Aswath Damodaran, Professor of Finance at the Stern School of Business at New York University, is well known to many of those who have worked in finance. His valuation datasets are widely used by bankers and consultants. But Damodaran does not just collect and publish useful data. In a recent article he asks important questions about the usefulness of so-called ESG-measures, metrics that focus on the environmental, social and governance related performance of businesses, and what the war in Ukraine tells us about their usefulness.
The ESG metrics are based on the idea that companies should look to all stakeholders instead of focusing only on profitability. This idea, often described as Corporate Social Responsibility (CSR), has been around for a long time. Originally an ethical concept, it stipulates that companies, or in fact shareholders and management, should aim at having a positive impact on society, that it is their duty to do so.
Many have criticised this idea, most notably Nobel laureate Milton Friedman in a 1970 New York Times Magazine article, where he argues that the only social responsibility of companies is to maximise their profits by constantly finding new ways to lower costs and increase revenues, always within the frame of the law of course.
If CSR was only about being ‘virtuous’ for no profit it would not have lasted long. But the promise of CSR is that by behaving in a socially responsible manner companies will in the long run benefit. It is on this basis that the environmental, social and governance metrics have been developed and are being implemented by businesses, investors and banks all over the world. If this development continues, it may mean, for instance, that otherwise successful and profitable businesses or investment funds which refuse to let an essentially political agenda dictate their business or investment decisions will face restricted access to loan financing. We are already seeing restricted access to equity financing as more and more pension funds use the ESG metrics to evaluate investments.