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Steven Globerman: Costs of mandatory environmental, social and governance disclosure would likely outweigh benefits 


The ESG movement“Environmental, social, and governance (ESG) criteria are a set of standards for a company’s behavior used by socially conscious investors to screen potential investments. Environmental criteria consider how a company safeguards the environment, including corporate policies addressing climate change, for example.” is proliferating across the Western world. 

In the United States, the Securities and Exchange Commission wants to increase disclosure requirements (with an ESG focus) for investment funds. The European Union has had disclosure mandates for public companies since 2018, tied to the UN’s Sustainable Development Goals.Do you know all 17 SDGs? Here in Canada, under current Canadian securities legislation, there are no specific requirements mandating the disclosure of the “environmental, social and governance” practices of public companies, but the idea is gaining steam in some Canadian precincts including the Trudeau government’s latest budget

Why? According to proponents, expansive and mandatory ESG disclosure regulations will better inform investors about the ESG practices of public companies (their carbon usage, for example) and thus more investment capital will flow to ESG-intensive companies and less will flow to companies lagging in ESG initiatives.

But in reality, an expansive government-mandated ESG reporting regime in Canada will likely have social costs that outweigh any social benefits. 

Consider this. If investors are willing to pay more to own stocks and bonds of a company that follows “best practice” ESG activities, that company surely has a strong incentive to inform the investment community about its ESG activities because it would help lower its financing costs, which, from an investor’s perspective, are mirror images of the values of that company’s equity and debt-financing instruments. As such, if companies voluntarily disclose to investors their favourable ESG-related activities, those companies should enjoy a lower cost of financing and a competitive advantage.

So if voluntary ESG disclosure will likely benefit companies, why would government need to impose an ESG disclosure mandate? True, in an environment where ESG disclosures are not mandated and thus less regulated by government, some companies may make false or exaggerated claims about their ESG practices (sometimes known as greenwashing“Greenwashing is the process of conveying a false impression or providing misleading information about how a company’s products are more environmentally sound. Greenwashing is considered an unsubstantiated claim to deceive consumers into believing that a company’s products are environmentally friendly.” But these same companies would suffer permanent reputational and financial damage if investors identified this greenwashing. That’s likely a risk few companies would take.

Moreover, some argue that ESG disclosure rules, backed by regulatory penalties against violators, would produce more useful ESG information for investors than a regime of voluntary disclosure. But in reality, it’s unlikely that any standardized ESG disclosure rules would remain relevant across different companies carrying out a wide range of production activities in our modern economy. For example, why mandate the same carbon disclosure rules for petroleum refineries and software developers?

Also, rating companies based on ESG performance remains a subjective exercise. Indeed, different ESG rating services, which sell their corporate rankings to investors, often disagree in their rankings of the same companies. And individual rating services change their rankings of the same companies over short periods of time, sometimes dramatically. In this context, requiring investors to rely on standardized disclosure information consolidated and distributed by rating agencies might actually deprive investors of relevant ESG information that does not fit into the government-mandated disclosure format.

Finally, this debate should include empirical evidence about whether mandating more expansive and standardized ESG disclosures would benefit investors. But unfortunately, methodological and measurement problems plague the empirical tests on that question. Nevertheless, a new study published by the Fraser Institute, which evaluates the available empirical evidence on the financial returns to ESG-themed investment strategies, finds no consistent evidence supporting the claim that highly-ranked (by ESG rating agencies) companies are rewarded with lower costs of capital.

This finding further calls into question whether a more expansive and standardized ESG reporting regime—mandated by government in Ottawa or elsewhere—will produce social benefits. Although there’s no doubt it will impose onerous new costs of doing business, particularly on small and medium-sized enterprises.

Opinion: Classical liberal votes are up for grabs in Canada—will anyone take them?


We are in the somewhat awkward position, as classical liberals who are neither big-C nor small-c conservatives, of having been asked to discuss classical liberalism as a faction of the conservative movement. We see why an alliance has been possible between classical liberals and conservatives, but we don’t think that compatibility can be counted on. It’s wrong to assume, as our country navigates its political realignment, that old alliances will—or should—hold. 

F.A. Hayek famously declared that he was not a conservativeWhy I Am Not a Conservative and proceeded to offer a definition of conservatismHayek was not a conservative. Here’s why. distinct from liberalism. Hayek says—and we agree—that conservatives prefer what’s tried and true to solutions grounded in theory, that conservatives focus on getting to specific outcomes rather than rules that let people choose their own paths, and that from a liberal perspective conservatives are over-sceptical of open-ended change and not sceptical enough of authority. 

Conservatives, as Ben Woodfinden recently argued,A Tory impulse and anti-Laurentian ideas drive Canadian conservatism want to conserve what they see as valuable. Their policy goals come from where we’ve already been and what we’ve already done. Conservative policy goals don’t come from first principles about a never-realized ideal. 

Following McGill’s Jacob T. Levy, we argue that liberals, in contrast, are committed—regardless of the institutions from which they start—to robust due process and the rule of law, to religious liberty, to freedom of speech and association, to support for markets, and to democratic control of the legislative and executive branches of government. 

The term classical liberal is only used in North America. In much of the world, the term “liberal” is used to describe people who oppose institutionalized and especially government-backed power and want limited government intervention in people’s economic and personal lives. However, the emergence and growth in the 20th century of welfare liberalism—which advocates for more government regulation and redistribution—led to the adoption of terms like “classical liberal” and “libertarian” to differentiate. 

For a long time, Canadian conservatism could be described as a fusion of support for freer markets (like those espoused by classical liberals) with social conservatism. But in the 21st century, most obviously since 2016, the issues on which parties seek the support of voters have changed. 

The historian Stephen Davies has predicted that the new dividing line between parties will be nationalism against international cosmopolitanism. This new order is reflected in the emerging scepticism of both immigration and trade in parties of the right—an example is the reshoring strategy advocated by our friend Sean Speer. Hostility to internationalism is why the World Economic Forum has become a touchstone to some in Canadian politics. 

As voters and parties realign themselves to discover what brings people together under different political tents, it’s less obvious what Canadian conservatism will become. Classical liberals and conservatives did not support the policies on which we’ve agreed in the past for the same reasons, and we should not expect conservatives to respond the same way to changing political realities as we would. 

Sean Speer provided a conservative account of fusionism.Canadian conservatism is powered by fusion It includes, he says, a commitment by social conservatives not to interfere with most individual choices, even where conservatives hold strong beliefs. But their opposition to government control was not a concession to the classical liberals under the big conservative tent, but an acknowledgement that socially conservative views had fallen out of the mainstream. As more of their views became political non-starters, social conservatives’ policy goals moved to the back burner. 

The defining policy debate of the late twentieth century was a bigger picture one, of broadly free markets versus government-controlled economies. When Canadian conservatives in the Cold War took the side of markets, they allied themselves with liberals. Tools like privatization and trade were seen as important to opposing the power and influence of the Soviet Union by even market-skeptical conservatives. Again the alliance was politically convenient. 

Liberals shouldn’t count on hands-off social conservatism, nor on a conservatism that sees free markets in line with conservative goals. Political convenience is unreliable during political realignment. 

Liberals’ belief that individuals know what’s best for themselves leads us to believe that social change should come through persuasion rather than using the law. Commitment to persuasion takes sweeping social change by government edict off the table for liberals in a way that it’s not for progressives, who aim to enforce “progress” through legislation. The resulting gradualism is often confused by conservatives for a commitment to conservation. But liberals do not support standing athwart history yelling “Stop!”, either. Where progressives agree with liberals, classical liberals have no desire to stop progress, we just won’t force it through.

“Political convenience is unreliable during political realignment.”

Classical liberalism emphasizes respect for individuals to make their own choices. Both progressives and conservatives have ideas of the good life towards which society ought to be moved. Sean Speer points to “the all-important question: freedom for what?” Liberals, and especially classical liberals, answer: that’s too important a question for us to decide for you, or for all of us to try to decide together.

With a political consensus around (mostly) free markets and (mostly) free social decisions, it was tempting for liberals to believe that the moral arc of history is one of liberation and progress. 

The political realignment has been a harsh wake-up call. Political and economic progress is more uneven and less certain than we previously believed. Debates we thought were settled have once again become live issues. 

We suspect that fusionism is dead. We’re not of one mind about how friendly conservatives have recently been to liberalism, but we agree that the disintegration of the old political centre is probably bad for liberalism, at least in the short term. Conservatives are increasingly focused on culture wars in a way that puts them at odds with classical liberals. 

We don’t know precisely where the new areas of agreement between conservatives and classical liberals will be, but we hope they will not disappear completely. Potentially fertile ground for cooperation could include changes to expand housing supply or educational choice. 

Conservatives (and progressives!) hoping to ally with liberals will need to keep in mind that old alliances, like old policy victories, can’t be taken for granted. Classical liberals, for our part, should embrace being accessible voters rather than part of the conservative, or anyone’s, political base.