top of page

What Would Milton Friedman Think of ESG? (4Q22 Quarterly Newsletter)

Updated: Oct 26, 2022

October 15, 2022

To: Clients & Friends

From: Chris Weil

A number of conservative State Attorneys General recently delivered a letter to Larry Fink, CEO of BlackRock, warning him that their various state pension plans were considering “firing” BlackRock from its role as investment manager. The reason? BlackRock’s decision to adopt Environmental, Social and Governance (“ESG”) standards as criteria (in some, not all) of their securities selection processes.

In effect, the Attorneys General asserted that applying ESG criteria would negatively impact investment performance as compared to methodologies where such criteria were not considered.

It strikes me that the AGs have dressed up their position to look investment-based (“ESG will hedge future investment performance”) when in reality their position arises from ideological conviction, pure and simple. And won’t the ultimate outcome of this “style” of manager selection and elimination result in the AG’s states being served only by managerial “yes” men/women and, paradoxically, by managers driven by considerations outside of profit-maximization.

Political intervention in private sector activity is a reality. Politicians directing business to friends, supporters and contributors (and away from “enemies”) has a long (and sometimes sordid) history. But it is disconcerting to see self-proclaimed conservatives attempting such a large scale intervention in a classic private-sector industry. What next? Nationalization?

So, what’s going on here?

Well, is it only a coincidence that 17 of the 19 states represented by the AGs are net importers of federal tax dollars, receiving (as they do) an average of $1.80 from the Feds for every $1.00 paid to the Feds?

Could there be an element of protectionism here? If I am a Red politician in a Red state I may well already be uncomfortable with this statistic, which contradicts one of the pillars of my ideological conservatism, the conservatism of Goldwater, Reagan, and Grover Norquist: “Government is not the solution, government is the problem.” And to compound my discomfort I see a powerful promoter of ESG doctrine as engaged in the process of undermining a portion of my state’s economy which – as I know full well – consists of at least some businesses which could never pass ESG muster. If ESG doctrine should become settled investment management practice, then a real risk exists that these companies will become pariahs, less likely to attract talented employees, less likely to secure favorable equity and/or debt financing, less likely to compete successfully and, worst case, destined to experience a slow and painful death.

In this scenario, longer term, the $1.80 becomes $2.00 or $2.25 or $2.50, giving new meaning to the term “welfare state.”

My own view (more on this below) is that ESG is in fact the wave of the future (but in configurations and applications much modified from today’s versions) and so the affected states and their political leaders do have much to worry about.

And speaking of waves, time will tell whether the tactic adopted by the AGs will have any effect or whether, like King Canute commanding the tide to recede from his throne on the beach, they might as well have saved their (collective) breaths.

A bit of history.

Back in the day, a few folks – eccentrics all – began to talk about the social responsibility of business. (Actually, “back in the day” means some time back. The English economist Alfred Marshall, in the late 19th century, made the case for economics as a branch of ethics, but my “bit of history” begins in the mid-20th.)

Roused from his academic preoccupations (preoccupations which would later result in a Nobel Prize), Milton Friedman famously made the case for business having only one social responsibility: to make as much profit as possible for the benefit of shareholders.

This was taken, by most economists and business people, as validation from an authoritative source of what was understood to be a common sense statement of fact. But it wasn’t a “common sense” statement of fact. It was a normative pronouncement. And, as with all normative pronouncements, the devil is in the details. And when the devil is in the details, arguments as to interpretation can last for years, or decades, or centuries.

Actually, Professor Friedman did those few eccentrics a great favor. Before Friedman, they were few and their influence negligible. But the Friedman dictum caused the whole idea of “social responsibility” to become a front burner topic, not just among economists and Wall Street types, but the public and the financial press as well.

ESG is the child of “Social Responsibility” but only in the sense that one was birthed by the other. “Socially Responsible Investing” was (and is) values-based: “I don’t want to invest in any company involved with tobacco, weapons production, pornography, alcohol, etc., etc.” With Socially Responsible Investing, the decision to avoid investment in certain businesses has to do with an individual’s personal beliefs and preferences.

While certainly having a values component, ESG is, in my view, much more grounded in the spirit of Friedman’s dictum. It simply takes Friedmann a step or two further. Yes, absolutely, the purpose of business is to make as much profit as possible for shareholders – and so it is obvious that business should in no way jeopardize its ability to do so. (Jeopardize: Put someone or something into a situation in which there is a danger of loss, harm or failure).

One way to view ESG – in a way that Professor Friedman might approve (at least in concept if not in execution) – is as an investment methodology designed to protect businesses against systemic threats to long-term, sustainable profitability.

But note that it is a methodology very much in evolution.

The current state of ESG methodology is nicely described in a recent letter to the SEC by Calvert Research and Management: “There are a number of ESG related terms and synonyms in use today and it is difficult to ascribe meaning to many of them. Further, new terms are likely to continue to emerge given how rapidly this part of the investment industry is evolving.”

Even given the fact that ESG rules, procedures, guidelines and standards are still very much in the workout phase and likely to be so for the foreseeable future, ESG advocates like BlackRock know enough to take the initial steps toward applying ESG criteria (even in its present imperfect state) to investment decision making.

Investors adopting ESG criteria know, for example, that environmental polluters face huge reputational and financial risks, as well as public opprobrium, all of which could negatively impact earnings and, worst case, cause the demise of the enterprise.

They know that global warming translates not just into the now well understood planetary risks of climate change but into a hundred (a thousand?) or more company-or industry-specific consequences, all of which could negatively impact earnings. If I’m an investment manager, I want to know how my investee companies are preparing for the uncertain, but almost certainly unpleasant, consequences of global warming on their businesses. There is a good analogy, by the way, to what business planners need to be focused on when contemplating the real “new world order.” Coastal communities are beginning to take seriously the idea of “managed retreat,” a coastal management strategy that allows the shoreline to move inland, instead of attempting to hold the line with structural engineering. At the same time, coastal habitat is enhanced seaward, to create a new, natural line of defense. Thoughtful business planning, planning which seeks to sustain profitability long term, involves asking “in light of what is awaiting us out there, what is our version of managed retreat (or managed offense, or managed defense, or whatever it is going to take for us to survive and prosper)?”

They know that the S in ESG is shorthand for certain quite radical changes in society’s “social sensibilities,” sensibilities that would have been considered eccentric as recently as fifty or sixty years ago. There was a time when smog was viewed as an inevitable, however unfortunate, by-product of urban life. There was a time when no one segregated renewable from non-renewable waste. There was a time when burn pits could have smoldered with little or no public outrage. There was a time when people and governments, with the exception of a few troublemakers, accepted as a given that business (and government) was free to use whatever rivers, oceans, lakes, open lands and atmospheres that happened to be convenient as repositories for their waste.

Social sensibilities change. They change, in part, because small, then growing, numbers of people “read the signs of the times” and have come to recognize that certain attitudes, behaviors, policies, customs and “truisms” brought forward from the past have consequences that are no longer acceptable, and possibly even destructive. It was no coincidence, by the way, that some of the most forceful voices for change arose from traditionally marginalized communities. It was those communities that in many cases bore the brunt of the “old” ways of doing things.

ESG investors also know that awareness of G issues, as with the issues of E and S, is altering (some would say distorting) traditional governance power relationships and lines of authority.

Here, put briefly and over-simply, is one example among many: management’s personal prerogatives.* Employers and managers have had to develop a new level of sensitivity to match the new level of employee expectations that have arisen in the workplace (expectations now codified by both law and best practices). In days gone by (and in the living memory of many of us), the boss had few constraints on his (almost never her) prerogatives. If he chose to comment on your clothing or your hair style or your weight

– so be it. If he chose to make suggestive remarks – so be it. If he chose not to hire or retain you because he didn’t like the color of your skin or the shape of your eyes or your sexual orientation – so be it. If he passed you over for advancement because he didn’t like your attitude or because you were female – so be it. And so on and on.

In effect, the workplace (at least most workplaces) has gone from “I can treat you any way I choose” (within very broad limits) to “you can’t treat me that way” (narrowly limiting behaviors that would, historically, not have been out of bounds). In my view, this has injected a heightened degree of managerial discipline into the work environment and so a heightened degree of employee morale. And how important is that to profitability?

No one (at least publicly) favors an institutional culture reminiscent of the 1950s: patriarchal, hierarchical, exclusionary; where men were men, women were girls and people of color were scarce on the ground.

ESG is the emerging institutional culture of the times, driven by environmental, social and governance realities. And we believe these changes will bring improved bottom lines across the economy.

I would like to hear from the AGs or those sympathetic to them where they think I am wrong.

Chris Weil

*I could have chosen Diversity, Equity and Inclusion (“DEI”) and its impact on governance (and profitability) as an example but I don’t have enough space to do it justice.

This communication may contain privileged and confidential information; people other than the addressee should not review, distribute or duplicate it without permission. Nothing in this communication constitutes a solicitation by us for the purchase or sale of any securities. We do not accept account orders or instructions by e-mail, and will not be responsible for carrying out e-mailed orders or instructions. We provide reports as an accommodation to help you monitor your investment activity; securities pricing may not reflect reliable values. In the event of a discrepancy, the information in your confirmations of daily activity and monthly statement of account shall govern. While the information in this communication comes from sources believed to be reliable as of today, we make no representation as to its accuracy and completeness and provide no assurances as to future returns or performance. We may own positions in securities mentioned in this communication. Investing involves risks, including the possible loss of the principal amount invested. There can be no assurance that recommended investments will be successful in meeting their objectives. Investment in mutual funds is also subject to market risk, investment style risk, investment adviser risk, market sector risk, equity securities risk, and portfolio turnover risks. More information about these risks and other risks can be found in the fund prospectus. You may obtain a prospectus for CWC's mutual funds by calling us toll-free at 888.550.9266 or visiting The prospectus should be read carefully before investing. CWC's mutual funds are distributed by Arbor Court Capital, LLC, Member FINRA/SIPC. Nothing herein should be construed as legal or tax advice. You should consult an attorney or tax professional regarding your specific legal or tax situation. Christopher Weil & Company, Inc. may be contacted at 800.355.9345 or


bottom of page