I’m not the greatest admirer of outsourced service provider Serco or their CEO Rupert Soames, but he made a very good point in an article in the Times last week.
He commented on the growing focus on ESG (environmental, social, governance) issues and how fund managers who invest in firms are increasingly looking at those issues when they make investment decisions. He wasn’t arguing about that conceptually, but he suggested some might be going too far.
We probably all agree that we don’t want our pensions or savings invested in firms that have an appalling record on pollution or human rights, for example. But what about funds that won’t invest in firms that work in the defence industry, or even those that provide support to areas such as management of refugees, or work in the criminal justice system – as Serco themselves do, of course?
He is concerned that if the cost of capital for this growing range of firms increases, as it will if investment dries up from many funds, then such businesses will take themselves out of the stock market and become private. Many have done that already with the growth in private equity in recent years. As private firms, they face less scrutiny, need to make fewer public disclosures, and save hard cash in terms of the cost of being a publicly quoted firm. As he puts it:
“I do not know when the tipping point arises when a critical mass of companies say ‘enough is enough’ and absent themselves from the public markets”.
He makes a good point. And whilst I do believe that some firms should find investment drying up, I don’t think that net should be drawn too widely. I do not intuitively like the idea of firms making guns and warships – but equally I don’t want to see the UK as part of the Russian or Chinese Empire in my daughter’s lifetime. We have to defend ourselves, which means we need a defence industry.
Equally, someone has to run refugee processing centres and do many other tasks that we don’t like to think about too hard. And where do you draw the line? I detest the gambling industry; others will feel the same about alcohol, tobacco, sugar-laden foods, even the gaming sector.
This is where we have to be careful with the unintended consequences of the ESG movement, even though it is good to see investors are paying attention to these vital issues. For our Procurement with Purpose book, I interviewed an old friend - Russell Picot, who is now chair of a huge pension fund and sits on the board of others. This is what he said.
“As the chair of a large pension fund, I know that achieving good outcomes for our pensioners and future pensioners will rely on the market, and returns will obviously be better into the future if we have a functioning system. Firms that are healthy and think about the long term, who see the (United Nations) SDGs as both risks and opportunities, are those that are likely to prosper.”
We would all agree with that. But we don’t want a holier-than-though approach that actually drives businesses into private ownership, where the scrutiny that people like Picot bring largely disappears. We might also find investment returns falling for the average person if a whole range of profitable firms disappear from the general investment landscape, leaving the hedge fund managers and billionaire private investors to make even better returns. So investors, fund managers and the like need to bring a degree of common sense and proportion to this, otherwise there could be counter-productive unforeseen consequences.
In the second part of this discussion, I’ll look at another related concern - why we need to be careful when we apply certain more specific procurement with purpose approaches to the market.