Environmental, social and governance investing—ESG investing for short—is the latest movement by activists to compel businesses and persuade investors to pursue larger social goals, including environmental initiatives, by increasing financial disclosure regulations, but a new essay series by the Fraser Institute highlights the misunderstandings and simplifications of this call for a new form of capitalism.

“The thrust of ESG investing—to force companies to pursue goals other than just maximizing returns to shareholders—shows a fundamental misunderstanding of how market economies work. Specifically, it misunderstands how firms pursuing profits already have to consider their communities, employees, suppliers, customers, and anyone connected with the business,” explained Steven Globerman, resident scholar at the Fraser Institute and contributing editor of ESG: Myths and Realities.

See related article: Alquity and Spouting Rock Asset Management Join Forces to Launch New Platform to Accelerate Adoption of ESG Investing in U.S.

The first essay, The New Capitalism, identifies the various arguments made in favour of ESG investing, including mandatory ESG disclosures by public companies. According to ESG advocates, forcing companies to report their environmental, social and governance activities allows investors to direct their money towards companies with high ESG ratings and away from companies with lower ESG ratings.

Future essays in the series will explore core questions and misunderstandings related to the ESG movement including how it undermines the fiduciary responsibilities of corporate directors; whether investors actually earn higher returns from ESG investing; and how market economies already achieve many of the things to which ESG advocates aspire, among other topics.

A second essay also released today, Friedman and His ESG Critics, revisits Nobel laureate Milton Friedman’s iconic 1970 article in the New York Times, which argued that the sole responsibility of business is to increase profits, and that it is misguided to expect managers of businesses to try to achieve broad public policy objectives.

For Friedman, when firms focus on achieving higher profits, other stakeholders, like consumers, employees and suppliers also benefit. Forcing managers of firms to focus on larger societal goals instead of profits—such as what is proposed in ESG investing—results in fewer benefits for consumers and other stakeholders who would have otherwise benefited from the higher profits.

“It is far too simplistic to say, as ESG advocates do, that corporations can be compelled to pursue social and environmental goals without imposing costs on those companies and society more broadly,” Globerman said.

“And as with all previous attempts to reform market economies, it’s important to understand the proposed reforms, and what the trade-offs (i.e. costs) will be.”

Source: GlobeNewswire