ESG | Opinion
The cult of the social dividend Mark Dunne fires a warning to investors looking to make a difference.
Corporate America is changing. In August, creating shareholder value was relegated below a focus on social responsibility as a central purpose, according to The Business Roundtable, an influential forum of the country’s largest businesses.
The bosses of Amazon, American Airlines, Ford, Apple and JP Morgan were among 180 business leaders that announced they were ditching the shareholder-first ideology in favour of benefiting society. It is good to hear that some of the world’s largest brands realise that they have a responsibility to improve our lives and pro- tect the world that we live in. Adopting this new focus might be in recog- nition of changing public attitudes. It could be due to various research reports pointing to greater value creation for those integrating ESG into their corporate cul- ture, or it could be just a cynical piece of public relations.
Whatever their motivation, it is important to point out that they have made it clear that making money is still high on their agenda,
just as it should be for pension scheme trustees who factor making a positive impact on society into their investment decisions.
I personally would like the guardians of huge pots of private capital to invest in improving our lives as well as the planet. Making a profit in the process is, of course, a must. After all, pension schemes are not charities. Housing is an obvious target in the UK with an increase in residential stock badly needed to meet rising demand from a growing population. Then there is repair- ing and upgrading the country’s infrastructure.
Pharmaceuticals and medical devices are other areas where private capital could ben- efit society by inventing medicines and technologies that treat the illnesses that are destroying peoples’ quality of life. Yet medical research companies are risky investments, inherently prone to ESG con- troversies and typically do not pay divi- dends, so it is understandable that risk-ad-
verse pension schemes may not have the stomach for the sector. This could be espe- cially true at a time when many schemes are reducing their exposure to risk assets as they target an endgame or are cash-flow negative and need regular returns. Pension schemes are investing savers capi- tal to fund their twilight years by paying their pension in full and on time. If the cupboard is bare, pensioners are unlikely to take comfort from the thought that their hard-earned savings have helped to increase renewable energy capacity in the national grid or improve working conditions in fac- tories in the developing world. Principles are great, and it is good to see that some of the leaders of the world’s most recognisable brands claim to have them, but you can’t eat them when you are hungry.
The point is that considering the ESG fac- tors of an investment when making deci- sions is a good idea. It could reduce risk in portfolios, keep them clear of volatility and avoid permanent loss of capital, but inves- tors need to be exposed to companies that have the potential to increase profits and generate enough cash to pay dividends and bond coupons. It is, after all, about making enough money to meet your obligations.
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24 | portfolio institutional | September 2019 | issue 86
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