Environmental, social, and governance (ESG) is not a norm that adds ethics to markets. It should be understood as an accumulation of thought extending from classical economics to modern finance—a language of capital seeking to capture "invisible risks."
ESG is often perceived as an ethical standard to compensate for the limitations of shareholder capitalism, or as a management technique to address stakeholder capitalism. However, its starting point was not a simple moral demand.
It originated from investors' concerns about how to capture and evaluate latent risks that markets had long failed to adequately reflect in prices. In other words, ESG was not a matter of ethics but a question of the conditions necessary for markets to function properly.
This awareness was not a product of a specific moment but formed within a long stream of thought surrounding market mechanisms. Historically, this represents continuity rather than discontinuity. ESG is a concept where accumulated thinking from classical economics through modern finance has been reformulated in the language of capital markets.
Adam Smith's "The Wealth of Nations," published in 1776, marks its 250th anniversary this year. His concept of the "invisible hand" is widely known for explaining market efficiency, but its operation was never value-neutral. The premise was already embedded that market efficiency does not occur spontaneously but can only be established on certain social and moral foundations.
In "The Theory of Moral Sentiments," Smith did not separate sympathy and moral judgment as ethics external to markets. These were core elements of economic order that lowered transaction costs and increased the reliability of contract fulfillment. Markets cannot function efficiently when trust and norms collapse. This is precisely why ESG emphasizes governance and social trust.
Alfred Marshall expanded this awareness to enterprise and industry-level analysis. As the founder of microeconomics who formalized supply, demand, and price mechanisms, he understood the economy as a long-term evolutionary process rather than static equilibrium. Technology, organization, and institutions accumulate and interact, forming differences in competitiveness.
According to Marshall, a firm's cost structure and productivity are not determined simply by technology levels. Non-financial factors such as worker skills, organizational culture, and industrial environment work in combination, and their effects accumulate as competitive gaps over time. Today's logic that ESG affects corporate value was already embedded in his insight that economics must be understood with "a cool head and a warm heart."
Marshall's concept of long-run equilibrium clearly demonstrates the financial significance of ESG. While environmental investments or labor and welfare expenditures may appear as costs in the short term, they serve as structural factors that lower average costs, reduce productivity volatility, and create sustainable competitive advantages over the long term.
Marshall's concept of external economies also offers significant implications. Changes in individual firms' environmental and labor standards affect cost structures and productivity across industries, with effects spreading along supply chains. This explains why ESG extends beyond individual companies to supply chains and industry levels.
Max Weber's "spirit of capitalism" explains the normative foundation underlying such economic choices. Values of moderation, responsibility, and discipline show that capitalism has operated as an order premised on self-control and predictability, not merely a system of greed.
From an investment perspective, this is a matter of risk, not ethics. As Weber's "The Protestant Ethic and the Spirit of Capitalism" demonstrates, norms are mechanisms that reduce uncertainty through behavioral consistency and trust. ESG is a modern mechanism that transforms such ethics into measurable standards, bringing externalized risks into corporate management and decision-making structures.
In essence, ESG is the convergence of classical economics' concerns, microeconomics' competitiveness analysis, and sociological insights into the language of capital markets. If the "invisible hand" explained market efficiency, ESG is an institutional mechanism attempting to reflect in prices the "invisible risks" that hand could not capture.
Therefore, the moment one interprets ESG merely as cost or moral pressure, one loses sight of the changes capital markets are capturing. ESG is not an externally imposed norm but the result of expanded risk recognition and evaluation methods accumulated in markets over time.
In this sense, ESG is an "old future"—capitalist thought extending from classical economics, reemerging in today's economic reality.
