ESG or Not ESG: What Would Adam Smith Say?

In this episode, we explore whether businesses should prioritize profit or ethical responsibilities by examining Adam Smith's philosophies. We connect his ideas from the Scottish Enlightenment to the modern debate over ESG, showing how companies can balance financial success with social and environmental impact.

Transcript

ESG or Not ESG: What Adam Smith Say?

Welcome to "George Street 22," the podcast where we dive deep into the ideas and philosophies that have shaped our world, exploring their relevance in today’s most pressing issues. I’m George and today we’re exploring the debate over ESG—Environmental, Social, and Governance principles—through the lens of the Scottish Enlightenment.

Why and How ESG is Currently in Contentious Debate?

The debate over ESG has become a significant point of contention, especially when comparing perspectives in the United States and Europe.

In Europe, the approach to ESG has been more regulatory and structured. The European Union (EU) has implemented comprehensive regulations, such as the Sustainable Finance Disclosure Regulation (SFDR) and the Corporate Sustainability Reporting Directive (CSRD). These regulations require companies to disclose their ESG practices, aiming to increase transparency and ensure that businesses are held accountable for their impact on society and the environment. 

However, in the United States, the ESG debate has become sharply polarized. Critics, particularly among Republican lawmakers in states like Texas and Florida, view ESG as a form of "woke capitalism" that diverts businesses from their primary goal of maximizing shareholder value. They argue that ESG imposes ideological agendas that could undermine economic performance and investor returns. This opposition has led to legislation aimed at restricting the use of ESG factors in state investments and procurement, showcasing a broader resistance to what is seen as corporate overreach.

This transatlantic divide highlights a fundamental question at the heart of the ESG debate: Should businesses focus solely on profits, or should they also prioritize broader social and environmental responsibilities? The answer to this question varies significantly between the U.S. and Europe, shaped by differing political, economic, and cultural contexts.

To understand the philosophical roots of this debate, we can turn to the Scottish Enlightenment—a period of intellectual flourishing in 18th century Scotland that significantly influenced modern thought on humanism, morality, and social responsibility. Thinkers like David Hume and Francis Hutcheson explored ideas that continue to shape how we view ethics and business today.

 The Scottish Enlightenment was deeply rooted in humanism, emphasizing the inherent value and dignity of individuals. This focus naturally extended to concerns about social welfare and moral responsibility, which are key elements of ESG. Francis Hutcheson’s philosophy, for example, centered on the idea that humans possess an innate “moral sense” that guides them to act in ways that benefit others. This moral sense is reflected in modern ESG practices, where companies are encouraged to consider the social and environmental impacts of their actions, not just their bottom line.

 The thinkers of the Scottish Enlightenment were engaged in rigorous debates about the nature of morality and the responsibilities of individuals within society—debates that resonate with today’s discussions around ESG. Hutcheson and others argued that both businesses and individuals have a duty to act in ways that promote the common good, a view that aligns with the sentiment-driven approach to ESG, where ethical considerations are at the forefront of corporate decision-making.

By linking the principles of the Scottish Enlightenment to the ESG debate, we can see that the challenges and opportunities we face today are part of a long-standing conversation about the role of ethics, reason, and social responsibility in economic life—a conversation that began in the intellectual salons of Edinburgh and Glasgow.

To fully understand ESG, we must revisit Adam Smith’s The Theory of Moral Sentiments (1759), where he explores human behavior, morality, and the role of emotions in social interactions—ideas that directly relate to the sentiment-driven view of ESG.

There are Two Distinct Views of ESG from this book: Sentiment-Driven vs. Market-Driven

First, Sentiment-Driven ESG. 

 In The Theory of Moral Sentiments, Smith visted the concept of sympathy, which he defines as our ability to understand and share the feelings of others. Smith writes:

“Humanity is originally the feeling that we are, in some way, partakers of the happiness and misery of others.”
 (The Theory of Moral Sentiments, Part I, Section I, Chapter I)

This concept forms the foundation of the sentiment-driven approach to ESG, and

posits that businesses have a moral obligation to act in ways that promote social welfare, driven by empathy and a sense of duty. This approach advocates for prioritizing the well-being of employees, communities, and the environment, even at the expense of short-term profits. The idea is that businesses should integrate social good into their mission, not as an afterthought, but as a central component.

Second, Market-Driven ESG

 In contrast, In The Wealth of Nations, Adam Smith introduced the concept of the "invisible hand," which remains one of the most influential ideas in economic theory. Smith observed:

“By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”
 (The Wealth of Nations, Book IV, Chapter II)

This concept is foundational to the market-driven view of ESG, which posits that businesses, by focusing on their own profitability and efficiency, can inadvertently create positive social and environmental outcomes. The essence of the invisible hand is that self-interest—when channeled through competitive markets—leads to public benefits.

The invisible hand concept illustrates how economic incentives naturally encourage businesses to adopt ESG practices that are both profitable and socially beneficial. As consumer preferences and investor demands increasingly prioritize sustainability, companies that fail to adapt risk losing market share and investor confidence. Thus, through competition and market pressures, businesses are steered toward practices that enhance both financial performance and social outcomes. This perspective reflects a synergy between economic goals and ethical responsibility, demonstrating that profitability and social responsibility can be mutually reinforcing rather than mutually exclusive.

Finally, let’ s think about how the Wisdom from the Scottish Enlightenment Can Shed Light on the Current Debate

1. Beyond Shareholder Wealth Maximization: A Broader Ethical Foundation

Michael Jensen's seminal paper, "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure," formalized the idea that a firm’s primary objective should be to maximize shareholder wealth. This concept has become deeply embedded in corporate finance, often presented as the fundamental guiding principle for decision-making. However, the Scottish Enlightenment provides a broader ethical foundation, emphasizing that businesses are part of a larger social fabric with responsibilities that extend beyond mere profit. By integrating these ethical considerations, companies can align their profit-making activities with the well-being of society, leading to more sustainable and socially responsible business practices.

2. The Role of Virtue Ethics in ESG

The Scottish Enlightenment also emphasized virtue ethics, which prioritizes the development of moral virtues like justice, benevolence, and prudence. Applying this to ESG, companies can adopt these virtues as core values, guiding their decision-making processes and fostering a corporate culture that prioritizes ethical behavior and long-term sustainability. This approach encourages businesses to act with integrity, respect for others, and a commitment to the broader social and environmental impacts of their actions.

3. Balancing Short-Term Gains with Long-Term Sustainability Through Corporate Culture

Finally, businesses can reconcile sentiment-driven and market-driven views by balancing short-term financial performance with long-term sustainability, all within a corporate culture that values both ethical responsibility and economic success. This means embedding values such as integrity and respect throughout the organization while maintaining clear financial objectives. Leadership plays a crucial role in modeling this balance, demonstrating that it is possible to achieve business success without compromising ethical standards.

In conclusion, the wisdom of the Scottish Enlightenment helps us see that businesses do not have to choose between profit and social responsibility. By integrating ethical considerations into their market strategies, companies can achieve a balance that benefits both their shareholders and society at large. This approach not only honors Smith’s dual perspectives but also positions businesses to thrive in an increasingly complex andsocially conscious market.

[Closing Music Begins]

Host (You):
Thank you for joining me on this journey through the ideas of the Scottish Enlightenment and their relevance to today’s ESG debate. I hope this exploration has provided you with new insights into how we can approach these complex issues with wisdom drawn from the past.

If you enjoyed this episode, don’t forget to subscribe to "George Street 22," share it with your friends, and leave a review. Your support helps us continue to bring thoughtful discussions on the ideas that shape our world.