It would be hard to overstate how much capitalism has transformed the world. In the last couple of decades alone it has given us longer life spans, generated a global online economy, spurred countless innovations, turned China into an economic powerhouse and connected billions of people via social media. Indeed, the fall of the Berlin Wall in 1989 was a potent symbol of the triumph of free markets over more repressive economic and social orders.
For all the prosperity that global capitalism has brought to so many people, though, the world remains beset with social and environmental challenges, from income inequality to water scarcity to climate change. Now individuals, societies and capitalists themselves are asking whether the system that won that epic battle over values and freedom in the 20th century can fully live up to its ideals in the 21st. Can private enterprise harness its awesome strength and innovative potential in ways calculated not just to increase sales, grow the bottom line and reward shareholders, but also to address some of the world’s great problems? Enter the age of responsible growth.
“Of course, we have to grow,” says Brian Moynihan, chief executive officer of Bank of America Corporation. “But we have to do it the right way: Our growth has to come from what we do for our customers; we succeed when they succeed. We have to take acceptable risk. And — core to responsible growth — we have to do it in a sustainable way. That gets to how we govern our activities, how we treat our employees, our support for the communities we serve.”
The Search for a Better Way
In the past, when private companies talked about helping the environment or easing poverty, “people’s immediate assumption was that you were doing charity,” says Christopher M. Hyzy, chief investment officer at Bank of America Global Wealth & Investment Management. Good deeds were gestures to be made after counting profits and rewarding shareholders. But that calculus is changing. There is now a growing consensus that capitalism can’t just say it’s better — it must actually be better.
Karin Kimbrough,Head of Investment Strategy, Merrill Lynch Wealth Management
What’s behind this awakening? One clear factor is the lingering effect of the 2008 financial crisis. Nearly a decade later, slow economic growth in much of the world has led to a conviction that traditional laissez-faire capitalism alone may not be the panacea many predicted back in 1989 — that perhaps a greater sense of underlying purpose could lift prosperity of companies and countries alike. “There’s a sense that capitalism may have been too narrowly defined as just allowing market forces to solve problems,” says Karin Kimbrough, head of Investment Strategy at Merrill Lynch Wealth Management. “People are starting to say, ‘No, it’s important for a firm’s identity to be holistically intertwined with how they see their role in the community.’”
An Emerging Vision
Evidence is building that concern for environmental, social and governance (ESG) practices isn’t just good for the world, but good for a company’s financial health — enhancing returns and lowering its stock volatility. “In fact, we’ve found that ESG factors overall enhance rather than detract from returns, especially for larger companies,” says Savita Subramanian, head of U.S. Equity and Quantitative Strategy at BofA Merrill Lynch Global Research. “The idea that these concerns are just for tree-huggers is simply not true.”
In her recent report “ESG: good companies can make good stocks,” Subramanian reported that 80% of fund managers who incorporate such factors into their investment decisions cite better returns as the main reason.1 Among S&P Common Stock companies, those with high ESG ratings averaged 5% higher return on total equity than did poorly rated companies.2
ESG performance can also help forecast future risks. Subramanian adds, “An investor who purchased only stocks with above-average ESG ratings would have avoided 90% of the bankruptcies we’ve seen since 2008.”3
This message is resonating at the top levels of corporate leadership. In 2015, global CEOs surveyed by the Conference Board identified sustainability as one of the top five challenges they face, the first time they’ve done so since the survey started in 1999.4 In part, such concerns reflect intense and growing interest among investors about investing in “responsible companies.” Once a sideline niche, widely regarded as offering subpar returns, investments in companies that actively pursue responsible, sustainable growth now account for some $8.72 trillion, or one in every five dollars of assets under management in the United States.5
“Great companies are getting much more strategically aligned between their ESG work and their core business,” says Jane Nelson, head of the Corporate Social Responsibility Initiative at Harvard’s Kennedy School of Government. “You’ve now got senior executives talking about this in a strategic way, whether it’s the CEO at the top of the company or business unit presidents and managers at the country level and the operational level.”
Expanding the Invisible Hand
Capitalism, at its best, has always been about enlightened self-interest: hard work, ingenuity, freedom, innovation, and taking calculated risks in exchange for the potential rewards of profit, prosperity and a better life. Adam Smith, in his treatise The Wealth of Nations, published in 1776, famously described a butcher, a brewer and a baker using quality materials and all of their skills to produce good products at a fair price. They were motivated not by altruism or regard for customers they didn’t even know, but by personal profit — the “invisible hand” of self-interest.
But with today’s increasing emphasis on responsible growth, Adam Smith’s baker can’t think only about making the best bread — though that’s still paramount. There’s also the smoke from his ovens to be considered — what impact is that having on the air quality of his neighbors? What are the working conditions for the laborers who grow his wheat or grind his flour? And what can he do as a business owner to improve the overall quality of life in his town?
This new mission for private business should not be confused with anti-capitalism or a call for the end of global free markets. Rather, the idea behind responsible growth is that private capital and innovative companies have special strengths and untapped potential to change the world — for the better.
“People very much believe in the power of capitalism to make a difference. As a result, they’re asking more from capitalism, not less.” —Jackie VanderBrug, Managing Director and Investment Strategist, U.S. Trust, Bank of America Private Wealth Management
“People, particularly younger generations, very much believe in the power of capitalism to make a difference,” says Jackie VanderBrug, managing director and investment strategist at U.S. Trust, Bank of America Private Wealth Management. “As a result, they’re asking more from capitalism, not less.” Indeed, 68% of baby boomers and 83% of millennials say private businesses are better able than governments to solve our toughest environmental and social problems, according to the 2016 U.S. Trust Insights on Wealth and Worth survey.
If anything, Hyzy sees a dissolving of old barriers in which “companies thought only about the needs of the private sector and government only about the needs of the public sector. Today, we’re looking at where those needs intersect, where they are the same, and, when it comes to addressing those needs, where can we find the greatest efficiencies. That’s the new capitalism.”
Christopher M. Hyzy, chief investment officer at Bank of America Global Wealth & Investment Management, talks to moderator Ron Insana about how a focus on ESG has influenced companies’ behavior — and their financial results.
Toward Greater Connectivity
Journalist James Fallows, a longtime writer for The Atlantic, says a recent trip to dozens of struggling small cities and towns across the American heartland convinced him that people are longing for what he calls “connectivity.” “I’ve seen it in every corner of the country,” Fallows says, “an understanding by people in business, finance, schools, local philanthropists, young people moving to town and families who may be struggling, that there is some shared interest in what their community is going to be like 20 years from now.”
Marc Morial, president of the National Urban League, sees the same phenomenon taking place in large cities, with the same crucial involvement by businesses. “The private sector has such an important role to play in building and rebuilding communities,” Morial says. “It’s more than writing a check — it’s a relationship.”
In a global economy, the desire for connections and shared solutions isn’t limited to or contained within individual countries or regions. Responsible growth compels companies that might traditionally have seen foreign nations primarily as sources of natural resources or cheap labor to consider whether their own practices are, on the one hand, exploiting local populations and degrading the environment or, on the other, creating opportunities and helping communities lead better lives. It may also mean taking a hand in solving larger global problems — whether it’s an international agriculture company finding ways for farmers in arid regions to grow more crops with less water, or a financial firm issuing green bonds to help spur the growth of small businesses in an impoverished nation while at the same time generating returns for investors.
New Voices, and a Clear Message
Another force behind responsible growth is the rising financial power of women — who control an increasing percentage of the nation’s wealth — and millennials now between the ages of 19 and 35, who already outnumber boomers as the largest generation in U.S. history. With that economic reality might come new perspectives on the relationship between capital and society. While 58% of high-net-worth individuals in the U.S. Trust Wealth and Worth survey say that companies’ social or environmental impact is important in their investment decisions, that number rises to 73% among women, and 93% for millennials. “They’re at the point where they’re saying, ‘Why are you asking me this question? Of course it’s important to me,’” says VanderBrug.
Companies Are Responding
Companies seeking to remain relevant, and to attract not just investment dollars but the best and brightest workers, are realizing that they must offer a sense of purpose above and beyond salary and job security — a sense that they’re part of a greater mission.
In the end, that symbiotic relationship represents the best of enlightened self-interest. “You don’t just want to hire talented people,” says Bank of America’s Moynihan. “You want them to be able to say: ‘I can do everything I dreamed of doing at this company.’” The benefits of such an approach redound to employers when idealistic employees enrich the company’s vision for the future. Says Moynihan, “We’re looking to them for the ideas and vitality to help us understand the world and our place in the world. And when you’re pursuing responsible growth, that understanding is critical.”
3 Questions to Ask Your Advisor
- What investments could I consider, such as mutual funds and green bonds, that focus on responsible growth?
- How can I determine which S&P 500 companies have high ESG ratings?
- How can I incorporate my personal values and beliefs into my investment strategy?
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