The global financial crisis crushed confidence in the capitalist system and sparked a deep distrust of the financial world that lasts to this day, manifesting itself in political populism and demands from the recent Extinction Rebellion protests to ‘fix the system’.
In the years since the financial crisis, markets have been on one of the longest winning streaks in history, but wages are stagnating, productivity is slumping and living standards have dropped for large swathes of people in Western democracies. Capitalism today is delivering returns for shareholders, but not in a sustainable way if the other stakeholders — employees, customers and the wider world — aren’t sharing in the benefits or, worse, if they’re paying a cost for delivering those returns.
Adopting too heavy a focus on maximising profits from year-to-year is, we believe, short sighted and disregards the broader socioeconomic ecosystem. With its myopic focus on maximising returns for shareholders from quarter to quarter, capitalism in its current form jeopardises the opportunity for profit long into the future.
For advised clients, the impact of the current system faltering would be very real. Their lifetime of savings, pension investments and precious legacies for future generations are exposed to a swathe of risks from this singular focus. Clients are also growing more aware of these risks with interest and demand for investing in companies that are engaging with environmental, social or governance (ESG) issues, and focussed on sustainability.
We believe that executives, investors and their advisers need to consider a new approach, one that recognises that long term profits depend on a diverse, thriving ecosystem.
This does not mean abandoning capitalism. Despite its current faults, it is a system that has powered many advances in society, from reducing poverty and disease to expanding electrification and internet access. The approach is not just a ‘nice to have’ or something for the altruistically motivated or ethical investment specialists. If you believe the world works best if capital owners act in their own self interest, it is still for you – if you have a long-term investment horizon.
We explore this approach in Rathbones’ latest investment report, Responsible capitalism: Benefiting society and investment returns. The new approach acknowledges that a healthy, well paid and socially mobile work force matters for market size and productivity; that climate-change related events and the environmental and financial stability that markets depend on are connected; and it understands the benefits of prioritising research and investment over juicing quarterly profits.
Investing in businesses that have a solid purpose and focus on the long-term can not only offer vast benefits to society, but also great opportunity for shareholder returns. Indeed the rewards may come quicker than you think. There is now an almost overwhelming body of evidence to suggest that businesses with the most sustainable practices are better performing than their peers.
When it comes to passing wealth down the generations, clients need the assurance of a long-term outlook. A flourishing socioeconomic ecosystem that creates jobs must be preserved, and investment growth maintained. By supporting a more responsible form of capitalism, it is possible to prioritise both.
Fighting for a better, more responsible form of capitalism is not just for specialist ESG managers to be concerned about – it is important for investors and businesses at all levels. As new generations of investors mature, demonstrating how they and their investments can contribute positively to society will become all the more important for them, and for those advising them. Businesses, investors and their advisers have a stake in this ecosystem.
