14. Farewell to Uncle Milt

Though socially responsible investing (SRI) has been around for as long as portfolio diversification, if not longer, its widespread and transformative effect on investing culture did not begin to take hold until the better part of the last decade. Philanthropy was certainly not known for being a profitable area of activity, and the great monetarist and libertarian, Milton Friedman, provided a widely accepted basis that the costs for corporations, who spent time worried about anything beyond earning a return to their stockholders, would exceed the benefits.

The main reason why Friedman’s earlier view has been successfully challenged is because environmental, social, and governance (ESG) factors in investing is not about philanthropy but about risk management. Investors seeking to manage risks and profitability in the long run also should be concerned about ESG factors. So, why is the integration of ESG into investment analysis important for the reduction of risk? First, we need to only look back at the corporate governance failures of the late 1990s and later 2000s in the financial sector to understand how crucial good corporate governance is to avoiding financial disaster. The Enrons, WorldComs, AIGs, and Lehman Bros. of the world stand out as embodiments of what can go wrong on a massive scale as a direct result of corporate governance failures. Research has found links between corporate governance, social responsibility, environmental and financial performance.