Warren Buffett’s ESG scepticism: The reaction

At the end of last year Warren Buffett, one of the world’s foremost investors, said it was wrong for companies to impose their views of “doing good” on society. We asked three experts to give their views on the Sage of Omaha.

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Abbie Llewellyn-Waters, manager, Jupiter Global Sustainable Equities Fund

There has long been an unwavering view that the purpose of a corporation was to serve the interest of one primary stakeholder: the shareholders.

For the first time in World Economic Forum history, the 2020 top five global economic risks are all related to the environment. We can no longer separate the needs of key stakeholders. Indeed, three have become co-dependent: shareholders, the environment and society. The balance of these stakeholders will determine economic stability and ultimately corporate efficacy.

As the ever-warming planet struggles to cope with burgeoning populations and depletion of natural resource, the investment industry is beginning to re-evaluate how corporations can respond or indeed survive this new trajectory. This isn’t about moral arbitration as Warren Buffett suggests; this is risk management coupled with new opportunity.

After half a century of singular capitalism, there is growing collective realisation that regeneration is imperative for any form of capitalism to continue to prosper. Corporate success depends on stable foundations built on simple assumptions such as clean air, availability of water, basic needs which underpin social stability and ultimately economic productivity. Companies who do not manage their footprint with regards to these issues, are arguably not considering the long-term needs of their shareholders.

This isn’t about moral arbitration as Warren Buffett suggests; this is risk management coupled with new opportunity.

Abbie Llewellyn-Waters

Just take carbon as an example of an inevitable economic cost. If you want to manage an issue, then you have to start with measuring it. Governments are beginning to respond and we have seen regulation accelerate, with COP 26 in Glasgow in November acting as a potential catalyst for meaningful developments in multilateral policy agreements.

There is greater transparency enabled through the introduction of climate reporting such as the TCFD (Taskforce for Climate Related Financial Disclosure) which lays the groundwork to build carbon pricing mechanisms. Companies who have a higher carbon output than their peers are likely to have higher costs which will lead to a competitive disadvantage. Decarbonisation is inevitable and corporations who deliver on this will ultimately support all stakeholders, including the shareholder.

Investing in employee benefits, training, treating suppliers fairly and ethically, protecting the environment: These types of strategic considerations have fast become business critical, underpinning the fundamental resilience of shareholder return.

Neil Sellstrom, client services manager, Pirc

Warren Buffett’s views are always worth paying attention to, and what he has to say about responsible capitalism rings true, though we might draw different conclusions from it.

For example, it is certainly the case that companies are undertaking initiatives that contribute to both profitability and sustainability, but focus rather more on the latter aspect of their decision. We could say the same about many of the ESG investment products now available. Buffett is more straightforward about his interest in wind turbines. He is in it to make money, first and foremost.

It is also true that it can be hard for investors to identify the “good” companies, in terms of ESG performance. Aside from the fundamental question of how to accurately measure this type of performance, there are numerous examples of companies that might exhibit good practice in one area, but behave poorly in another.

We don’t think companies are trying to impose their views on society. Rather companies are seeking to respond to societal expectations of them.

Neil Sellstrom

We have seen a number of companies that make a significant environmental contribution but have some questionable workforce practices.

Finally, Buffett is right to say that some of the most difficult social and environmental questions that affect companies will ultimately have to be decided by government rather than by business.

In particular a decisive shift to a low-carbon economy requires government intervention in numerous areas. And for government to intervene, in turn requires democratic legitimacy, the public has to give its assent.

This last point highlights where we take a slightly different view. We don’t think companies are trying to impose their views on society. Rather companies are seeking to respond to societal expectations of them. Trust in business is low, and polling suggests that the public would like to see companies run in a way that takes account of social and environmental factors in addition to profit.

It is the public, the same people who both buy the products which companies produce and whose savings provide capital for their investment, that believe that many corporations have not behaved responsibly.

So companies’ social and environmental initiatives, as well as seeking to generate profit, are also a response to demand from both consumers and shareholders. That sounds like the sort of capitalism we all want to see.

Dr. Michael Viehs, head of ESG integration, international, at Federated Hermes

Taking environmental, social, and governance (ESG) considerations into account can help companies achieve better financial outcomes. That is, in a nutshell, the reason why investors should not ignore relevant, idiosyncratic ESG information.

By taking ESG considerations into account when making investment decisions, we investors can make better decisions for our clients—and other stakeholders at the same time.

This is so because ESG information on companies can have a direct impact on—both over the short and, more importantly, long term—a company’s risk profile and profitability.

Let’s ask ourselves some practical questions. Why should consumer goods companies which look after and take good care of their employees and customers not be successful at the same time? Why should industrial companies which have appropriate environmental management systems and greenhouse gas emission reduction plans in place not be more successful and more resilient?

ESG is not just a trend. It is here to stay. Investors are increasingly asking questions about how their savings are being invested, and whether the companies they are investing in have a “social licence to operate”.

Michael Viehs

Companies that have invested in robust ESG policies tend to be more resilient to the impact of factors like tightening climate change regulation or supply chain risk. This results in a lower risk profile and greater growth opportunities over the long term, generating holistic returns for beneficiaries.

There is also a growing body of robust academic research suggesting that investors who take ESG into account when making investment decisions are not worse off. Rather the contrary is true: They tend to be, on average, better off. Much like financial risk, ESG considerations are simply another set of risk factors by which to assess a company.

ESG is not just a trend. It is here to stay. Investors are increasingly asking questions about how their savings are being invested, and whether the companies they are investing in have a “social licence to operate”.

The purpose of investment is to create wealth sustainably over the long term and through active stewardship and engagement, we can help companies achieve this, resulting in positive financial outcomes for investors and society as a whole.