In a nutshell, Friedman argued that companies' sole purpose is to generate money for shareholders. He asserted that businesses with a “social conscience”2 are less competitive and put shareholders’ profits at risk.
Friedman’s argument had a huge influence on the actions of companies and investors in the 1970s right through to the 1990s. However, the last 20 or so years have seen his ideas soundly, and quite rightly, rejected.
Today, it is taken for granted that consumers, voters and the media care about the environment and believe that businesses have a role to play in making it better – or at least not making it worse. People are genuinely concerned about social issues such as how labourers are treated, even in distant continents which they will never visit. There is a widespread interest in matters of good governance, such as encouraging gender equality.
The conversation has changed substantially since the last decades of the 20th Century – and companies and investors have reacted accordingly. It is impossible to pinpoint exactly when the tide began to turn. However, in 1999 the United Nations announced the creation of the UN Global Compact, a set of principles to encourage businesses to adopt socially and environmentally responsible policies3.
This sent a clear signal to businesses that they shouldn’t wash their hands of the world’s problems. It was an expression of the idea that big companies have a lot of power and with the right incentives, pressure and persuasion can be a force for good.
Since then things have moved on significantly. In 2000, the UN introduced the Millennium Development Goals. The Principles of Responsible Investing (PRI) followed in 2006, setting a global standard for investing using environmental, social and governance (ESG) factors.
Principles in action
Newton was one of the earliest signatories of the UN PRI, way back in 2007. As part of the pact, each year we are assessed on our responsible practices. In the latest annual assessment report we received a maximum A+ rating4.
However, investing responsibly has been central to our approach for much longer: in fact, right back to when the firm was created in 1978.
But why do we care? Because looking beyond the financial numbers gives us a window on the culture and management of a company. It is a way of distinguishing between businesses that are really well run and those that are too concerned about short-term profits.
Investing in companies that flout good practices is also a huge risk. If a company is willing to pour harmful pollutants into local drinking water it risks falling foul of the law or being fined by regulators. If a company employs slave labour in an Asian factory, one person with a smartphone can destroy its reputation by posting a video that is viewed by millions of consumers around the world.
What’s more, there is an increasing weight of academic evidence that shows that investing responsibly doesn’t appear to harm investment returns, but could potentially improve them.
Back in the 1970s and ‘80s, when Friedman held sway, such ideas were deeply unfashionable. It has been gratifying to see so many of the doubters come around to our view that responsible investing is the future.
The value of investments can fall. Investors may not get back the amount invested.
- 1 New York Times: The Social Responsibility Of Business Is To Increase its Profits, 13 Sep 1970.
- 2 New York Times: The Social Responsibility Of Business Is To Increase its Profits, 13 Sep 1970.
- 3 UN.org: SECRETARY-GENERAL PROPOSES GLOBAL COMPACT ON HUMAN RIGHTS, LABOUR, ENVIRONMENT, IN ADDRESS TO WORLD ECONOMIC FORUM IN DAVOS, 1 Feb 1999.
- 4 Newton Investment Management: 2018 PRI annual assessment report