consider “e —

iciency” as one o — a number o —

actors in rulemaking).

DIAGRAM: Figure 1. Typology o

Firms based on Environmental Per — ormance and Communication

~~~~~~~~ By Seth C. Oranburg, Associate Pro — essor. University o — New Hampshire Franklin Pierce School o — Law; Co-Director, Program on Organizations, Business, and Markets at the Classical Liberal Institute at NYU School o — Law; JD, University o — Chicago.

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