It’s time to make a case for ‘woke capitalism’

If the sole social responsibility of a business is to increase profits for its shareholders, then that business had best pay attention to ESG

Woke capitalism? Bring it on! In fact, we need more of it.

But perhaps we should first define “woke”. This has come to mean “anything we don’t like”. It now encompasses everything from the censorship of books (I’m not a fan), to applying trigger warnings to them and to movies (ditto), to doctors treating their patients like adults, which I’m fully in support of. No, I’m not kidding with that one. A report by a pair of doctors advocating for better communication with patients led them to be branded “woke medics”.

The aspect of “wokeness” that I’m prepared to defend is defined by three letters: ESG – that is environment, social and governance.

ESG – or woke – investing can involve screening companies for their behaviour on these three issues, as certain funds do. But it also encompasses big money managers using their voting power to nudge companies into behaving better. That is, apparently, is enough to put them on the right thinking naughty step. Or worse.

Writing for Unherd, John Masko branded ESG as nothing less than a “threat both to shareholder capitalism and American democracy”.

Crikey! That’s bad!

Now, I want to stress that I’m not trying to demonise Masko, much less cancel him. I’m sure he’s a perfectly nice chap. His piece was simply the first I found giving voice to the fierce backlash that has emerged against ESG; so fierce that Larry Fink, the boss of BlackRock, the world’s biggest investment house, was moved to take shots at the “ugly” and “personal” attacks against it (and him) at the World Economic Forum.

It might just be me, but Davos, a posh ski resort where the world government of money gathers to pretend to care about stuff, was probably not the best place for him to do that.

The best of it is that BlackRock, the particular subject of Masko’s ire, isn’t even very “woke” as regards ESG. It is by American standards, sure. But it’s the UK and Europe that have led the charge.

Legal & General Investment Management (LGIM), the biggest money manager in Britain, is one of ESG’s most prominent exponents. Does this mean the organisation, which manages a number of popular stock index tracker funds, is doing us all down? Sacrificing our returns so it’s well-paid fund managers can pat themselves on the back and feel good about themselves?

Well, no. Let’s start with the G, governance, which is probably the easiest to justify paying attention to, at least so far as those subscribing to Nobel Prize winning economist Milton Freidman’s oft quoted doctrine that the social responsibility of business is solely to increase profits for shareholders.

Well-governed companies, with strong and effective boards capable of properly scrutinising corporate executives, do that best. They deliver for their customers and their shareholders, and they avoid getting into messy scandals. Look back at the corporate failures of the last 20 years. You’ll find that governance failures are at the core of a disproportionate number of them.

Royal Bank of Scotland, which British taxpayers cost billions, is a classic example. Sure, it obeyed the forms. But its board was weak. Its non-executive directors failed to properly oversee the bank’s bosses. They swore fealty to an overmighty CEO and the thing would have hit the rocks were it not for a multibillion pound taxpayer bailout.

Good governance matters. Here endeth the lesson.

The “Social” part of ESG is that perhaps what most rouses the ire of its critics. But if you look at the regular series of reports on, say, diversity at the top of companies by McKinsey, there is a marked correlation between this and improved corporate performance which has only increased over time.

“The business case for diversity, equity, and inclusion (DE&I) is stronger than ever,” said the famously hard-nosed management consultancy, which is about as far from woolly wokery as its possible to get. It’s all about the returns, baby.

As for the environmental part of it… sigh, do we really need to go there? Do we really need reiterate the devastating impact climate change is going to have on the world’s economy and, thus, investment returns? The ruinous costs of (increasingly common) extreme weather events? The negative effect on employees’ health? The dangerous consequences of the consequent loss of biodiversity?

Investing in a low carbon future will protect corporate profits and shareholders’ returns. And jobs. Failing to do so will destroy them. And the planet we live on.

If the sole social responsibility of a business is to increase profits for its shareholders, then that business had best pay attention to ESG, because its shareholders will otherwise suffer.

It is curious to me that capitalism’s noisiest defenders struggle with that. Capitalisms biggest fans seem determined to trash the best way to generate capital. It’s a funny old world.

The rest of us should attention to the likes of LGIM, whose people I have talked to at length. The case they make for ESG, which they expound upon in a report published earlier this week, is quite compelling. And they’ll be putting their votes to work with that in mind over the next few months. To the benefit, needless to say, of those who invest with them.