ESG is an enduring social contract

This election season, Republicans have made the corporate adoption of Environmental, Social, and Governance (ESG) principles one of their flagship issues. It is a major talking point for presidential candidates and the topic of Congressional hearings. As presidential candidate Vivek Ramaswamy put it, “Society created companies to provide goods and services that consumers want, not to push social values.” 

Ramaswamy and his peers in the GOP make two claims about the origins of corporations, both false: first, that they were created to facilitate economic production, and second, that they are now being dragged, unfairly, into politics.

The actual history of corporations shows just the opposite. Corporations have always been deeply intertwined with politics and have succeeded, for centuries, in balancing public interests with the pursuit of profit. 

The corporate charter in its modern form dates back several centuries. Charters were always a delegation of public power to private enterprise, issued exclusively by governments for national purposes. Corporations were granted special privileges, allowing members to pool resources, share risk, and limit personal liability as they pursued initiatives so risky and large that no individual could or would undertake them alone.

In 1628, for example, Charles I of England chartered the Massachusetts Bay Company, which resulted in the founding of Boston. The members were both settlers and shareholders, and their corporate charter called for profits to be split between company and crown.

Likewise, in the early decades of the American republic, every would-be corporation needed a special legislative act. Charters were only granted if the business served a public need. Early corporations in New York State built toll roads and dug canals.

In the last third of the 19th century, with industrialization surging, the progressive movement successfully advocated to democratize access to the corporate form. In the 1880s and 1890s, states like Delaware and New York passed laws of “general incorporation.” For the first time, a business could file standard paperwork and a state government would automatically grant a charter of incorporation, no political petition required. Americans now had the right to life, liberty, and limited liability. 

But freedom to incorporate did not mean freedom from public responsibility. Through the 1950s and 1960s, there was broad consensus that corporations should balance costs and benefits for shareholders, executives, workers, and the community. Profits were the paramount concern, but not the exclusive one. As Charles Wilson, the President of General Motors, famously said during his confirmation hearing for U.S. Secretary of Defense in 1953, “for years I thought what was good for our country was good for General Motors, and vice versa.” In these same decades, U.S. corporations first came to dominate world commerce. 

In the 1970s, the alignment between corporations and other public stakeholders began to break down. Economist Milton Friedman argued forcefully for “shareholder primacy,” by which profits are the only appropriate measure of corporate success. In practice, shareholder primacy led corporations to focus narrowly on short-term profits, measured on a quarterly basis. Not that corporations exited the public arena all together — since the 1970s, businesses have dramatically increased their engagement in electoral politics and regulation through lobbying, advocacy, and campaign contributions. 

The critics of ESG believe that corporations should have all the special powers granted by the state and none of the responsibilities. Indeed, many Republicans argue that corporations should be banned from doing anything that does not directly and immediately benefit shareholders.

From where we stand, that is a little rich. The fact that corporations are granted special privileges by the public — privileges not afforded to individuals — is exactly why companies should be held to certain ethical standards. 

We are not arguing for sacrificing shareholder value on the altar of the public interest. ESG principles empower corporate executives to make difficult and uncertain trade-offs between short-term gains and long-term value creation, like paying low-wage workers more to secure longer job tenure, or re-investing revenue from oil extraction into alternative energy sources that will still be valuable in two decades.

They encourage corporations to act, at least on the margins, out of enlightened self-interest when it comes to customers, workers, and the environment. ESG standards are at the very heart of the enduring social contract between governments and the corporations they charter. If the experience of the Massachusetts Bay Company is any indication, a little public-mindedness will go a long way. 

Nate Loewentheil is a former economic advisor to President Barack Obama and the founder of Commonweal Ventures, a venture capital firm. Jamie Rubin is the Chief Investment Officer at Aligned Climate Capital and the former Director of State Operations for New York State.