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Friedman and the sustainable investing conundrum

Lex Hall  |  27 Nov 2020Text size  Decrease  Increase  |  
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How hard is it for a company to ensure it satisfies its shareholders and at the same time does the right thing by those it employs, those to whom it sells its wares, and those who live in the communities in which it operates?

This ethical conundrum is bringing the notion of sustainable investing into sharper focus and prompting thornier questions. Does adherence to environmental, governance and social benchmarks help or hurt investing performance? What ESG risks are truly material to cash flows? Is laying off workers in one country bad if you hire an equivalent number elsewhere? Should an oil company scale back production to protect the environment, even if that means laying off people and harming the local communities where those refineries are located?

Last week we told you about Morningstar’s new ratings on how companies stack up on the environmental, social and governance front. This week Morningstar researchers debated the merits of ESG, and in particular stakeholder capitalism versus shareholder capitalism. Stakeholder capitalism is the idea that companies should look to serve all stakeholders, not just shareholders but also customers, employees, suppliers, and local communities. Shareholder capitalism, on the other hand, posits that companies should focus exclusively on serving in the interest of shareholders, the owners of the stock of the company.

To get the juices flowing, the two sides were asked to agree or disagree with the view of shareholder capitalism advanced by economist and Nobel laureate Milton Friedman. "The discussions of the 'social responsibilities of business' are notable for their analytical looseness and lack of rigour,” Friedman wrote in 1970. “In a free‐enterprise, private‐property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom."

For Team Disagree, manager research analyst Alyssa Stankiewicz argues Friedman's remarks are no longer really relevant to what sustainable investing and stakeholder capitalism are about today. “ESG strategies target the relevant risks and opportunities that aren't discernible from earnings reports,” Stankiewicz says, citing research that shows "firms with good performance on material sustainability issues significantly outperform firms with poor performance on these issues, suggesting that investments in sustainability issues are shareholder-value enhancing."

But isn’t such a view in fact an endorsement of Friedman’s profit motive? So argues Team Agree’s Preston Caldwell, head of Morningstar’s head of economic research. “I think we drastically undersell what the unabashed pursuit of profit or shareholder value can achieve,” Caldwell says. Cheaper and better products, innovation, and higher real wages are all consequences of the profit motive. “If Henry Ford had been worried about all of the horse-drawn carriage workers he was going to make unemployed thanks to his creation of an affordable automobile, maybe he would have never done it.”

a picture showing a quote from Milton Friedman

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You can watch the full debate here.

In Firstlinks this week, Graham Hand pores over the 650-page Retirement Income Review. The Review finds many people are forced to reduce consumption in their working years, and often end up with more in retirement than they need, Hand writes. He explores five ways the Review will guide future policies, setting up retirement planning for big changes.

Hand also speaks to Steve Bennett of Charter Hall who describes the income opportunities in funds with investments in long-term commercial leases to high quality tenants.

Elsewhere, we speak to Magellan’s Hamish Douglass and get his view on big tech, China, and the winners and losers in the post-covid world.

Astra and Oxford reported strong covid-19 vaccines this week. Astra’s vaccine looks potentially easier to transport with only mild temperature requirements as compared with the other vaccines, reports Morningstar associate director Damien Conover.

Morningstar director of passive strategies research Alex Bryan argues gold is a dull investment. It may offer some insurance against a market meltdown, but there is a cost to own it.

Video gaming has become a professional industry in recent years, and the covid-19 pandemic has created a new generation of gamers. That spells opportunity for investors, writes Morningstar’s Annalisa Esposito.

The growth trajectory of the buy now pay later sector remains strong despite a report by the financial regulator and the sector will continue to grow and take business away from credit cards, Morningstar analysts tell Nicki Bourlioufas.

Emma Rapaport sits down with BNPL analyst Shaun Ler to weigh the merits of Zip Co; Grant Slade examines why pallet maker Brambles has truckloads of emerging market growth potential; and guest contributor, Aberdeen Standard Investment’s Pruksa Iamthongthong singles out some Asian investment themes for next year.

And finally in Your Money Weekly, Peter Warnes argues that this time is really is different—and in more ways than one. “This time it’s different, no hint of a credit squeeze,” Warnes writes. “In fact, the massive injection of liquidity by the central banks and governments would normally drive inflation as too much money chases a limited amount of goods. This time the liquidity has driven risk asset prices, particularly equities, with no inflationary knock-on.”


Morningstar's Global Best Ideas list is out now. Morningstar Premium subscribers can view the list here.

See also Morningstar Guide to International Investing.

is senior editor for Morningstar Australia

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