The Big Think
Beyond profit
The growing importance of social considerations in investment decision-making
By David Crosoer , Chief Investments Officer at PPS Investments
The debate about whether asset managers and corporates , more generally , should explicitly take “ social issues ” into account in terms of their investment decision-making is not without controversy .
I strongly believe in tackling our society ’ s challenges . Like many South Africans , I am deeply sceptical about the state ’ s current ability to do much about these challenges .
Despite my reservations about the incentive structures that currently exist within the assetmanagement industry and private sector , which pose challenges in effectively addressing pressing social issues , I am enthusiastic about the transformative potential of the corporate sector . Within this context , I believe the corporate sector can adopt a purpose-driven approach and assume an empowering role in tackling these challenges .
Many of the pressing issues facing our society today are linked to the state ’ s inability to regulate the private sector adequately to prevent it from over-supplying goods with negative externalities ( e . g ., tobacco , alcohol or carbon emissions ) or the state ’ s inability to produce public goods with positive externalities ( e . g ., education , electricity , safety ).
Many of these public goods are social , where the benefit of providing it is shared more broadly than the individual who directly benefits from it or would be willing to pay for it . Here the incentive for the private sector is to structurally undersupply the public good , no matter the legislative pressure . Similarly , unless government imposes societal costs on private companies so supply negative externality goods , the private sector will oversupply them .
At its most basic level , then , the private sector responds to the price mechanism . Often , the price mechanism fails to adequately price the true cost / benefit of the good provided , and consequently , the private sector will either over- or under-supply the good . Notably , the private company that pollutes the environment because it does not bear the full social cost , or the one that only provides education to the marginal benefit of the individual user , is not a bad company or a company that has not fully integrated environmental , social and governance ( ESG ) into its decision-making , but rather a company that is appropriately responding to the price signal . Likewise , asset managers are incentivised to respond to the price mechanism . No matter how much we wish it , and no matter
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