If corporate leaders dress up ideological expenditures as profitable investments, without vetting them against projected cash flows and opportunity costs, they are not merely misallocating capital but misleading stakeholders and courting legal liability.
The fundamental obligation of a corporate fiduciary is unambiguous: to make business decisions on a fully informed basis in order to maximize shareholder value. While this duty has long been the bedrock of corporate governance, the rapid expansion of environmental, social, and governance (ESG) investing—growing to more than $16 trillion in U.S. assets by 2020—has introduced a dangerous ambiguity into boardrooms. One can now read 50-page sustainability reports filled with platitudes regarding the value of often tens of billions of dollars being invested without once seeing a reference to Net Present Value (NPV) or Return on Investment (ROI). However, as political winds shift and scrutiny intensifies, it is time to return to Business Decision-Making 101: expressly authorizing investments based on NPV and maintaining them based on ROI is the default rule.
Recent executive actions have re-emphasized that investor returns should be the "only priority" for those managing the assets of American families. Yet, there are some red flags suggesting corporate leaders are allocating capital to ESG initiatives based on ideology rather than arithmetic. While not every minor business decision is perfectly amenable to NPV or ROI calculations, consciously disregarding even the attempt to perform these calculations for major strategic shifts is likely bad faith.
When business leaders tout ESG-related investments as "good for business," or even more directly tie them to shareholder value, it is fair to argue that they are implicitly making a specific financial claim. Specifically, they are arguably implying that these investments have been vetted via traditional financial metrics like NPV and ROI. Accordingly, if a CEO claims a net-zero pledge or a diversity initiative will drive growth but has not actually vetted that claim against projected cash flows, opportunity costs, etc., they are arguably misleading the market and the company’s owners. And this does not only implicate corporate fiduciary duties. If this lack of financial vetting is not disclosed, such assertions might also constitute securities fraud or consumer fraud.
Capital may certainly be allocated to meet governmental regulations or for risk mitigation. In these instances, the expenditure is perhaps a pure cost center—necessary for operation, perhaps, but not a driver of profit. The problem arises when these costs are dressed up as profitable investments. If a project is undertaken to satisfy a regulatory requirement or to avoid litigation, that rationale should be disclosed transparently to shareholders. It should not be sold as a profit-generating venture if the ROI does not support that conclusion.
The consequences of ignoring economic reality are becoming starkly visible. In the energy sector, green projects such as offshore wind are struggling to compete or are being canceled altogether as they collide with market realities. Companies that previously touted ambitious climate goals are now quietly backtracking as the economics fail to pencil out. And to be clear, we at the Free Enterprise Project of the National Center for Public Policy Research (NCPPR) have been warning corporate boards and executives about this risk of “reverse stranded assets” for years, so don’t buy for a minute any claims that corporate America couldn’t have predicted the underperformance and outright failure of green transition investments.
Relatedly, the federal government is taking steps to ensure that fiduciaries do not sacrifice pecuniary value for political agendas. A recent executive order directed the SEC to enforce anti-fraud provisions regarding material misstatements in proxy voting recommendations, specifically targeting the promotion of non-pecuniary ESG goals over investor returns.
Shareholders deserve the truth. If an investment increases the Net Present Value of the firm, accounting for opportunity cost, fund it. If an expenditure is required to comply with the law, pay it and disclose it as a cost. But using shareholder capital to fund what often appear to be politically motivated agendas without, for example, a rigorous ROI analysis can be a dereliction of duty. Fiduciaries must stop hiding behind vague promises of sustainability and start providing more transparency. To that end, look for shareholder proposals from NCPPR seeking ESG ROI reports.
