Are Sustainability and CSR Practices Here to Stay in American Business?

“Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to society.“ – Larry Fink, CEO of BlackRock Inc.

Changes in economic, social, and environmental factors have altered market conditions to such a degree that enterprises that are unwilling to integrate meaningful CSR (Corporate Social Responsibility) and Sustainability practices into their core corporate strategy will simply die off[1].

Since the 1970s, CSR and Sustainability have been relegated to the fringes of American business thought. In large part stemming from the considerable influence of Milton Friedman and the Chicago School’s doctrine, which asserted that the sole metric of a company’s social responsibility should be profit maximization and the creation of shareholder value[2]. More recently, academia and business have come to consider the Friedman Doctrine as outdated and lacking the necessary nuance to properly understand social responsibility of business[3]. Thus, enterprises have begun to move away from concentrating solely on profit maximization. The shift in the philosophy surrounding governance and the responsibility of enterprises is the direct result of substantial shifts in economic (globalization and digitalization), environmental (climate change and resource scarcity), and social factors (changes in generational consumer preferences). It is abundantly clear that failing to seriously consider these increasingly crucial factors will degrade an enterprise’s value by eroding its social license to operate[4]. For the most part, society has placed the responsibility for the integration of CSR and Sustainability programs on the shoulders of managers in industry, and investors have been slow to understand its importance, and therefore have not rewarded enterprises that implement meaningful CSR and Sustainability strategies. This is beginning to change with the rise of impact investing, which is based upon two fundamental principles, “accumulating wealth by any means followed by a turn to philanthropy in search of impact is not an efficient way to create overall value for society” and “there are investment opportunities that create both strong financial and impact returns without requiring a tradeoff”[5]. Impact investing and SRI (Socially Responsible Investing) has been increasing steadily the past decade, but those principles have been adopted to a greater degree in the venture capital and private equity space[6] than capital markets and institutional investors.

2018 is the inflection point in which CSR and Sustainability have finally entered the lexicon of the uppermost tier of American finance. As Larry Fink, CEO of BlackRock, the world’s largest asset manager, called on CEOs to fundamentally reexamine their companies’ value proposition, “Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate”[7]. His open letter represents a fundamental break from the conventional finance philosophy and represents a call to action to the American finance elite, who are well-schooled in the self-correcting nature of Adam Smith’s invisible hand and the Friedman doctrine.

Why is this important? While the notion of impact investing has existed for the past several decades, it was mostly considered to be the domain of small and middle market private funds, NGOs, and non-profits, and it traditionally delivered below market returns[8]. It was not considered to be of interest to large financial players that are driven by returns, not social impact.

However, given the fact that there has been a considerable amount of academic research that has demonstrated that there is, in fact, a positive correlation between performance on ESG matrices and overall financial returns[9], investors have begun to take notice. After the 2008 financial crisis, business leaders have started to recognize the dangers of short-sighted strategies driven by an obsession with quarterly results, which have been only reinforced by the West’s seeming fixation on short-term success[10]. By serving all stakeholders, instead of only shareholders, enterprises can gain competitive advantages by approaching their strategy in a holistic manner that puts the long-term sustainability of their business over short-term profit maximization[11]. An even more telling example and one that ties directly into Larry Fink’s words is that the average holding period of a stock was just 22 seconds in 2014, compared to four years after the end of the second world war[12]. However, enterprises that prioritize the long-term viability and health of their business tend to get penalized in the short-term by markets, thus making the paradox of short and long-term strategy even more difficult to navigate. There is an obsession with hot money[13] and high-frequency trading that has significantly altered the structure of the market, creating levels of volatility that result in levels of uncertainty that affect the strategic decision-making of companies. This “short-termism” is not only being driven by human tendencies, but also by the proliferation of short-term passive investment vehicles, which has altered the structure of the market. ETFs (Electronically Traded Funds), whose algorithms fail to consider “real world” factors other than financial information. By only interpreting financial statements and not possessing the ability to consider unpredictable real-world events, companies are penalized for activities that active investors would not penalize.

One might ask how this tie into sustainability and more importantly Larry Fink’s letter? Essentially, investors are beginning to look for companies that successfully balance the paradox of short and long-term thinking and strategy, as companies that think further out into the future strategically perform better[14]. However, markets are significantly trailing business in their understanding of the strategic importance for companies in engaging in meaningful CSR and Sustainability practices. Therefore, it has become almost self-evident to leaders in that they need to adjust their business model and operations to remain competitive in the long run. But what has not shifted is the way that most investors evaluate companies, they are still primarily concerned with short-term performance, and are reluctant to hold stocks for extended periods of time. This creates a tremendous problem for CEOs, as they are being pulled in two different directions simultaneously. They need to ensure that they address long-term strategic concerns, whilst putting up acceptable quarterly returns for investors. One can see how this presents a problem for companies, as it is a chicken and egg problem, allocate resources for CSR and sustainability activities, or continue to focus on short-term results and continue to please investors.

The only way to solve this problem is to fundamentally change investor behavior, and business needs to convince investors to hold stocks for increasing periods of time, which would provide the necessary stability for companies to implement strategies that ensure their long-term competitiveness. This really underscores the importance of Larry Fink’s letter, because he is giving industry leaders the license to reexamine and readjust their business models to adapt to the coming changes.

We see this as being a pivotal moment in the acceptance of Sustainability and CSR as legitimate strategic concepts in the American business psyche. And while it represents a significant step in the right direction, the flood is coming and those who do not fundamentally rethink their businesses will be left off the ark.


About the Authors

Prof. Dr. René Schmidpeter holds the Dr. Juergen Meyer Endowed Chair of International Business Ethics and Corporate Social Responsibility at Cologne Business School (CBS), Germany. He is also a professor at the Nanjing University of Finance and Economics and an Adjunct Professor at Murdoch University in Perth, Australia. He is a series editor for Springer’s CSR, Sustainability, Ethics and Governance books, a section editor of the Encyclopedia of Corporate Social Responsibility (ECSR) and an editor of the Dictionary of Corporate Social Responsibility (DCSR) as well as Editor-inChief of the International Journal of CSR (Springer).


Haden Garth Cosman is a master’s student in International Business – Strategic Management and Consulting at the Cologne Business School. In his current role at CASM, he is primarily responsible for the management and support of research and other assorted publications. He completed his bachelor’s in International Political Economy, with a focus on Economic Development, and German Language at Fordham University in New York, and has professional experience in the finance and consulting sectors on both sides of the Atlantic.


[1] See Definition of Strategic Drift and Katz, D., & Kahn, R. L. (1966). The social psychology of organizations. New York: Wiley.

[2] Friedman, M. (1970). “The Social Responsibility of Business is to Increase its Profits”. The New York Times.

[3] McKinsey Global Institute. (2009). Valuing Corporate Social Responsibility: McKinsey Global Survey Results; McKinsey Global Institute. (2011).The Business of Sustainability: McKinsey Global Survey Results.

[4] Heuskel, D., Lewis, T., & Reeves, M. (2010). “Social Advantage”. The Boston Consulting Group Publications.

[5] Seegull, F. (2018). “From Milton Friedman to Larry Fink—The Rise of Impact Investing”. Harvard Business School Social Enterprise Impact Insights.

[6] EY Global Private Equity Advisory (2017), “Profit and Purpose: Impact Investing Goes Mainstream”. EY Private Equity Hot Topics.

[7] Fink, L (2018). “A Sense of Purpose”. BlackRock, INC.

[8] EY Global Private Equity Advisory (2017), “Profit and Purpose: Impact Investing Goes Mainstream”. EY Private Equity Hot Topics.

[9] Bassen, A., Busch, T., & Friede, G., (2015). “ESG and financial performance: aggregated evidence from more than 2000 empirical studies”. Journal of Sustainable Finance & Investment.

[10] Barton, D. (2011). “Capitalism for the Long Term”. Harvard Business Review.

[11] Gordon, M. (2014): Ira Sohn Investment Conference Presentation.

[12] Gordon, M. (2014). Ira Sohn Investment Conference Presentation.

[13] Constable, S. (2018). “What is Hot Money”. Wall Street Journal.

[14] https://hbr.org/2017/02/finally-proof-that-managing-for-the-long-term-pays-off Barton, D., Manyika, J., & Williamson, K, S. “Finally, Evidence that Managing for Pays Off”. Harvard Business Review.

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