ESG- Good Business or Woke?

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 free and open competition, without deception or fraud.”

— Milton Friedman

Milton Friedman was a Nobel prize winner, an unapologetic proponent of free market capitalism and the advisor to successive American presidents. His thoughts helped shape modern economic theory and globalism.

However, Friedman’s comments that a business’s first call was to make profit for its shareholders, who in turn, would engage in charitable works as they saw fit, do not resonate in the same way today.

Friedman’s comments that businesses should only pursue its shareholders’ economic interests and going beyond that would be fundamentally subversive seem anachronistic today, more so, when his comments are viewed in the context of that time- apartheid in South Africa, the American civil rights movement and increasing incidents of businesses recklessly polluting the environments in which they operated.

The Evolution of Corporate Social Responsibility
In the last fifty plus years, the thinking has evolved around concepts of corporate citizenship and corporate social responsibility (CSR) whereby enlightened businesses embrace values that posit that companies have a duty to operate in an honourable manner, provide good working conditions for employees, be a good steward of the environment, and actively work to better the quality of life in the communities where they operate and in society at large.

This has been driven in part by the general society’s view that businesses must operate ethically, in harmony with the environment and society, but also by a realization that, as Michael Porter put it, “corporate social responsibility can be much more than a cost, a constraint or a charitable deed- it can be a source of opportunity, innovation and competitive advantage”. In other words, effective CSR goes beyond check book philanthropy but provides creative solutions to critical social and businesses challenges that assure long term sustainability.

Environment Social Governance- ESG
The corporate social responsibility concept in turn has continued to evolve. The drivers for this change have been to a large extent the growing recognition of climate change and its impending fall outs, but also the unfulfilled promises of globalization and the repetitive moral hazards and financial failures that continue to assail our capitalist system.

A 2004 United Nations report, developed by the world’s largest financial institutions, called for the global “integration of environmental, social and governance issues in investment decisions,”. The Davos Manifesto 2020: The Universal Purpose of a Company in the Fourth Industrial Revolution redefined the purpose of a company as “to engage all its stakeholders in shared and sustained value creation”. It further stated that “in creating such value, a company serves not only its shareholders, but all its stakeholders – employees, customers, suppliers, local communities and society at large.”

The Environment Social Governance or ESG framework has come to provide a lens through which we can appraise how an enterprise’s environmental, social, and governance factors can and do impact the company’s value. It is essentially a risk management tool to advise how a business is affected by sustainability issues (“outside in”) and how their activities impact society and the environment (“inside out”).

Moreover, tools such as the EU Corporate Sustainability Reporting Directive, provide a common report card, with identified criteria, that provide insight into companies’ sustainability credentials. These criteria may cover energy efficiency, greenhouse gas emissions, learning and growth development, staff demographics and turnover, corruption and bribery, respect for human rights and innovations. These metrics provide shareholders and potential investors with a means to identify potential risk exposures and assess a company’s resilience and therefore its ability for long term value creation. Investors believe attention paid to environmental, social and governance issues now will help sustain organizational health into the future.

The purpose of a company is to engage all its stakeholders in shared and sustained value creation. In creating such value, a company serves not only its shareholders, but all its stakeholders – employees, customers, suppliers, local communities and society at large.” Davos Manifesto 2020: The Universal Purpose of a Company in the Fourth Industrial Revolution

So, Why the Push Back
While the ESG framework is based on a solid risk management premise, that Milton Friedman would have approved, it will be argued that there has also been the development of an ideology, especially in regard to the S, the Social lens through which the business is viewed. Providing decent work and fair pay leads to positive views from people both inside and outside the organization. There is general agreement that this can result in low employee turnover, improved organizational engagement and ultimately increased profits.


However, more and more companies are taking positions on the big social issues, such as the Black Lives Matter campaign, carbon reduction and more recently transgender and women’s reproductive rights issues. Many ESG investors support this but for other interests this amounts to “woke capitalism”, allocating resources based on a political agenda and an over-reaching of the business’ mission.
To this end, this matter will ultimately be settled by the organization’s stakeholders, who are likely to demand more engagement with the company, and to see the company address their concerns about the environment, social issues and governance.

Are You ESG Ready?
Building the ESG principles and frameworks into your organization would be adopting best practice. This initiative would not only provide clarity of purpose for all its stakeholders- employees, customers, suppliers, local communities and society at large- but also transparency as to how well the company is meeting its mandate to engage all its stakeholders in shared and sustained value creation. A focus on sustainability can also be more than a responsibility but also an opportunity to develop new markets, be responsive to changing customer needs and to attract and retain talent.

For businesses that have understood that doing the right thing is as important as doing things right, this is unlikely to be a difficult transition to embrace. However, as with all management systems, it also brings with it levels of bureaucracy that will necessitate a review of some work processes and available resources.
Establishing the ESG framework involves a three step process in the first place, viz.:

  1. Carry out a Baseline Assessment of the existing sustainability reporting protocols, including any established KPIs, benchmarking where you are re your industry peers, executing a legal and regulatory scan to establish any pending legislation, and determining the internal level of support for the program.
  2. Based on the benchmarking and gap analysis, establish ESG SMART Goals relevant to the business and key stakeholders, training and development needs, and select an ESG framework.
  3. Design a policy and risk management framework, including the work processes and controls, and Create a Roadmap, recognizing the route, key steps and milestones, to achieve the ESG goals.
    A final word on culture. For all change initiatives to be successful, aligning the critical elements of your organization, viz. strategy, culture and people, to achieve the short and long term goals is required. Without cultural alignment, organizations will likely fail to integrate the environmental, social and governance issues into every aspect of the business, facing resistance from both management and employees.
    Enterprises would do well to develop and embrace a Culture of Caring, as a colleague of mine articulates. This entails a genuine and demonstrated care for the people inside and outside the organization, the communities in which you operate and the impact of the business on the near and wider environments- a focus on Planet, People, Prosperity and Principles of Governance in the ESG lexicon. This provides the bedrock for meaningful stakeholder engagement, robust business processes and employee engagement.

May 3, 2023/fah

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