Corporate America Discovered Ethics. Then It Turned Ethics Into a Business
Corporate America rarely describes itself as being interested only in profit anymore. Annual reports discuss communities, sustainability and employees. Investment managers offer funds built around environmental, social and governance principles. Chief executives talk about stakeholders rather than merely shareholders, while consultants, ratings firms and accounting companies have built businesses around measuring whether corporations are behaving responsibly.
There is nothing inherently cynical about any of this. Companies affect workers, customers, communities and the environment, and management decisions inevitably create consequences beyond quarterly earnings. A business that treats employees well, avoids environmental liabilities and maintains customer trust may also be better positioned to prosper over decades. The problem begins when corporate responsibility becomes easier to advertise than to practice and when voluntary pledges are treated as substitutes for rules that actually impose costs for harmful behavior.
That tension has become increasingly visible as the enthusiasm surrounding ESG investing has faded. Sustainable funds remain a large investment category, but investors have withdrawn money from U.S. sustainable funds for three consecutive years, even as rising markets pushed total assets to a record $368 billion at the end of 2025. The retreat does not prove that corporate responsibility is meaningless, but it does suggest that investors have become more skeptical of the idea that attaching an ethical label to an investment automatically produces either better social outcomes or better financial returns.
Stakeholder Capitalism Made an Ambitious Promise
For much of modern corporate history, the dominant shorthand was shareholder primacy: Management’s central responsibility was to create value for the owners of the company. That did not legally require executives to mistreat workers or ignore communities, but it created a relatively straightforward measure of success. A profitable company that created durable shareholder value was doing the job investors expected.
In 2019, the Business Roundtable attempted to broaden that definition. A statement signed by 181 chief executives said corporations should deliver value not only to shareholders but also to customers, employees, suppliers and communities. The group explicitly described the statement as a move away from its previous language emphasizing that corporations existed principally to serve shareholders.
The World Economic Forum pushed the idea further. In 2020, it worked with Bank of America and the four largest global accounting firms to develop stakeholder-capitalism metrics covering people, planet, prosperity and corporate governance. The initiative eventually produced 21 core metrics and 34 expanded disclosures intended to let companies demonstrate sustainable value creation beyond traditional financial statements.
The ambition was substantial: Capitalism would not merely produce profits and then rely on governments and individuals to address the external consequences. Corporations themselves would acknowledge responsibilities to a broader group and provide measurable evidence that they were meeting them. The unresolved question was what happened when the interests of those stakeholders actually conflicted.
It Is Easy to Serve Everyone Until Someone Has to Lose
The weakness in stakeholder capitalism appears when a decision benefits one constituency at the expense of another. Raising wages may help employees but reduce near-term profits. Closing a polluting factory can benefit a community while eliminating local jobs. Keeping production in a higher-cost country may support domestic workers while raising prices for customers and lowering returns to investors.
The Business Roundtable itself acknowledged that stakeholders can have competing short-term interests, while arguing that their interests ultimately converge over the long term. Sometimes that is true. Treating workers well can improve retention, environmental investments can reduce future liabilities and maintaining a strong reputation can support sales.
The difficulty is that almost any decision can be justified as serving somebody’s long-term interests. Management can cut thousands of jobs and argue that the restructuring preserves the company. It can increase prices and argue that higher margins finance innovation. It can abandon an environmental commitment and say the decision protects employees and shareholders from competitive disadvantage.
When responsibility is defined broadly enough, accountability can become surprisingly weak. Shareholder value can at least be measured through cash flow, earnings and investment returns. A corporation claiming to serve five different stakeholder groups can often declare success without establishing who received the benefit, who absorbed the cost or what management would have done differently if the pledge had never existed.
ESG Investing Inherited the Same Definition Problem
ESG investing attempted to translate corporate responsibility into portfolio construction. Investment managers would evaluate environmental risks, labor practices, board governance and other nonfinancial factors, then use that analysis to select companies that were supposedly better positioned for a changing economy or more aligned with an investor’s values.
The problem is that ESG never developed one universal definition of what “good” means. One fund might exclude fossil-fuel companies entirely, while another might own an oil producer because management is investing heavily in renewable energy. A third might accept a company’s environmental record but reject it because of labor practices, board independence or weapons exposure.
Morningstar’s examination of U.S. sustainable equity funds demonstrates how different those definitions remain. As of April 2025, only 31 diversified sustainable equity funds in its analysis had no fossil-fuel involvement, while another 31 had more than 10% of their portfolios exposed to fossil-fuel-related companies. Of 561 funds examined more broadly, only 282 received Morningstar’s Low Carbon Designation, which itself does not require complete fossil-fuel avoidance.
That does not necessarily make the funds deceptive. A manager can reasonably believe that engaging with an energy producer creates more environmental progress than excluding the company altogether. The problem arises when investors believe the word “sustainable” conveys a standard that is far more precise than the investment mandate actually requires.
An ESG Score Can Reward Disclosure More Than Behavior
One of the most damaging critiques of ESG investing is that the measurements themselves may not capture what ordinary investors assume they measure.
Research published in the Review of Accounting Studies compared self-described ESG funds with conventional funds offered by the same investment managers. The researchers found that companies held by ESG funds had worse records on certain labor and environmental law violations and higher carbon emissions per unit of revenue, even though those companies received higher average ESG scores. The research also found ESG scores were associated with how extensively companies disclosed ESG information rather than necessarily with actual compliance records or emissions.
That creates a perverse possibility. A large corporation with sophisticated reporting teams can produce detailed sustainability disclosures, set targets and measure dozens of indicators, while a smaller business with fewer resources may disclose substantially less. The first company can appear more sophisticated under an ESG framework even when the connection between the disclosures and real-world outcomes is uncertain.
Measurement is still valuable because companies cannot manage every external effect without collecting data. The lesson is narrower: reporting should not be confused with performance. A corporation publishing an elaborate carbon report has demonstrated that it can publish an elaborate carbon report; determining whether its environmental impact actually improved requires a different analysis.
Ethical Investing Has Not Produced a Reliable Return Advantage
ESG was sometimes marketed not merely as a way to align investments with values but as a strategy likely to outperform because responsible companies supposedly face fewer regulatory, environmental and reputational risks.
The academic evidence has never supported such a simple conclusion. A 2026 study examining S&P 500 companies between 2005 and 2024 found that lower-ESG-rated portfolios generated higher absolute returns over the full period studied. After adjusting for risk, however, the researchers found no statistically significant performance difference between higher- and lower-rated portfolios.
Earlier research on ESG mutual funds also found that they underperformed other funds offered by the same asset managers in the periods examined while charging higher fees. Neither study establishes that ESG funds will always underperform, just as strong performance from one sustainable strategy would not prove that ethics automatically create excess returns.
The more defensible conclusion is that investors should separate two objectives. Someone may choose an ESG fund because avoiding certain industries or supporting particular corporate practices has personal value even if returns simply resemble the broader market. What investors should not assume is that an ethical label provides a free financial advantage without tradeoffs.
Regulators Eventually Had to Address the Labels
If voluntary ethical labels were always clear, regulators would have little reason to intervene. The Securities and Exchange Commission concluded otherwise.
In 2023, the SEC expanded its investment-company Names Rule to cover funds using terms that imply particular investment characteristics, including ESG-related terminology. Funds covered by the rule generally must maintain a policy requiring at least 80% of assets to be invested consistently with the focus suggested by the fund’s name. The SEC said the changes were designed to prevent fund names from misleading investors about investment strategies and risks.
The SEC continued issuing implementation guidance in February 2026, clarifying how the expanded 80% requirement applies to fund names implying specific investment characteristics. The rule does not solve the philosophical problem of defining sustainability, because a fund still must explain what its terms mean. It does establish something the voluntary market struggled to provide consistently: a clearer link between what a fund calls itself and what it actually owns.
That regulatory response reveals an uncomfortable truth about self-regulation. Voluntary standards can encourage innovation and allow businesses to adapt faster than legislation, but their credibility weakens when companies retain too much freedom to decide whether they have complied with promises they wrote themselves.
Companies Have Strong Reasons to Prefer Voluntary Responsibility
Corporations often prefer voluntary standards because voluntary commitments preserve flexibility. A company can announce a sustainability target, adjust the timetable when economic conditions change and explain why the new strategy remains consistent with long-term responsibility. A government regulation is much less accommodating because failing to comply can result in penalties regardless of whether executives believe the requirement remains convenient.
That does not mean every corporate-responsibility program is designed to prevent regulation. Many initiatives produce genuine improvements, and companies often move faster than lawmakers on issues where customer preferences or operational efficiency create a strong incentive to act. Energy efficiency, workplace safety or waste reduction can produce both social and financial benefits.
The potential conflict emerges when voluntary action becomes part of the argument against mandatory rules. A corporation can tell lawmakers that regulation is unnecessary because the industry is already addressing the problem, while retaining much greater discretion over the scope, timing and enforcement of those voluntary commitments.
That can be particularly attractive when mandatory regulation would impose costs across an entire industry. A large corporation may even be able to afford extensive compliance programs that smaller competitors cannot, which means supposedly ethical standards can sometimes reinforce the position of companies large enough to absorb the expense.
Small Businesses Can Face a Different Version of Corporate Responsibility
The largest multinational companies can employ sustainability officers, outside consultants, lawyers and specialized teams to produce ESG disclosures. A small manufacturer or regional supplier may be asked to meet similar reporting expectations without remotely similar resources.
That difference matters as major corporations increasingly push environmental and labor requirements through their supply chains. A multinational trying to reduce its reported emissions may demand detailed information from hundreds of smaller suppliers. The objective can be legitimate, but the reporting burden does not disappear simply because the policy carries an ethical purpose.
Large companies can also turn compliance expertise into a competitive advantage. If an environmental or governance standard costs millions to implement, the expense may barely affect a global corporation while becoming prohibitive for a smaller rival. Ethical regulation therefore requires the same cost-benefit analysis as any other regulation rather than assuming that a socially desirable label eliminates economic consequences.
The strongest standards focus on measurable outcomes and scale requirements appropriately. Corporate responsibility becomes less credible when the companies best able to absorb complicated rules are also the companies helping design them.
Stakeholder Capitalism Can Also Be Profitable for Its Architects
The institutions promoting stakeholder capitalism are not operating outside capitalism. Investment firms earn management fees from ESG products. Consulting businesses sell sustainability strategies, rating providers sell data and accounting firms help companies measure and report the new metrics.
The World Economic Forum’s stakeholder-capitalism reporting project itself was developed with Deloitte, EY, KPMG and PwC, alongside Bank of America and major corporations. Their involvement does not invalidate the work; those organizations possess precisely the accounting and financial expertise needed to build measurement frameworks. It does demonstrate that the transition toward expanded corporate reporting creates an economic ecosystem of its own.
That is not unusual. Environmental regulation creates demand for environmental consultants, tax complexity creates work for accountants and cybersecurity rules create business for technology providers. Problems arise only when the people defining ethical behavior benefit financially from making the standards increasingly complicated or when commercial incentives are hidden behind claims of disinterested social leadership.
The appropriate response is not to reject every institution that profits from reform. It is to recognize that stakeholder capitalism has stakeholders too, and the organizations promoting the system should face the same questions about incentives that they apply to corporations.
Corporate Responsibility Can Still Be Real
The failures of ESG scoring and corporate marketing do not prove that business ethics are useless. Some of the strongest arguments for responsible corporate behavior require no new theory of capitalism at all.
A company that sells unsafe products can lose customers and face litigation. A manufacturer that contaminates its community can eventually face cleanup costs and regulatory penalties. A business that chronically underpays or mistreats employees can suffer turnover, recruitment problems and reputational damage.
Many stakeholder interests therefore overlap naturally with long-term shareholder value. A well-managed business should care about workers because workers affect productivity, customers because they produce revenue and communities because companies require social and political legitimacy to continue operating. Corporate ethics becomes most credible when those relationships produce observable operational decisions rather than promotional language.
The tougher test comes when ethical behavior reduces profit. If management maintains the commitment even when there is a real economic sacrifice, stakeholders have evidence that the principle functions as an actual constraint. When every ethical promise disappears as soon as quarterly earnings are threatened, the program was closer to branding.
Investors Should Ask What the Fund Actually Does
For investors, the lesson from the ESG boom is not to avoid sustainable funds automatically. It is to stop treating category labels as due diligence.
An investor concerned primarily about fossil fuels should examine actual holdings and exclusion policies rather than assuming an ESG label guarantees fossil-free investing. Someone focused on labor practices should determine whether the fund incorporates labor violations into stock selection rather than relying on aggregate ratings that combine unrelated environmental and governance factors.
Fees and performance also matter. An investor paying substantially more for an ESG strategy should understand what additional service is being purchased and whether the portfolio actually differs meaningfully from a cheaper conventional index. A sustainable fund that owns nearly the same dominant technology and financial companies as a broad-market fund can still have a legitimate methodology, but investors should know whether they are paying extra for a genuinely different portfolio or primarily for a different screening process.
The SEC’s enhanced Names Rule can reduce some of the most obvious mismatches between branding and holdings, but no regulator can decide what every investor considers ethical. That judgment still belongs to the person supplying the capital.
The Decline of the ESG Label May Actually Improve Corporate Responsibility
The recent backlash against ESG is sometimes portrayed as evidence that corporate responsibility itself is disappearing. The situation is more complicated.
Morningstar reported $19.6 billion of U.S. sustainable-fund outflows during 2024, followed by another year of withdrawals in 2025, even though total assets ultimately rose with financial markets. Funds have closed, changed names and adjusted strategies as political scrutiny and investor skepticism increased.
That contraction may force the industry to become more precise. If an investment manager can no longer attract capital merely by placing “ESG” or “sustainable” in a fund name, managers have stronger incentives to explain the actual investment process and measurable outcome. Companies may similarly discover that broad promises about changing the world receive less credit than concrete reductions in emissions, improved worker safety or better governance.
Corporate responsibility may ultimately become stronger when it becomes less fashionable. Ethical behavior that survives without a marketing premium has a better chance of representing a genuine business principle.
Ethics Needs Accountability More Than Branding
The central flaw in modern corporate ethics is not that companies care about stakeholders. They should. Businesses exercise enormous influence over employees, communities, consumers and the environment, and pretending those consequences do not exist would be equally unrealistic.
The flaw is assuming that corporations can define the ethical standard, measure their own compliance and then ask investors and governments to trust the result. ESG ratings have demonstrated how different measurement systems can produce confusing outcomes, while sustainable funds have shown that an ethical label can encompass portfolios with remarkably different exposures. The SEC’s decision to strengthen fund-name requirements reflects the recognition that marketing terminology cannot be allowed to substitute entirely for measurable investment practices.
Stakeholder capitalism faces the same challenge. Declaring that a company serves employees, customers, communities, suppliers and shareholders sounds admirable, but the statement becomes meaningful only when management explains how those interests are balanced and accepts consequences when commitments are ignored.
Business ethics works best when it changes what a corporation is willing to do, not merely what the corporation is willing to say. Responsible companies do not need to abandon profit, and ethical investors do not need to accept poor returns automatically. What both need is greater clarity about when social goals genuinely constrain financial decisions and when the language of responsibility simply makes ordinary profit-seeking look more virtuous.
The future of corporate responsibility may therefore depend less on inventing another acronym and more on an older principle: if a company wants credit for behaving differently, it should be able to demonstrate what it actually did differently.
