THE traditionally-accepted purpose of a business, as famously espoused by Milton Freidman, has been to earn a profit for its owners or shareholders. This concept stood for many years as fundamental and non-negotiable.
The investment world has historically been managed on two dimensions: risk and return. For an investor, the question has typically been: how much risk am I willing to take in order to earn an expected rate of return? From the viewpoint of investment managers, the primary consideration has been their “fiduciary duty” to their clients, ensuring that they act in the best interests of their beneficiaries or the end client. Typically, those “best interests” served to generate the maximum return relative to the client’s risk appetite.
However, what we’re seeing more among some investors is the notion that generating a profit is not the sole consideration. Increasingly, consumers and investors, particularly individual investors, want to know what a company stands for and if it serves a higher societal purpose beyond making a profit. Many investors now want a three-dimensional view of their investments: one of risk, return, and impact.
Are these demands fundamentally changing the nature of capitalism? The 1970 Friedman doctrine argues that a company has no social responsibility to the public or society; its only responsibility is to its shareholders. We are now at a threshold where this is no longer the gospel it once was.
Despite much of the debate, this holistic perspective demanded by some stakeholders is not at cross purposes with a company’s traditional profit motive – or even an investment manager’s fiduciary duty should the client seek such an outcome. At CFA Institute we call this “purposeful capitalism”, where profit and higher purpose are symbiotic.
There has been an evolution in the investment industry to one that is more professional, ethical, and client-centric. As we have seen, organisations now place a greater focus on transforming their own cultures and integrating environmental, social, and governance (ESG) factors.
Often, a company that does well on societal and environmental measures such as caring for its employees and managing its supply chains responsibly, also does well on long-term profit measures. Running a sustainable business is all about the long-term horizon.
No doubt, investing with societal purpose can be difficult. Companies still need to deliver profits for investors, and measures of societal impact can be challenging to track. The basic definition of ESG Investing is not even universally agreed upon.
Investors will ultimately have to decide if ESG factors merit consideration in their portfolios or if corporate ethics will play a part in their investing decisions. That is their prerogative. And those who serve as advisors must be led by their clients’ wishes. Yes, we can and indeed must consider the panoply of risks in a portfolio – and we must raise those risks with our clients – but our clients must make the final call on their desired outcomes.
Mark Carney, the former governor of the Bank of England, enunciates the view, which I share, that there is a responsibility for leaders to truly embrace a more mission-driven approach. Carney suggested companies should embrace the values of solidarity, fairness, responsibility, resilience, sustainability, dynamism, and humility.
Companies and investment firms today must accept this new equation – risk, return, impact – as their new reality and manage it accordingly. The deceptively simple question, “What is finance for?” goes to the heart of the matter.
Investment managers have a duty to act as stewards of investors’ assets, ideally in a market environment that nurtures a culture of ethical behaviour and promotes market integrity. As clients start to bring their personal values to their investment decisions, investment managers will do well to see their role as more than stewards of assets, but of their clients’ deeper desires to make a positive impact on a changing world. How corporations articulate and deliver on their higher purpose indeed matters.
Friedman might turn in his grave, but for many investors, the world is well and truly moving on.