Milton Friedman, Ha! ESG Sentiment Won't Ruin Companies Long Term

How best to convince companies that sustainability is vital to their futures and to their stock performance, as well? That was the question experts on environmental, social, and governance (ESG) investing wrestled with at CIO’s 2021 Symposium on Wednesday.

Hovering over the session was the ghost of Milton Friedman, the famed University of Chicago economist and Nobel laureate, who postulated that the duty of a corporation was to make money for its shareholders. Friedman’s precept is often used as justification by opponents of ESG investing, who say bowing to sustainability thinking will result in crimped earnings.

Our panelists argued that ESG investing is the best approach to ensuring that corporations thrive in the future, and now, too. Companies that blight the environment, mistreat and discriminate against employees and others, and run their businesses in a high-handed manner will not be winners in the fullness of time, the panelists argued.

“There’s a lot of skepticism in the US about ESG, but not in Europe, Australia, or Japan,” said Christopher Ailman, CIO of the California State Teachers’ Retirement System (CalSTRS). “It’s sad to see this short-term thinking in the USA.”

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To Ailman, anti-ESG types are misreading Friedman (who died in 2006). The economist “said the role of a company was to make money, but he didn’t say over what period. He didn’t mean over just 90 days; he meant over the long term,” the CIO reasoned.

The notion that ESG isn’t practical or obtainable at the moment rankled Del Stafford, BlackRock’s head of US iShares portfolio consulting, and the panel’s moderator. “Long-termism isn’t about perfection today,” he said. “And we can’t wait around for 30 years” to get a handle on any problems.

What’s more, ESG-oriented stocks did better during the pandemic-induced stock plunge of last spring than the broader market, noted Linda-Eling Lee, head of ESG research at MSCI. Her firm’s ESG ratings are a well-followed measure of corporate behavior. “That showed their good track record,” she said about sustainability-oriented shares. “They were resilient during the sell-off.”

Nowadays, there are a host of different techniques and measurements to guide ESG, she said. “We have more choices and analytics,” Lee declared, thanks to three decades of data. “We have flood maps and modeling” procedures that didn’t exist before or in as much depth.

“ESG is not hype,” said Eric Van Nostrand, head of research for sustainable investments and multi-asset strategies at BlackRock, the world’s largest asset manager. The task ahead is to “identify forward-looking bullet points” that will compel ESG action.

CIO Ailman made the case for not simply divesting stock in companies that have problematic ESG records. Rather, he contended, the better course is to stay invested and seek to influence them with the leverage that comes with being a major shareholder.

His CalSTRS, for instance, has pushed ExxonMobil, one of the biggest US oil companies, to elect four outside board members who would aim to move Exxon toward cleaner energy.

Tackling the agendas of the US’s and the world’s enormous number of companies can be “daunting,” said BlackRock’s Stafford, yet worthwhile.