Of ESG Wars & Rules of the Game

Back in 1970, Milton Friedman wrote of the responsibility of business to maximize profits for shareholders (stockholders, “owners”) — vs. thinking of businesses as social organizations that must consider a whole range of stakeholders (not stockholders) including customers, employees, neighbors, the local environment, and so on.

Today’s concern for social responsibility amongst businesses generally manifests itself as “ESG” (environmental, social, governance) criteria that companies must report on, along with their financial accounting. Investors have increasingly desired to know more about a company’s business practices so they can invest (or divest) appropriately based on their own values, including financial return but also other concerns, for example a company’s carbon footprint and impact on climate change. Investors may want to divest from fossil-fuels, for example. Other important social and environmental impacts of business include conservation and biodiversity, representative governance amongst high level executives to include women and racial minorities, and so on.

President Biden vetoed yesterday a Republican-led bill aimed to outlaw federal investment managers’ consideration of ESG factors.

There are three levels on which to think about this.

Fiduciary Responsibility and the Rules of the Game

First, there’s the deep question about what business should be doing. Friedman did us the service of making the clearest possible case for the simplest possible ultra-capitalistic free market approach. The only people who matter are investors (shareholders), and what they care about is financial return. They are the “owners” of the business, after all.

Most people, on the face of it, would immediately deny that’s all there is to it. Of course other social concerns matter! But it’s worth reading Friedman’s arguments carefully, such as:

IN a free‐enterprise, private‐property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.


But the doctrine of “social responsibility” taken seriously would extend the scope of the political mechanism to every human activity. It does not differ in philosophy from the most explicitly collectivist doctrine. It differs only by professing to believe that collectivist ends can be attained without collectivist means. That is why, in my book “Capitalism and Freedom,” I have called it a “fundamentally subversive doctrine” in a free society, and have said that in such a society, “there is 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, which is to say, engages in open and free competition without deception fraud.”

Friedman does limit the goal of business as sheer profit-making by citing the rules of the game. Even he would grant that it’s not okay to maximize profits by murder, by enslaving people, by harvesting kidneys, by cutting down trees on your neighbor’s property, by mining on public land. There are rules. Even the freest enterprise has to operate within the rules.

The question then becomes: what are those rules? Even assuming that the profit motive should be the only one (and I’m not), there are still important limits.

An interesting take on this question is the recent work of Katharina Pistor of Columbia University, based on her book, The Code of Capital. The Institute for New Economic Thinking has published a seven-video series by Pistor covering the Laws of Capitalism, that is, the legal underpinnings of how capitalism works.

(Note: I have not yet worked my way through all these lectures, plus the substantial accompanying resources, and Pistor’s book — there’s a lot — but this is the kind of research and thinking that’s surely needed.)

Implementation & Policy

The second level of consideration is practical implementation. Elon Musk famously called out ESG as a “scam” last year when Tesla was demoted on S&P Global’s Index.

The measuring, reporting, and technical investment decision-making that emerges from taking account of non-financial factors within the hugely complex ESG “system” is undoubtedly fraught with problems. By its very nature this kind of exercise is a minefield of devils in details.

Even if one deeply agrees with the purpose of business (and the rules of the game) to require far more than profit maximization, one could still take issue with the particular way the current ESG system is actually implemented. One should veto a bad policy even if one cares greatly about what that policy is ostensibly trying to accomplish — especially if one genuinely cares about what is trying to be accomplished.

Simply put, there may need to be a better way to do it.


The previous two levels are entirely legitimate for political and economic debate. What do we value and why? How are we going to protect against illegality and immorality (rules of the game)? How are we actually going to craft and implement policy and business best practices? (ESG is first of all a business rather than a governmental problem.)

At a third, unsavory level, there is pure politics, on both sides of the aisle.

Joe Manchin, a Democrat who sided with the Republicans to submit the anti-ESG bill, forthrightly commented:

Manchin said the rule exemplified “how the administration prioritizes a liberal policy agenda” over protecting the retirement accounts of pension investments. He also said the rule could penalize the fossil fuel industry important to his state. (source)

See also Manchin here.

In other words, he’s opposing Biden’s liberal (elsewhere called a “woke” agenda), and defending the fossil fuel industry of his own state.

Far be it from a senator not to represent the interests of the people of his state. But who are the financial contributors to his campaigns? Who is actually getting him elected?

The same problems of ideological name-calling and dubious political incentives span across the aisle. (I should insert here many examples to be even-handed… feel free to google.)

One wants a broader American debate over fundamental values and good policy rather than ideological attack and crony capitalism — from both sides.

The last thing I want to see in a congressional or congressional-presidential stand-off is petty politics. (Can politics be anything other than petty these days?)

There should definitely be a debate over good policy and implementation, and it seems the ESG system deserves a thorough review — and possibly an overhaul.

Even more important, however, is to make clear what are the deep, underlying values at stake — and how we can best uphold them, especially by taking a hard look at the rules of the game. Even Milton Friedman would agree.