ESG’s Capitalist Roots

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Sustainability isn’t just a moral imperative. It’s a core business model.

Writing in The New York Times in 1970, economist Milton Friedman dismissed the very notion of corporate social responsibility as “a fundamentally subversive doctrine.” There is, he argued, “one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.”

Friedman, a Nobel Prize laureate, was among the most respected and influential economists of his age. In his obituary in 2006, the Times noted that conservatives and liberals alike considered him “one of the 20th century’s leading economic scholars, on a par with giants like John Maynard Keynes and Paul Samuelson.”

But Friedman’s disdain for corporate social responsibility—he invariably enclosed the phrase in quotes—has since lost most if not all of its currency.  These days, more corporations than not have adopted CSR as a core operating model, inextricably linked to their business goals and practices. Likewise, CSR’s first cousin—ESG (Environmental, Social and Governance) has become a focal point for investors.

To be clear, CSR are related but not interchangeable. CSR came first—an umbrella term for a company’s self-regulated policies and practices around social, environmental and economic issues. CSR gave rise to ESG, a set of criteria that enables individuals and institutions to evaluate a company’s sustainability practices and choose whether to invest in it.

Most importantly, both CSR and ESG are widely as essential to profitability, not inimical to it.  In his annual letter to US CEOs last month, BlackRock CEO Larry Fink expanded on his often-expressed belief that profits go hand in hand with purpose.

“Stakeholder capitalism is not about politics,” he wrote. “It is not a social or ideological agenda. It is not ‘woke.’ It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper…. We focus on sustainability not because we’re environmentalists but because we’re capitalists and fiduciaries to our clients.”

Friedman would have had little patience for such assertions, but they’re rooted in fact. In a recent study, IO Sustainability found that companies that integrated CSR into their business model were able to increase sales by as much as 20%, boost productivity by 13%, increase their share price by up to 6% and reduce financial risk and their borrowing costs.

Likewise, ESG has played increasingly well to investors, who allocated a record $649 billion to ESG-focused funds worldwide in 2021—a 20% increase over 2020 and more than double the inflows in 2019. According to Refinitiv Lipper, ESG funds make up one tenth of worldwide fund assets.

ESG and CSR were already on the ascent when the COVID-19 crisis hit and the Black Lives Matter movement gained fresh momentum. But by all accounts, the events of the last two years have stoked an even greater appetite for investments and corporate practices with the potential to change the world.

Milton Friedman wasn’t writing his screeds in a vacuum. As far back as the 1960s, companies were awakening to their role as drivers of sustainability and social equity—even before those terms had found their way into common parlance. Friedman saw social responsibility as a betrayal of shareholder interests. Today it is viewed as an imperative—and an opportunity.

“CSR isn’t an initiative that’s sprinkled on top of our business model,” says Daniel Schreiber, CEO of the insurance company Lemonade, which was featured in 2020 in Carpenter Group’s Brand Acts of Kindness series. In Lemonade, as in all Brand Acts profiles, Carpenter Group saw a company that epitomized the notion of doing well by doing good. In the long term, neither is likely to happen without the other.