Taming capitalism’s nature

Capitalism though has proved a nearly impenetrable jungle. Yet history tells us (and I won’t push this metaphor any further) rather than clear the jungle and replace it with exotic crops, better to recognise and harness the value of the biodiversity.

“Most credible economists and policy makers recognise we need a better way to manage capitalism and the latest version of this is stakeholder capitalism.”

Capitalism works. It has reduced poverty and improved the welfare of societies around the world, vastly more than any alternatives currently tried, notably central planning. McKinsey suggests comparing West Germany and East Germany; South Korea and North Korea; Costa Rica and Cuba.

The issue with capitalism is not the theory – free markets allow for the most efficient distribution of society’s resources to grow the total size of the economy. The issue is human nature and inefficiencies in information distribution.

That’s why we see outcomes like growing wealth disparity – those with money and power can game the system absent due regulation and enforcement – and insoluble problems like the tragedy of the commons – where everyone benefits from a resource but no one pays for it, leading to its terminal exploitation.

Meanwhile, as McKinsey notes, “there is a term for an enlightened company with the most perfect intentions that does not make money: defunct”.

Not new challenges

Markets require clear pricing and the absence of “information asymmetries” but in the real world these conditions don’t exist. Sometimes because measurement is complex – the negative externalities of carbon dependent industries, for example, or the benefits to everyone from health and education systems. Theoretically, markets should be able to provide aged care but they haven’t because price signals have rewarded owners for better marketing and lower costs, not better aged care.

These are not new challenges, they have always existed in human societies in one way or another although they have become greater and more corrosive since the industrial revolution.

Most credible economists and policy makers recognise we need a better way to manage capitalism and the latest version of this is stakeholder capitalism – a capitalism which rewards all participants in an economy, all of us, not just the owners of capital.

Crucially though, this is not through central planning or even a much heavier, more visible hand of government, but through the recognition all stakeholders – including shareholders - do better if an economy is run sustainably, with equal opportunity and with as few economic rents as possible.

In an interview between ANZ’s chief executive Shayne Elliott and Nathan Parkin, as part of ANZ’s ESG investor day this week, Parkin, a very prominent and early adopter of stakeholder capitalism principles, explained the rationale – not least the significant costs, in both the short and long term, associated with businesses which ignore their broader impact on society.

Parkin is the Investment Director and Co-Founder of Ethical Partners and has 25 years’ experience in Australian financial markets including as Deputy Head of Equities at Perpetual Investments.

He argued using ESG lenses across businesses was actually no different to analysing their financial statements and risk management.

“It's really the same thing,” he said. “When we started Equity Partners we deliberately made the decision to put ESG factors into our investment process. We think companies that are very conscious of being responsible in a social way, in the human rights way, in an environmental sense, usually have good governance to back that. So why wouldn't a more responsible and socially aware business have more success?”

This is essentially the thinking behind the emergence of not just specialist ESG funds but the far greater use of broader investment metrics by major institutions globally. This weight of money is telling but also amplifies the impact on company behaviour – in most cases well ahead of governments or regulation.

According to Bloomberg, global ESG assets are on track to exceed $US53 trillion by 2025, representing more than a third of the $US140.5 trillion in projected total assets under management, assuming 15 per cent growth, half the pace of the past five years.