More good than harm

When a 16-year-old Gre­ta Thun­berg stood before the Unit­ed Nations gen­er­al assem­bly in Sep­tem­ber 2019 and told them “all you can talk about is mon­ey and fairy tales of eter­nal eco­nom­ic growth”, she skew­ered the heart of the cur­rent finan­cial sys­tem.

Too often finance has been iso­lat­ed from sus­tain­abil­i­ty and social and envi­ron­men­tal con­cerns, plac­ing the needs of the present above those of future gen­er­a­tions. The focus has sole­ly been on the mon­ey, with lit­tle con­sid­er­a­tion of the prob­lems such a sin­gle-mind­ed approach might cause.

But mind­sets are shift­ing. Cli­mate change has exposed that some busi­ness­es, for exam­ple those that depend on burn­ing fos­sil fuels to make their prof­its, can do more harm than good. Finance can no longer ignore “exter­nal­i­ties”, how­ev­er incon­ve­nient they may be to the busi­ness of mak­ing mon­ey.

Beyond gen­er­at­ing green­house-gas emis­sions, busi­ness­es are busy cre­at­ing prof­its that can cause harm in many oth­er ways too. Big com­pa­nies have scoured the plan­et to find cheap resources, cheap ener­gy and cheap labour to deliv­er cheap goods to us. Mea­sured in finan­cial terms the cost is low, but even if you haven’t watched Sir David Attenborough’s remark­able wildlife films, you will be increas­ing­ly aware of the many hid­den costs of busi­ness to nat­ur­al and social cap­i­tal.

Pop­u­la­tion growth and eco­nom­ic progress have cre­at­ed too many activ­i­ties that, while finan­cial­ly lucra­tive for their share­hold­ers, are envi­ron­men­tal­ly and social­ly destruc­tive. And the scale of the nat­ur­al cap­i­tal loss is stag­ger­ing: over the past 50 years, the human pop­u­la­tion has more than dou­bled, while the wild ani­mal pop­u­la­tion has declined by 70 per cent.

And the breadth of finan­cial gain has been remark­ably nar­row: in 2019, rough­ly two bil­lion peo­ple suf­fered from mod­er­ate or severe lev­els of food inse­cu­ri­ty. Such lev­els of envi­ron­men­tal strain and social inequal­i­ty are clear­ly unsus­tain­able.

Not all of the blame can be placed on busi­ness; all of us are guilty of focus­ing on our own activ­i­ties and not see­ing the big­ger pic­ture. But if we are to solve these prob­lems, many of us will need to recog­nise the sys­tem must change.

This is par­tic­u­lar­ly true of those in the rich­er coun­tries, with the most intense con­sump­tion, and the largest busi­ness­es organ­is­ing and fos­ter­ing that con­sump­tion. Those busi­ness­es and their investors must ques­tion whether the pat­terns of con­sump­tion that sup­port their cur­rent prof­its can con­tin­ue. By ignor­ing harm­ful envi­ron­men­tal and social impacts they may be tak­ing increas­ing­ly large finan­cial risks.

Part of see­ing the big­ger pic­ture is bet­ter mea­sure­ment as what gets mea­sured gets man­aged. At the moment, com­pa­ny accounts and invest­ment man­age­ment reports focus only on the mon­ey. But lat­er this year, new sus­tain­able finan­cial dis­clo­sure reg­u­la­tions come into force in the Euro­pean Union, with equiv­a­lent reg­u­la­tions expect­ed in the UK. Pro­posed new account­ing stan­dards and more respon­si­ble audit prac­tices are also on the cards.

These reg­u­la­tions will require investors and busi­ness­es to dis­close the adverse impacts their invest­ments have on the cli­mate and the envi­ron­ment, as well as oth­er sus­tain­abil­i­ty issues such as social and employ­ee mat­ters, human rights and anti-cor­rup­tion, or explain why they don’t con­sid­er them. That means finan­cial returns will be viewed in a con­text beyond pure­ly mon­e­tary val­ue as the hid­den envi­ron­men­tal and social harms become increas­ing­ly appar­ent.

To bet­ter see the big­ger pic­ture, it also helps to stand back and con­sid­er the pur­pose of what you’re doing. “The pur­pose of busi­ness is to solve the prob­lems of peo­ple and plan­et prof­itably, and not prof­it from caus­ing prob­lems” was the con­clu­sion reached by the British Acad­e­my in their 2019 The Future of the Cor­po­ra­tion pro­gramme.

An increas­ing num­ber of large com­pa­ny man­age­ment teams are pon­der­ing their pur­pose. They are lis­ten­ing to their employ­ees, who want to work for a respon­si­ble and sus­tain­able com­pa­ny, and their cus­tomers, who are increas­ing­ly favour­ing more eth­i­cal sup­pli­ers.

And they should be hear­ing more from their share­hold­ers too. As the own­ers, it is incum­bent on investors to stew­ard their com­pa­nies. In oth­er words, to set the pur­pose of the busi­ness by direct­ing the com­pa­ny man­age­ment. This hap­pens through vot­ing on mat­ters like the appoint­ment of direc­tors, incen­tive pack­ages and major strate­gic changes, as well as engag­ing with the man­age­ment team.

Too often this share­hold­er lead­er­ship oblig­a­tion is treat­ed pas­sive­ly and left for oth­ers to deal with. Respon­si­bil­i­ty may lie with the ulti­mate share own­er or their agent, a fund man­ag­er. Sad­ly, too often it is the lat­ter who has respon­si­bil­i­ty and the vot­ing records of many fund man­age­ment com­pa­nies do not look good.

At Sarasin we have placed stew­ard­ship at the heart of our invest­ment process for more than a decade. It is one of our core prin­ci­ples and it is how we believe we can secure tomor­row. Sim­ply put, wealth cre­ation at soci­ety’s expense is like­ly to be ephemer­al and sus­tain­able com­pa­nies are like­ly to make bet­ter invest­ments.

Invest­ing to achieve a finan­cial reward over the long term takes detailed work to look at the big pic­ture to iden­ti­fy win­ning and los­ing invest­ment themes that dri­ve progress over time, to analyse finan­cial val­ue in the con­text of envi­ron­men­tal and social cap­i­tal costs, and to lis­ten to our clients and reflect their views on sus­tain­abil­i­ty in their invest­ment strate­gies.

Encour­ag­ing cor­po­rate pur­pose and address­ing “prof­its made from caus­ing prob­lems” does not mean the cap­i­tal­ist, prof­it-max­imis­ing “ani­mal spir­its” will be weak­ened. Instead, as costs and prob­lems, which were pre­vi­ous­ly hid­den become bet­ter recog­nised, finan­cial mar­kets will begin to dis­count the long-term risk that the returns for many busi­ness­es could shrink, unless the exter­nal­i­ties are cost­ed and tack­led.

This is already appar­ent as the move to net-zero car­bon emis­sions gath­ers pace. The same will hap­pen as actions start to be tak­en to reverse oth­er big-pic­ture impacts, such as bio­di­ver­si­ty loss and inequal­i­ty. Future invest­ment suc­cess now depends on being ahead of the trend to inte­grate social and envi­ron­men­tal costs.

Gre­ta Thun­berg is right, a nar­row focus on mon­ey is unsus­tain­able. By solv­ing prob­lems rather than caus­ing them, and ensur­ing future gen­er­a­tions are not com­pro­mised by the pur­suit of prof­its today, invest­ing can be sus­tain­able. If we do that right, busi­ness, finance and invest­ment can do more good than harm.

For more infor­ma­tion please vis­it www.sarasinandpartners.com/think

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