The economist Milton Friedman famously said that in a market economy, ‘there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.’
For Dr Friedman, it is ‘fundamentally subversive’ for corporations to accept that they have any other social responsibility ‘other than to make as much money for their stockholders as possible.’
So, what would he think today about the increasing focus of funds on ESG issues, particularly climate change? I think he might agree!
At the FSC’s Investment Summit, BlackRock Chairman and CEO, Larry Fink declared that he is fundamentally a capitalist, and it is because of his belief in a market economy that he believes that sustainability must be a focus for investment firms.
The reality of climate change for Mr Fink, who has personally been touched by seeing first-hand the effects of climate change on the Great Barrier Reef, in Alaska and in Botswana, means that long term investment profitability is at risk if climate risk is not taken seriously. Mr Fink believes every company has to focus on how climate change is impacting their company and how they are preparing.
For Mr Fink, long term profitability depends on meeting the needs of clients, but also being responsive to the needs of the community within which you operate – a concern for the impact of climate on the world, and profitability for your clients is not at odds.
This theme was echoed in a panel on the Responsible Stewardship of Capital, chaired by the Investment Director of Pendal Group Dan Campbell. John Galloway, Head of Investment Stewardship, Vanguard US, affirmed the need to act primarily in the best interest of shareholders. For Mr Galloway, like Dr Friedman, all environmental and social risk must be viewed through that lens, and investment decisions must be taken that maximise long term value for clients. Sound governance of real risks, such as climate change, will mean that value is improved over the long term. On the same panel, Andrew Fray, the Director of ESG and Stewardship at AustralianSuper, stated that the reason they have a big focus on engagement and stewardship is primarily because it is in investor’s long-term interests.
Fundamentally, funds have fiduciary duties to act in the best interests of their clients. Clearly these fund managers aren’t merely engaging in an environmental crusade. They have judged that a focus on ESG is fulfilling their legal obligation to their clients.
It is certainly true that a greater focus on ESG has also been driven by increasing expectation from investor groups that may be seen by some as business being driven by activism. But for the panelists at the Investment Summit, an attention to stakeholder concerns is vital for future profitability. It is capitalism with a social conscience – a belief in the fundamental effectiveness of the market to allocate resources effectively, but a recognition that successfully operating in the market requires the consideration of the stakeholders affected by business operations. No corporation is an island.
Milton Friedman’s unequivocal language about corporations having no social responsibilities other than profit may ring harsh to most ears today. It seems overly atomistic, without proper consideration for business operating in a larger community. But I suspect he would have found much common ground with investment managers at the Investment Summit that a concern for client’s interests must underpin ESG activity.