Capitalism Versus Focusing on ESG

We believe it is not a contradiction to be a capitalist and focus on ESG at the same time.


Milton Friedman famously wrote about the profit motive in his 1970 New York Times article1, quoting from his own 1962 book Capitalism and Freedom: “there is one and only one social responsibility of business ... to increase its profits so long as it stays within the rules of the game ... without deception or fraud”.

We first studied this during the ‘Ethique et entreprise’ course by Laurent Bibard at ESSEC business school back in 1993. We had our doubts back then, and we now think there are at least two potential issues with Friedman’s line of thinking.

The Issues With Friedman’s Thoughts

First, regulation is often late and behind the curve, and this is especially true in a rapidly changing world through technological innovation. If a company knows that its – currently – lawful activity is harmful to people and / or the environment, should it keep this knowledge to itself, only change behaviour once the law has changed and make as much profit out of it as possible while it is allowed? Or should it run a profitable business while working with regulators and government to help shape responsible laws and regulation? This is a complex question, but to us the answer lies somewhere in the middle, even if one agrees that corporates’ only motive is to maximise value to shareholders.

We believe, at a minimum, a corporate should weigh up the short-term gains with the long-term reputational damage of its actions if it continues with an activity that may be widely regarded as morally wrong. Taken to the extreme, if an imaginary company engages in a lawful hypothetical activity that only it knows will destroy the earth 12 months from now, all gains are futile, or – if you prefer the pure capitalist argument – the net present value of the company engaging in this hypothetical activity may well be less than if it did not.

Second, we hate to admit it, but we have to acknowledge the possibility that Adam Smith’s invisible hand – i.e. if all economic actors look out for themselves, their collective actions are beneficial to the overall good of society – is self-defeating at times. This is well-illustrated by a topic close to our heart: inequality of income, wealth and opportunity. It can be argued that the pure profit motive has led to such excesses in income and wealth inequality, that it may well sow the seeds for its own destruction, and we could all be worse off as a result eventually, in certain future scenarios. The counterfactual will never be known, and we have sympathy for the capitalist who argues that all the innovation and improvements made in our current system will make us better off, collectively, even after the potential setbacks that are driven by the current inequality.

But still, we cannot prove that an economy guided by ‘the invisible hand’ is better for all its inhabitants than one guided by a hand that is more visible or regulated or self-regulated. Climate change may be another example where the invisible hand did not quite steer things the right way.

The Modifications to Friedman’s Profit Motive

We would propose a modification to Friedman’s profit motive, one that preserves the spirit. A modest modification is to say that, rather than focus on increasing its profit, a company should focus on maximising the NPV of future profits, taking into account the potential long-term impact of its actions on its reputation and chances of long-term survival.

A more ambitious modification is that a company should maximise the NPV of its future profits, while being fully comfortable with full transparency and all of its actions being reported on the front pages of all major newspapers. Morally, we have a preference for this more ambitious modification.


Finance is full of theories that would be convenient if true, but are not quite valid in practice. For instance, the efficient market hypothesis is neat, but has now been well refuted. A second example is that if returns followed a normal distribution, some computations and predictions would be quite straightforward; however, in practice, the distribution of returns has fatter tails. Friedman’s profit motive may well fall into the same category, for the reasons mentioned, implying that ESG and responsible investing is very much not in contradiction with capitalism.