ESG: A panacea for market power?

We study the equilibrium effects of the 'S' dimension of ESG in a model of imperfect competition in labor (and product) markets. All else equal, a profit maximizing firm can benefit from adopting ESG policies that give a competitive edge in attracting workers; 'Doing Well by Doing Good' applies in our setting. ESG policies are strategic complements, and in equilibrium, they are adopted by all firms resulting in higher worker welfare but lower shareholder value. Thus, profit maximizing firms benefit from coordinating on low impact ESG policies, raising anti-trust concerns from the adoption of industry-wide ESG standards. A purposeful firm (led by a socially conscious board) benefits from such ESG policies, and imperfect competition between purposeful firms obtains the first best in equilibrium. Thus, the social purpose of the corporation is a panacea to excessive market power. More broadly, our analysis relates the adoption of ESG policies to the nature of competition between firms and their model of corporate governance.

Introduction

There is an ongoing debate in academic and policy circles regarding whether a corporation's purpose is, or should be, to maximize value for its shareholders or instead to consider the interests of all its stakeholders. These questions have significant implications, influencing how companies and boards factor in Environmental, Social, and Governance (ESG) considerations in product and service development, business decisions, risk management, long-term strategies, talent recruitment, workforce investment, compliance programs, and public disclosures. Numerous empirical studies have explored whether firms truly implement ESG policies, whether these policies achieve their intended goals, and whether equity markets reward such initiatives. Theoretical studies have also investigated how shareholder actions incentivize firms to engage in socially responsible practices. However, the literature largely lacks an examination of how firms' ESG policies impact equilibrium outcomes in the actual markets where they operate. Our paper aims to address this gap.

We construct a foundational model to analyze the effects of corporate social responsibility on market equilibriums, specifically focusing on the 'S' aspect of ESG within labor and product markets. In our framework, various oligopolistic firms interact within labor or product markets. The presence of imperfect competition and limited regulation provides room for substantial corporate social responsibility. We depict an ESG policy as a restriction that a firm's board of directors places on its manager.