The business world has recently seen a dramatic increase in the vogue for “socially responsible” rules of behavior. Companies are encouraged to make environmental, social, and governance (ESG) concerns central to their operations, tracking and disclosing, for example, how many women sit on their boards of directors, how many tons of greenhouse gases they emit, and how many days of vacation they award to employees. Finance-consulting firm Opimas earlier this year estimated that the annual market for ESG ratings and analysis alone will reach $1 billion by 2021.
Conservatives have begun to take notice of this trend as well. Once the province of environmentalists, diversity activists, and organized labor, ESG investing and its various “corporate social responsibility” variants have elicited a rapidly growing volume of serious commentary from right-of-center experts and commentators. Recently, National Review’s own Ramesh Ponnuru wrote a particularly interesting piece that provides a useful framing for the opportunities and threats that conservatives will be increasingly confronted with on this issue.
Ramesh takes a useful look at corporate behavior through the lens of free-market hero Milton Friedman’s famous defense of profit-making. Friedman, notorious among his critics for insisting that “the [only] social responsibility of business is to increase its profits,” has led some defenders of the market economy to assume that every single decision any corporation manager makes must be solely focused on immediate profits to be legitimate. Anything less, the Friedman-ite imperative supposedly insists, is to give in to Bolshevism.
That’s obviously not true, of course, as well over a century of corporate charity and attractive employee benefits from the nation’s most successful corporations demonstrates. Even hard-nosed corporate titans known for running tight ships never shaved every possible cent off of every transaction — especially not when, by being more generous, they built useful relationships and long-term goodwill with the partners they needed to be successful. Even beyond that sort of enlightened self-interest, however, many founders, CEOs, and boards of directors have invested resources and taken public positions on important issues that were dictated by ethical concerns rather than simply financial returns.
But the left-leaning ESG crowd would have you believe that before the last few years (and their own efforts), corporate America was a Wild West frontier of rampant fraud and abuse. America’s corporate leaders haven’t always been successful at debunking that impression. When the CEO members of the Business Roundtable issued their much-discussed “statement on the purpose of a corporation” in 2019, they pledged to compensate their employees fairly and deal with their suppliers ethically. This led quite a few people to wonder: If this is how they’re going to behave from now on, how exactly were they doing business before?
The Business Roundtable CEOs would no doubt insist that they have always acted in such a manner, and last year’s statement was just an opportunity to reiterate that fact. But that’s not the impression many observers got from the huge volume of news coverage and commentary that followed the announcement. If you walked by a nursing home and you saw someone hanging up a sign out front that said, “Here at Shady Pines, We Do NOT Beat Our Residents!,” it might raise more questions than it answers about how they operate.
Because of widespread suspicion of how well corporate America is treating forests, low-wage overseas workers, and internal whistleblowers, today’s activists are increasingly insisting that the goals of existing ESG standards — generally voluntary and non-binding — be made mandatory through law and regulation. Already, the movement’s most vocal advocates have taken to describing it as “an unstoppable force” with “inevitable” consequences. Their rhetoric seems aimed at steamrolling the “profit only” standard, past the “prioritizing profit” mark, and on to “profit only in service of social justice” imperative, creating a sort of inverse Milton Friedman rule for business. You might be allowed to make money, but only if you can prove your allegiance to a laundry list of progressive principles first.
But old Uncle Miltie himself may have given us the answer to this threat without realizing it. Friedman’s most famous statement on corporate responsibility was undoubtedly the 1970 New York Times Magazine article that Ramesh quotes from. But we should also look to his 1962 book Capitalism and Freedom, in which, among other things, he argued against mandatory occupational licensing. In it, he explained that private and voluntary certifications, even in seemingly persuasive cases such as medical licenses, are superior to government requirements. His arguments apply just as well to any proposed future system of ESG certification for for-profit companies.
A mandatory occupational license, just like a potential ESG requirement for operating as a public company, increases costs on both producers and consumers, limits competition, privileges incumbents and larger firms, and inevitably becomes hostile to any innovation that would disrupt the existing cartel of certified participants. Friedman also points out that as a political construct, it is subject to mission creep. That may be less of a worry for a framework that already has such a wide-ranging portfolio, but Friedman’s mention of Washington State veterinarians once being forced to take an anti-Communist loyalty oath does fire the imagination as to possible abuses. Would it surprise anyone if the ESG Czar in a future Democratic administration proposed requiring companies (or corporate managers) to sign a Black Lives Matter statement of principles?
What government-enforced registries and licenses supposedly provide for consumers is valuable information that they need to make informed hiring and treatment decisions. Traditionally, licensure advocates have argued that market processes will fail to produce accurate and timely information, so government permission should be required before anyone is allowed to practice certain professions. But in the case of ESG — perhaps especially in such a case — we know that there is already a large and highly-evolved market for providing such information to consumers. High-profile finance and consulting firms offer a wide variety of detailed ESG analysis, reports, and ratings of companies and investment vehicles, and the industry is growing rapidly.
Some ESG advocates have conceded that their goals can’t be achieved solely with government regulation, but it’s worth asking why government should be involved at all. There are already private certification bodies that offer ESG ratings and endorsements for the companies that choose to seek them. Some, such as the United Nations-sponsored Principles for Responsible Investment, focus on members having some sort of “responsible investing” plan and prioritizing its consideration by senior managers. Others, such as the nonprofit organization B Lab, require applicant firms to adopt a long list of specific policies to get their seal of approval.
But those non-binding certifications — which companies can walk away from if their demands become too great — are not enough for some people. They point out that corporate law and precedent in the U.S. generally requires boards of directors to manage their firms to maximize shareholder returns, meaning that adopting policies that are ethically desirable but not profit-maximizing could expose them to shareholder litigation. Fortunately, it is possible for those business owners and managers who are afraid of being sued for doing too much good to incorporate in most states (including business incorporation fan-favorite Delaware) as a “benefit corporation,” the structure of which explicitly lifts the expectation of shareholder primacy from its directors.
If any change is necessary, it will be in the creation of additional, competing certification bodies. Many investors and managers concerned about ESG issues support the socially liberal B Lab, but there are also many people of goodwill who don’t embrace the same ethical framework and priorities. Why not have a socially responsible business-certification entity informed by the teachings of the Roman Catholic Church? Or perhaps one based on the Adam Smith Society, which has chapters at business schools across the country?
Firms such as Inspire Investing, which offers the Inspire International ESG ETF (ticker symbol: WWJD), are already putting a biblically responsible investing spin on the ESG construct, influencing large, public companies to adopt policies that are more closely aligned with the values of their investors. Inspire also declines to invest in companies that are “involved in immoral activities like abortion, pornography and human trafficking.” Meanwhile, most current social-responsibility ratings would likely award extra points to a corporation for donating to Planned Parenthood as a sign of feminist empowerment.
Some investors may see multiple, diverging rating systems as a step backwards — the financial press is already full of stories lamenting the lack of agreement among current ESG ratings systems. But a single measurement is ultimately a mirage that privileges one particular set of values when many competing sets are in evidence. Even in a far more specific and well-defined context, multiple certification bodies with overlapping standards flourish: Ask anyone who has ever shopped for kosher or organic food. If disputes over the exact demands of kashrut law can support hundreds of independent certification agencies around the world, charting the virtues and vices of every corporation on Earth can allow for more than one numerical score from one organizational assessment.
Perhaps most important, we need a clear repudiation of the implicit assumption by the loudest ESG advocates that their moral positions and priorities constitute an objective standard of virtue. The one thing missing from Friedman’s earlier analysis is that there can, and will always be, fundamental disagreement about the correct way to deal with many of the topics that ESG investing purports to address, particularly controversial social issues. There will likely be little demand for physicians who claim to balance your four bodily humors or dentists who advise treatment based on the phases of the moon. But there is a very great demand for institutions that, for example, embrace a culture of life versus endorsing campaigns of population control. We can likely agree on who is competent to be a plumber, but what constitutes a “good” corporation is much more complex and dependent on the faith and reason of the potential investor.
Private certification of responsible companies and investment vehicles doesn’t have to be the exclusive domain of secular humanists, environmentalists, feminists, or adherents of any particular set of beliefs. The ESG advocates are right when they say that embracing a specific set of values beyond merely following the law and producing widgets is important. But they fail when they seemingly lay claim to sole authority to define what counts as responsible, virtuous, or just. Fortunately, as long as we have the ability to disagree, we may just avoid wasting a lot of time and money fighting over it in Washington.