In September 1970, the economist Milton Friedman wrote a seminal essay entitled “The Social Responsibility of Business Is to Increase Its Profits.” Company leaders, Friedman argued, should be entirely concerned with making money for shareholders, not with their businesses’ environmental, social, or broader economic impacts.

Friedman’s tract was influential—and damaging. Over the ensuing five decades, corporations prioritized short-term profits even at the expense of their home countries, communities, and workers. CEO compensation at the top 350 U.S. firms rose by 940 percent in the four decades after 1978, compared with a 12 percent rise for the typical worker over the same period—a change driven by the idea that giving executives higher compensation would get the best performance. It is hard to believe that these dramatic financial incentives at the top have made much of a difference for the U.S. economy, looking at its performance before and since the mid-1970s. But the pay bump shouldn’t be a surprise. If greed is considered good, greed will become the new normal. The worldview Friedman advocated has undermined social norms that allowed the capitalist market system to work for the majority.

But as the essay has passed its 50th anniversary, Friedman’s doctrine might be in terminal decline. Amid the human and economic carnage of the COVID-19 pandemic and the extreme weather events of the last few years, sentiments in the financial markets appear to be shifting. In December 2020, for example, Engine No. 1, an environmentalist hedge fund, won three seats on ExxonMobil’s board after shareholders rebelled against the oil giant’s reluctance to reduce its carbon footprint. The Bank of England and the European Central Bank have asked financial institutions to conduct stress tests for different climate-related risk scenarios. The business world is also independently reevaluating its purpose. Klaus Schwab, chair of the World Economic Forum, wrote in Foreign Affairs in 2020 that companies must actively take “steps to meet social and environmental goals” or risk having “employees, clients, and voters . . . force change on them from the outside.”

There is certainly a great deal of interest among businesses in how to measure and report their societal impacts. Increasingly, companies are flocking to adopt voluntary standards for environmental, social, and governance (ESG) reporting, including those published by the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures. This means that in addition to reporting their financial returns, as publicly listed companies are already required to do, many businesses now attempt to measure and divulge how much carbon they emit, for example, or how much plastic they use, or how many people of color sit on their boards. These responsibility metrics become part of the profile of a corporation and can help attract or dissuade potential investors. Consequently, there is a rapidly growing industry of ESG advice from consultancies and think tanks, and it will probably not be long before regulators start to crystallize these metrics into a required standard.

Many corporations are not genuinely interested in bettering the world.

The movement toward ESG reporting certainly highlights important issues, such as climate change and the treatment of workers, and it is welcome that corporations want to engage in the debate. But the belief that companies can solve such pressing issues—through pursuing ESG standards or otherwise—is deeply flawed. Despite purportedly having good intentions, many corporations are not genuinely interested in bettering the world, and some use ESG metrics or other sustainability measures mainly to launder their reputations. Fixing some of the world’s most vexing problems will require that businesses dramatically alter their own practices, and it makes little sense to entrust systemic reform to the very institutions that themselves require change.

Instead, action must come from elsewhere: namely, governments. States must impose new regulations on the market economy to ensure that businesses are delivering shared productivity and social progress. Politicians will need to create laws that make markets work well and embed values—such as environmental sustainability or higher wages for low-income workers—that reflect the mainstream views of society. Renewed regulatory activism must include restoring competition through effective antitrust enforcement, legislating for the national interest over global profits, and tilting the balance of economic returns from older, wealthier generations to younger, poorer ones. It should also mean regulations to fight climate change, such as emission limits, mandates to end the sale of internal combustion engine vehicles, or bans on the use of certain materials.

This doesn’t mean that governments should discourage ESG standards and reporting. Officials should still urge manufacturers to disclose, say, the amount of pollution they produce and set reduction targets. But for the speed and scale of change that the world needs, states will have to force corporations to take steps that they would never agree to take on their own. The job of creating a more just and sustainable world cannot be outsourced to the private sector.


At first glance, it seems possible that mandating ESG reporting would force businesses to be socially responsible. If corporations were required to disclose their societal and environmental impact, firms or people looking to invest in sustainable ways could make apples-to-apples comparisons and buy accordingly. Journalists might more easily scrutinize how companies affect their surrounding communities and the wider world. This could, in turn, incentivize executives to cut back on harmful corporate practices.

But the value of relying on required ESG reporting is questionable for several reasons. The first is temporal: the world’s problems are pressing, and it is still far from settled what the regulatory and governance framework for the corporation of the future will be. Laws move more slowly than public opinion, and although the intellectual case for a broader definition than Friedman’s of corporate purpose is advancing in the academic world, plenty of politicians and lawmakers (not to mention executives) have yet to be persuaded. Change in legislation and legal enforcement may be slow.

The second problem with mandated ESG reporting is more fundamental: the outcomes it aims to measure are broad and complex, whereas metrics are by definition tightly specified. There are inherent challenges in capturing complex, interrelated economic, social, and environmental phenomena—with all the nuances of interpretation involved—in easy-to-produce metrics. This means that even if states could quickly implement ESG requirements, it is unclear how useful they would be. The United Nations’ Sustainable Development Goals, to which much of ESG reporting is linked, clearly demonstrate the challenge. There are 17 of them, all worthy aims, including eliminating hunger, producing affordable and clean energy, and fostering responsible consumption and production. They are divided into 169 targets, measured by 232 indicators. But although progress on most (although not all) of them can be tracked, the monitoring is imperfect, and there are tradeoffs between many of the targets. This would also be the case for ESG targets. The costs companies incur in adopting new production methods for environmental reasons, for instance, might make it less likely that workers down the supply chain would receive wage increases.

Focusing on GDP harms the ability of governments to deliver prosperity.

Even when there are no tradeoffs between the targets, reductive metrics can have damaging consequences, as the political scientist James Scott explained in his masterly book Seeing Like a State. The social world, which is embedded in the natural environment, is messy and disorderly, and so imposing order through classification and measurement requires shaving off or tucking in many rough edges. Scott gives many examples of how this has backfired. To hit forest management targets, for example, Germany grew standard trees in ever more standard ways. Given the narrow criteria used to determine which forests were successful—namely the ease of controlling them and their ability to supply timber—this system made forests more productive and profitable at first. But it ultimately harmed biodiversity, and much of what was grown died in the longer term.

Similarly, the seven-decade-long practice of measuring economic activity in terms of GDP has led states to overlook some of the most important consequences of business and policy decisions. GDP is not a natural object; rather, it is an intellectual construct. For example, it decrees unpaid work in the home and natural environmental processes, such as pollination by bees and climate cooling by forests, as outside the economy because there are no market prices for them. As a result, the worlds of policymaking and scholarship have failed to see the importance of laws and regulations that would enable higher growth and living standards over time. Relying on this indicator alone harms the ability of governments to deliver prosperity.

Ultimately, what metrics like GDP perhaps best illustrate is not what they purport to measure but instead that data itself is not objective; it does not merely capture facts about the world. Artificial intelligence systems trained on existing data, for example, often discriminate against disadvantaged social groups: an algorithm used by many hospitals was found to consistently predict that Black patients needed less health care. Any data reflects the social order of which it is a product, so a biased society will replicate its biases in its data. But quantification gives the impression of objectivity, obscuring the tradeoffs and definitional decisions that go into turning actions and outcomes into numbers.

Data is not objective; it does not merely capture facts about the world.

These concerns are clearly applicable to ESG metrics. For example, if a company pledges to avoid child labor, the question arises: What are the boundaries of the universe for which the company can be held responsible—just its direct supply chain or also the supply chains of its manufacturers? What responsibilities and powers should any one company have to monitor the activities of its suppliers? If a multinational business promises to decrease unemployment, is it more responsible for creating jobs in the country where its headquarters is domiciled or instead in lower-income countries where it could contribute to the betterment of many more people’s lives? What is the right tradeoff between the interests of current or future employees and those of pensioners? No universal ethical principle applies to these questions, despite the impression often given in the ballooning literature on ESG standards. No doubt this is why the Task Force on Climate-Related Financial Disclosures recommends reporting decision processes, risk management, and transparency rather than many specific metrics.

Some companies may attempt to make good-faith judgments when resolving these tricky questions. But others will not, and the definitional difficulties highlight a bigger issue: that corporations will manipulate measures or selectively choose specific targets in order to appear responsible without making decisions that would eat into their profits. If sustainability is translated into a metric such as “decreased use of plastic,” for example, what is to stop a company from simply choosing a different environmentally damaging material? A business might switch from packaging waste in recyclable plastic to packaging it in bulky cardboard, which requires more energy to process. If a city must increase its carbon emissions as a result, it isn’t clear how the business reduced its environmental footprint.

Greenwashing—the name for this type of reputational laundering—isn’t a speculative concern. The Adani Group, one of India’s biggest and most powerful energy companies, says it follows responsible ESG principles and has pledged to go carbon neutral. Meanwhile, the company is pushing ahead with some of the world’s biggest new coal projects with financing from major international banks. Starbucks announced a new strawless lid in a bid to cut back on plastic, but it quickly became apparent that the new top used more plastic than the previous lid-and-straw combination. (The company says the new lids are easier to recycle.) Revealing what was an especially cynical ploy, ExxonMobil executives told undercover journalists that the company endorsed a carbon tax precisely because it thought the tax would never pass in the U.S. Congress, making it an easy way to improve the company’s reputation without facing any real consequences.


At root, demanding that companies use ESG metrics would effectively be asking private entities to legislate social outcomes. The calls for companies to put social aims at the heart of their activities mean placing small numbers of executives in powerful political, economic, and social roles. But business leaders should not be left to make what are, in fact, important collective decisions.

The issue is illustrated in a microcosm by Facebook. Mark Zuckerberg controls Facebook personally and therefore has significant power to shape the culture, social norms, and political outcomes in many countries. Many progressives were delighted when his company banned President Donald Trump from its site, but they still dislike Zuckerberg and his business for offering a platform to right-wing sources. Conservatives, meanwhile, would be thrilled if the company brought the former president back online, and many hate Zuckerberg for purportedly discriminating against their views. But the acrimony over Facebook and its CEO is emblematic of a bigger issue: no one private company or individual should ever have so much power.

To address this problem, states could curb the power of gigantic corporations through stronger competition policies. This would mean abandoning the extreme form of the “consumer welfare standard,” which holds that corporations can continuously expand so long as their behavior doesn’t result in higher prices for final buyers. The doctrine has led to immense concentrations of both economic and political power, as very large companies have cemented their dominant market positions and used that weight to lobby over how they are regulated. This standard is now being strongly challenged by some antitrust experts and officials, including Lina Khan, chair of the Federal Trade Commission, and other so-called neo-Brandeisian thinkers. Legislators in the United Kingdom, the European Union, and other jurisdictions are also actively considering more interventionist approaches, such as requiring that certain large companies notify authorities in advance of planned takeovers or prohibiting platforms from favoring their own products over those of competitors.

Khan testifying before Congress, Washington, D.C., April 2021
Khan testifying in Washington, D.C., April 2021
Graeme Jennings / Reuters

But stronger antitrust enforcement is only one of the new policies that governments should impose on the private sector. Financial companies are impoverishing their clients by selling products, such as certain kinds of derivatives, that ultimately take money from customers, rather than helping them invest properly. Food and drug manufacturers are damaging their customers’ health through their contributions to the obesity and opioid epidemics. Technology firms are polluting rather than enlightening the sphere of public debate. The capitalist system as it exists today is not delivering for society, even before taking environmental damage into account. States cannot and should not tolerate the way the private sector operates. They need to make specific interventions—such as better enforcement of food standards and more active consumer protection in finance—to help their residents.

The problem is that despite all the criticisms of the business world, many people believe that companies are more effective than governments at achieving desired changes. According to the latest annual Edelman Trust Barometer, survey respondents around the world had more faith in businesses than in governments or politicians. Indeed, according to the 2021 findings, the business world is the only institution now seen as both ethical and competent despite the hugely increased presence of the state in economic life since the start of the pandemic. (Nongovernmental organizations are seen as ethical but not competent, and the media and politicians are seen as neither.) It is therefore important that corporations continue to reflect on their purpose and monitor their impact on society.

And some corporate involvement in public life can be positive. The business world, for example, helped drive acceptance of LGBTQ rights in the United States by banning discrimination within its own workplaces well before the government took action and then pressing politicians to repeal anti-transgender laws. If corporate actions can do the same for intractable environmental and social challenges, activists should accept the help. Businesses can be powerful advocates when it comes to forcing legislative action, and calls for businesses to take the lead in bringing about change reflect a welcome recognition that their narrow profit-driven purpose has failed society.

The capitalist system as it exists today is not delivering for society.

But even Friedman understood that it would be dangerous to have businesses become too involved in addressing public issues. Part of his argument against corporate social responsibility was that it was undemocratic. Corporate money spent in pursuit of anything other than profit, he argued, was tantamount to taxing shareholders (or customers and employees), and taxing and spending are properly the business of government—not the business of businesses. “Here the businessman—self-selected or appointed directly or indirectly by stockholders—is to be simultaneously legislator, executive and jurist,” Friedman wrote. “He is to decide whom to tax by how much and for what purpose, and he is to spend the proceeds.”

Friedman was wrong, of course, to argue that businesses had no duty to think beyond profit. Companies are important social institutions, shaping how people work, what they buy, how healthy they are, and what kind of communities they live in. Corporate executives should consider the moral aspects of every choice they make. But some of the questions raised about corporate responsibility and ESG reporting do run headlong into political choices, and his point still has force.

The movement for ESG reporting reflects a vacuum in political leadership. To reach a zero-carbon economy, the state cannot count on businesses to voluntarily pare back profits. Governments will need to force companies to invest in new technologies and ways of operating and to pay higher energy costs during the transition. In order to restore healthy markets for customers and workers, states will need to cut into the revenues of dominant businesses. Happy talk about corporate purpose and responsibility cannot serve as a distraction from hard choices. Business leaders need to play their part, but so do political leaders and voters. Like it or not, everyone is in this together.

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