In 1970 Milton Friedman, the American economist and Nobel Prize-winning statistician, wrote an essay for The New York Times Magazine in which he said: “The social responsibility of business is to increase its profits.” Full stop. This free-market, capitalistic approach to business – and investing – has certainly dominated world markets in the intervening years. That is, until recently.
In 2019 The Business Roundtable, an organisation representing CEOs from leading American companies, refined its view of why companies exist. To create value for all stakeholders, the body said, and to “play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services”.
This view shifts the accepted mindset from pure profit to longer-term thinking. It requires a forward-looking approach that asks companies to play a positive role in society and to be accountable to communities, employees and investors. The approach goes by a few names – be it ESG, impact investing or socially responsible investing – but they all fundamentally speak the same language and focus on putting money into ventures, funds or stocks that are profitable while reflecting the social and ethical values of the investor.
The burgeoning ESG trend
The Financial Times newspaper in London, one of the bastions of global business, has delved into the growing push to incorporate environmental, social and governance – otherwise known as ESG – into investment decision making. Quoting research conducted by professional services firm PwC, the newspaper noted in 2020 that three-quarters of 300 investors polled (including pension funds and insurance companies) intended to stop buying conventional funds in favour of ESG products by 2022. PwC believes ESG funds will jump from a 15% share of the European fund sector to 57% by 2025.
Already, in the United States, investments under management with an ESG focus rose 42% between 2018 and 2020, up from US$12 trillion to US$17.1 trillion. This is according to the Forum for Sustainable and Responsible Investment’s 2020 trends report. That’s a notable jump and one that highlights the growing importance of socially responsible investing choices to many investors around the world. The question is: Can you make money, preserve wealth and be sustainable at the same time?
Is a win-win possible?
According to the Fidelity Putting Sustainability to the Test report in the United Kingdom, over the course of 2020 companies with better ESG ratings outperformed those with weaker ratings. This was notable as it showed an ability to deliver returns even in the midst of a market collapse and recovery cycle.
Across Africa, investors are also being drawn to an investment approach which values a positive impact on society as much as it does tidy dividends. While measuring the impact of their investments has, traditionally, been associated with giving to or supporting impact-driven non-profits, such as Carrick Wealth’s own Carrick Impact platform, now this thinking is catching up with big business and bringing with it a stronger focus on partnerships, the planet, people and, of course, profit.
“When it comes to investing, it is our intention at Carrick Wealth to help realise a profitable return,” stresses Anthony Palmer, Group Commercial Director. “With the return to the table of the United States in the Paris Accord on Climate Change, the global support for ESG is a strong trend to watch.”
The events of 2020 and the global response to Covid-19, have certainly highlighted the outperformance of ESG investment themes, including around issues pertaining to climate change – such as clean energy, water and waste management – as well as health and security. This represents one of the major investment themes identified by Carrick Wealth in 2021.
“The current shareholder model of capitalism is likely to be replaced by a more aligned ‘stakeholder’ model,” predicts Palmer. In other words, if ESG is not currently on your radar as an investor, perhaps it should be.