The debate on Environmental, Social, and Governance (ESG) policies is not a new one. Nearly fifty years ago, economist Milton Friedman wrote a famous op-ed arguing against the adoption of ESG in the business world. Amidst the burgeoning ESG initiatives of the 1970s surrounding South African apartheid and the Vietnam War, Friedman argued that businesses should not engage in such seemingly noble efforts, instead believing that the “social responsibility of business is to increase its profits.” Friedman likened business involvement with political and social causes to “pure and unadulterated socialism” that undermines the basis of free society. For many, this claim may seem hyperbolic. Why shouldn’t large, often greedy global corporations pay back to society with the products of their success? Yet the past half-century of ESG efforts have indeed proven Friedman’s thesis correct or even prophetic.
In recent years, major companies and investment funds have increasingly prioritized the ‘social responsibility’ aspect of the ESG framework, even at the expense of maximizing profits. Yet as Friedman notes, it is paradoxical to argue that corporations are obliged to pursue an ambiguous social good. Individuals making up the corporation (executives, employees, shareholders, and consumers) certainly have their own varied ideas of their social responsibilities; however, the corporation itself is ultimately bound to the common denominator that unites all these stakeholders – profit. When corporate executives implement ESG policies, they may, in some cases, bring about some external good for the world. However, in doing so, they must spend someone else’s money without consent, either by raising prices on consumers, reducing returns for stockholders, or lowering wages for workers.
In this sense, Friedman accurately describes ESG as a socialist process where businessmen effectively ‘tax’ stakeholders without the accountability of an elected government. This tax was recently studied by former chief economist of the NASDAQ Mike Edleson and former CEO of Fortune 500 Andrew Pudzer in their study on the profitability of ESG investing. Their study analyzed the S&P 900 large and mid-cap companies and found that the firms that remained neutral on political issues such as the environment, education, and abortion consistently outperformed the other firms that took both conservative or progressive stances. The authors write, “The data indicate that, as common sense would suggest, companies that focus on profits outperform companies that don’t.” In fact, over a ten-year span, the neutral portfolio significantly outperformed its peers, giving a return of 334 percent relative to the 220 percent return of the market.
The story is the same for large retirement and teacher pension funds which are increasingly facing pressure to hop on the ESG bandwagon and ignore their fiduciary obligations. Left-wing legislators and activists believe that climate and social justice activism should influence the decisions affecting millions of hardworking Americans’ retirement savings without their consent. CEO and publisher Steve Forbes describes the phenomenon as “politics polluting pension funds.” As he put it, “People don’t want their Wall Street investment advisers to be distracted by saving the planet or ending society’s ills. They just want the best possible return on their money.”
Many Americans agree with Forbes’ assessment and are beginning to voice their concern over investment policies that jeopardize their savings. In response to the growing frustrations surrounding ESG investing, two of the largest money management funds, Vanguard and BlackRock, have walked back their previously ESG-friendly policies, slashing the majority of climate and social proposals from their investment decisions.
In addition to decreasing stakeholders of profits, ESG practices easily devolve into ideological agendas that pursue a subjective social ‘good’. Policies that very clearly cater to progressive dogma alienate conservative consumers who have their own notions of the social good. Dubbed ‘woke capitalism’, social justice ESG efforts advance partisan policies such as Diversity, Equity, and Inclusion (DEI), LGBTQ, and fossil fuel divestment to unconsenting consumers.
One notable example is Anheuser-Busch’s recent Bud Light campaign, where transgender influencer Dylan Mulvaney marketed a campaign to make the historic beer more ‘inclusive.’ While this ideology may have been seen as good by corporate executives, consumers grossly disagreed. Following this campaign, Anheuser-Busch saw its revenue decline more than 10 percent in Q2 compared to the preview year, and its US operating profit dropped nearly 30 percent.
The story was similar for Target, which recently implemented an array of LGBTQ+ Pride and transgender displays in their stores in the name of the ‘Social’ component of ESG. Disconnected and out-of-touch executives believed they were obliged to promote LGBTQ+ and transgender norms, even in the design of children’s clothing. As one might expect, consumers retaliated with their purchasing power, and Target suffered a $10 billion loss of value in just ten days.
The subjectivity of the social good has led without fail to the corporate world accepting prevailing progressive ideas. Friedman argues that the clear and obvious solution to ESG’s subjectivity consists of businesses returning to the norms of the free market: to maximize their profits and offer the best and cheapest products possible relative to their competitors. Consumers reserve the right to spend money on the issues they care about and have confidence that their investments are not placed in service of the ideals of corporate executives.
If these arguments from principle are not convincing, it’s also important to consider that there is simply no practical way to implement ESG metrics and reporting, as recent years have demonstrated. In his article “ESG Investing: A Failure in the Making?”, the founder of venture capital firm Antler Sachin Sharma doubted that ESG practices can be successfully implemented because of “too much exuberance, too much virtue signaling, a lack of openness and debate.” Sharma cites the lack of standardized ESG metrics and “greenwashing” as two pressing hurdles preventing the adoption of ESG. The Economist performed a study on 20 of the biggest ESG funds in 2021 and found that, on average, each of them holds investments in 17 fossil fuel producers. As firms seek to virtue-signal to consumers without trusted and transparent metrics in place, consumers will see inflated prices without even the supposed virtues of ESG.
Proponents of ESG will counter these claims by saying certain issues, such as the ‘climate crisis,’ are too urgent and catastrophic for companies to ignore. They argue that businesses, with their adaptability and resources, are better primed to tackle these issues than a sclerotic government, hindered by lobbyists and the bureaucratic state. Thus, businesses must share the burden of creating a healthier or more sustainable future.
However, Friedman rejects this in principle because if the desired policy can not be achieved by democratic participation, then it is not popular enough to be implemented and likewise should not be done through business action. Even with its imperfections, the democratic process ensures an accountability that can not be replicated in the corporate structure. Policy by government action may be an imperfect option, but the safeguards of democracy make it the least harmful alternative to corporate influence. Friedman summarized this reality in his op-ed, writing, “In a free society, it is hard for ‘good’ people to do ‘good,’ but that is a small price to pay for making it hard for ‘evil’ people to do ‘evil,’ especially since one man’s good is another’s evil.”
Alternatively, some will argue that there is no harm if stockholders, investors, or customers consent completely to paying more for an eco-friendly product or taking a dividend cut for the sake of reducing emissions. For example, in 2022, Patagonia founder Yvon Chouinard converted his company into a non-profit trust, which will divert future profits to the fight against climate change. Friedman acknowledges cases such as these where a company is an individual proprietorship that chooses to pursue ESG policies. Here, the company may pass on higher prices to consumers, but losses to revenue only affect the proprietor, who chooses which policies to pursue. Thus, while it’s not ideal for the integrity of the free market, this situation does not violate Friedman’s objections to ESG.
As Friedman argues, the true social responsibility of businesses remains to maximize profits within the boundaries of the free market, allowing individuals to pursue the responsibilities they deem best for themselves. With regard to corporate virtue-signaling and pushing ideological agendas, it would be best for woke executives of today to learn a lesson from Michael Jordan. In response to pressure to endorse Democrat Harvey Gantt in the 1990 North Carolina Senate race, Jordan declined to get his sneaker business involved in politics and was quoted saying, “Republicans buy sneakers, too.” So too should today’s businesses focus on the bottom line and reject ESG.
The above is an opinion contribution and reflects the author’s views alone.
(Photo courtesy of Wikimedia Commons)
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