Markets waking up to the truth – there are no “externalities”.
Capitalism must change to avert climate change, according to the vice-chair of the world’s largest asset manager, Blackrock.
Two weeks ago, Blackrock boss Larry Fink shook the corporate world with a letter demanding social responsibility in return for the support of his company, which manages around $6 trillion in assets.
On Wednesday, at the annual World Economic Forum in Davos, vice-chair Philipp Hildebrand expanded on that theme.
Fiduciary duty – asset managers’ legal responsibility to make clients the best return on their money – is often deployed as a reason not to consider how investments might impact the climate. But that concept was “evolving”, said Hildebrand.
He called on academics to look more deeply at the issue. The European Commission recently launched a public consultation seeking for contributions from the financial world.
“We will hopefully demonstrate that at a minimum there is not a negative trade-off and there may even be better performance,” said Hildebrand.
That would mean funds like Blackrock could become duty-bound to consider environmental risks such as climate change while making investments. It would create a dramatic shift, he said, but warned it would take time.
“We have to be realistic, we also have an enterprise to run, we have shareholders, this is a complicated story. Nobody is served by reducing this to very simple, fast things that we have to do immediately. We have to change capitalism. This is really what’s at stake here. And frankly we need a new contract between companies, investors and governments,” said Hildebrand.
Former US vice-president Al Gore, who was on the panel with the Blackrock executive, agreed that the field of research was still evolving. But said: “In 26 sectors of the economy, the vast majority of them, the companies that integrate ESG (environmental, social and governance) into their business plans perform better.”
He added: “For many years investors and asset managers have said ‘well I would like to invest with attention to these things, but my fiduciary duty to my clients keeps me from doing it’. The revolutionary change… is that now it may be becoming clear that if you do not integrate these factors into your investing, you’re violating your fiduciary responsibilities.”
Over the last decade, there has been significant growth in sustainable, responsible and impact investing—or SRI, which can also stand for socially responsible investing—a strategy in which companies that fail to meet certain socially responsible standards are avoided and those making progress in environmental friendliness, social responsibility and corporate governance (ESG) are sought out.
“The growth [in SRI] has been pretty remarkable,” said Mark Peters, principal and member of the investment of Federal Street Advisors, a firm with a substantial focus on SRI and mission-related investing. According to the Forum for Sustainable and Responsible Investment, SRI investing grew 929 percent—a 13.1 percent compounded annual growth rate—between 1995 and 2014.
“More recently, you’ve had very sharp uptick,” Peters said. From the beginning of 2012 to 2014, SRI assets in the U.S. grew 76 percent, to $6.57 trillion, up from $3.74 trillion. The number of stock and bond mutual funds that apply socially responsible mandates has also risen. In the U.S., there are now more than 100 sustainable mutual funds.
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Among the topics clients are particularly interested in are climate change and other environmental issues.
–Opinions are mixed about the impact of SRI strategies on performance. However, David Kathman, a mutual fund analyst with Morningstar, said that based on numerous academic studies, the general consensus is that “there will be good times when a social screening will hurt you and times when it will help you, but over time it doesn’t make a difference.”
“It’s neutral,” he said. “Basically, a free good.”
One report conducted by Deutsche Bank Climate Change Advisors that was based on more than 100 academic studies (click here to download the report) found SRI strategies to be correlated with superior risk-adjusted returns at a securities level. It also found that companies with high ratings for corporate social responsibility (CSR) and ESG have a lower cost of capital in terms of equity and that companies with high ratings for ESG factors tended to exhibit market-based and accounting-based outperformance.
In a candid assessment of what’s happening in the business world — and perhaps taking a veiled shot at Washington at the same time — Mr. Fink wrote that he is seeing “many governments failing to prepare for the future, on issues ranging from retirement and infrastructure to automation and worker retraining.” He added, “As a result, society increasingly is turning to the private sector and asking that companies respond to broader societal challenges.”
It is a refrain that we’re hearing more and more from various pockets of the business community, and in fact last year company leaders found themselves taking stands on issues like immigration policy, race relations, gay rights and more.
But for the world’s largest investor to say it aloud — and declare that he plans to hold companies accountable — is a bracing example of the evolution of corporate America. Mr. Fink says he is adding staff to help monitor how companies respond; only time will tell whether BlackRock truly uses his firm’s heft to influence new social initiatives.
Part of Mr. Fink’s argument rests on the changing mood of the country regarding social responsibility. He contends that if a company doesn’t engage with the community and have a sense of purpose “it will ultimately lose the license to operate from key stakeholders.”
Check it out: Capitalism IS the problem.
And yet, I spend big chunks of time on environmental blogs arguing with supposedly aware environmentalists about RE policy, and they all want corporations, the miracle of the free market, etc, to solve AGW.
Environmentalists actually argue against RE subsidies. Almost no one thinks government has an important role to play. The meme of a “carbon tax” itself relies on (supposed) free market principles.
This idea of “changing capitalism” – environmentalists themselves have not got the memo yet.
Right. The left-wing and environmentalists can be just as pro-growth as any Republican. They just want more of the growth to go to their agendas. Growth on a finite planet is ultimately fatal. As long as one can make decisions which profit yourself significantly and yet impose a vanishingly tiny degradation on the Earth – and nothing more exemplifies this than CO2 and Climate Change – then we’re headed pell-mell into catastrophe.
Capitalism is spectacularly efficient at accomplishing its goals Spectacular. It is like “The Terminator”. Kyle Reese – “It can’t be reasoned with. It doesn’t feel pain, or pity, or remorse. And it absolutely WILL NOT STOP….. until you (we!) are DEAD!” What is it’s priority over-ride Purpose? Not to kill Sarah Connor, but to accrue money to the capitalists and their corporations. It’ll buy politicians, lie to consumers, poison the environment, fake science, fund goon squads to intimidate its foes, buy media to silence the Truth, Greenwash their nefarious products. The list is endless. And it’ll do it all with a smirk of moral superiority….”Trust me!”. Just watch CNBC.
The fatal flaw is in the great carved-in-stone lie “A system in which each individual is free to pursue his own perceived best interests, best guarantees the entire society”. On a finite planet approaching its limits, it only guarantees the most ruthlessly efficient stripping of the Earth for private profit at public and global expense.
“Capitalism is spectacularly efficient at accomplishing its goals Spectacular.”.
As efficient or spectacular as China is at building and deploying RE? Nope.
Capitalism is what got us here to this dire juncture, and has been spectacularly bad at getting us out of it. Capitalism is what gave us climate denialism.
No, the problem is not capitalism, but it certainly is a very stupid and destructive manifestation of our psychopathology.
It’s time to look for a wiser way to gather and make what we need while leaving intact what we need to make it. But if we don’t change our psychological state whatever we replace it with will exhibit the same symptoms–destruction, ruthless exploitation and all the rest. It’s a poor carpenter who blames his or her failures on the tools, and capitalism is just a tool through which we manifest our psychopathy, addictions, objectification, and other symptoms. Corporations, and the economic system as a whole, are what we project those into to avoid owning them ourselves, and the corporations behave in the only way they can, given our unwillingness or inability to deal with those symptoms in a more forthright and conscious way.
“Failure to face the shadow” according to Jung, or “unwillingness to face the pain of self-examination” (M. Scott Peck) is the reason capitalism is one way we exhibit our problems, so until we’re willing to look honestly at ourselves and do what it takes to change, we’re going to cause the problems we’re causing now, whatever the economic system. We can change some of the worst aspects–switch to renewables and get more efficient, etc.–and put off the day of reckoning a little, but something will always drive us to destroy until we fix ourselves.