Over the last two years, sustainable or ESG (environmental, social, and governance) investment funds have increased tenfold. During that time, the Business Roundtable strongly endorsed “stakeholder” capitalism, rejecting the traditional notion that maximizing shareholder value should be a firm’s exclusive focus. Today, managements and boards are pressured to do whatever it takes to score higher on ESG metrics. Proponents (including the rapidly growing ESG investment funds) say that giving ever more attention to ESG initiatives rings true to the firm’s purpose in society.
In the old days, management relied on a finance principle as a guidepost to fulfilling the firm’s purpose. Fund those investments that are expected to at least earn the cost of capital and create value while avoiding investments that will likely be value dissipating. The logic is sound. However, is there an element of truth that, in the past, this way of looking at the world (heavily tied to accounting numbers) shortchanged non-shareholder stakeholders? Yes.
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