American economist Milton Friedman penned in his famous 1970 essa that the sole social responsibility of a business is to increase profits.
However, this prevailing view was written into law long before Friedman. The Michigan Supreme Court’s 1919 decision in Dodge v. Ford Motor Co, held that “a business corporation is organized and carried on primarily for the profit of the stockholders.”
Recently, however, an alternate view was developed that focused on social factors as much as profit. Known as Environmental, Social, and Governance, or ESG, this framework holds corporations accountable to additional stakeholders: customers, employees, suppliers, communities, and the environment.
ESG proponents believe corporations that “do good” will also do well – or better - for their shareholders. ESG, promoted as socially progressive, quickly became the hot new marketing slogan for funds composed exclusively of purportedly ESG-compliant companies.
But there is no SEC list of ESG criteria. Promoters are free to label any company they want as ESG-compliant. Some companies, such as fossil fuel giant Exxon, have used ESG rhetoric to greenwash investors into believing they are eco-friendly despite increasing carbon emissions. Firms were piled into so many ESG funds that Aaron Brown, former head of financial research at AQR Capital, wrote in a 2021 Bloomberg article, “Many ESG funds are just expensive S&P 500 indexers.”
NYU’s Stern Center for Sustainable Business analyzed over 1,000 studies of ESG performance published between 2015 and 2020 and found only 33% of ESG investments outperformed non-ESG investments. The other 67% showed no difference, mixed, or negative results.
At DCM, we believe protecting the environment, being socially responsible, and following sound corporate governance principles are all positive qualities. However, we don’t look for good or bad when investing your funds. We focus on bullish vs. bearish. We prioritize proven security, income, and growth of your invested assets. Until ESG is a regulated, standardized designation and evidence shows that ESG firms consistently outperform, we will not include ESG in our investment considerations.
