We’re hardly alone in pointing out that today’s ESG activism has failed to stop companies from externalizing social and environmental costs when they can gain a financial advantage by doing so. Many other critics conclude that shareholder activism at companies is therefore a distraction at best and greenwashing at worst, and that shareholders should focus on government regulation as the only way to rein in cost-externalizing business decisions.

While these criticisms often come from quarters that desire a more activist government role, a similar objection has emerged from a different direction. In the United States, and to some degree in other countries as well, a burgeoning right-of-center coalition complains that ESG activism by corporations and investors oversteps their proper sphere of influence. Led by conservative state officials, they maintain that corporate managers and investment professionals should use their power to maximize the returns of companies, not to engage in quasi-regulation. They argue, for example, that public pension funds shouldn’t ask individual companies to engage in any activity that doesn’t strictly relate to increasing their own profits, because doing so might reduce the money ultimately available for state workers who depend on pension funds for their retirement.

While these two sides are polarized on desired outcomes, they share a common, siloed view of how companies, regulators, and the economy operate, arguing as if each does not influence the other. In fact, there are multiple feedback loops among them. It is an observable fact that if shareholders do not use their governance rights to rein in the individual companies they own, those companies will, in pursuit of profits, find opportunities to externalize costs, lobby against regulation that reduces their profits, and use jurisdictional arbitrage to defeat rules that are passed. But while preserving profits at individual companies, these corporate activities often result in lower overall long-term economic performance that drags down overall portfolio performance. The micromotives of corporations thereby defeat the macroeconomic goals of their diversified investors, who rely on a strong economy, which in turn requires sensible rules to protect common resources.

To be effective, shareholder activism must focus on the conflict of interest that exists between individual companies and their diversified shareholders. Starting from that understanding, investors can practice system stewardship with a view toward complementing regulatory strategies. First, investors should exercise their corporate governance rights to stop corporate influence on the regulatory process where that influence interferes with economy-maximizing solutions. Second, investors should implement guardrails across their portfolios, limiting companies’ ability to use business practices that are profitable from an individual company perspective, but costly from the perspective of long-term, diversified shareholders.

To put a finer point on it, corporate capture accounts for much of the political paralysis that stymies meaningful regulation of systemic threats. Diversified investors and their fiduciaries can and should wield their stewardship power to address these threats in order to protect their ongoing portfolio value and prosperity.