A few weeks ago, I was listening to a radio show about Milton Friedman who advocated for a concept called “Shareholder Theory” back in the 1970’s. In short, his thesis was that a company’s main responsibility is to its shareholders, no one and nothing else. This theory has driven policy and corporate thinking for the last 40 years.
If a company’s sole purpose is to maximize profit, then it should externalize as many costs as possible. Another term for “externalize” is “avoid paying for.” By Friedman’s logic, it is in the company’s best interest to advocate for lax pollution and clean-up laws and regulations for example. A company should not have any interest in advancing society as a whole, because that behavior does not maximize profit. That’s up to individuals, not the company for whom they might work.
The problem is that when “corporations are people” and money is free speech, as the courts have ruled, then the voice of a large business or business lobby to influence laws and regulations will drown the voice of any individual or a group of individuals, unless the person or persons have as much money as a business, like Michael Bloomberg. 99.999% of us are not Mr. Bloomberg, so we are shouting into the gale force winds of corporate influence.
A light when off in my head after hearing this story, because it was not soon after Friedman’s theory took hold in the late 1970's that big companies started lavishly funding organizations that actively discredited the findings of climate science – namely, that greenhouse gases are rapidly altering our planet to our detriment. In addition, these companies themselves actively promoted doubt about climate science and global warming.
The Heartland Institute is just one example. Founded in 1984, its funders include the Koch brothers, Microsoft, General Motors, big pharmaceutical companies, big tobacco companies, and of course, Exxon.
Heartland, to this day, continues to actively cast doubt on human-caused climate change, work to repeal clean energy mandates, and fund so-called “climate skeptics”.
Why do they do this? The author Naomi Klein concluded that big business recognized decades ago that addressing climate change represented a “profound threat to our economic and social systems and therefore denying its scientific reality” was the only way to protect those systems, damn the consequences.
In other words – casting doubt on climate science increased shareholder value.
But there is now a new wrinkle in the whole “shareholder is king” story.
BlackRock, an asset management company with $7 TRILLION in investments recently decided to “make investment decisions with environmental sustainability as a core goal” according to the NY Times. “[The] intent is to encourage every company, not just energy firms, to rethink their carbon footprints.” As a major shareholder in many companies, large and small, it will “move more aggressively to vote against management teams that are not making progress on sustainability”.
Why this change in heart? Because it is now clear to BlackRock that climate change is a huge risk to investors. This firm is not turning into a tree hugger, they are still looking at the bottom line. BlackRock, according to its president, has a fiduciary responsibility to protect shareholder interests.
Used to be that saying a business is under water was a metaphor for drowning in debt. BlackRock is not interested in having the phrase become literally – drowning. Drowning is not good for the bottom line, as it were.
The other thing is the BlackRock has been behind the curve. Financial Advisor Magazine noted that investment in “sustainable” mutual and exchange traded funds increased four-fold in 2019 – to almost $21 billion.
Investors have to read the fine print on “sustainable” fund prospectuses however; because some of the companies in these funds may be more greenwash than green.
According to the Times article, if other investment firms like Vanguard ($6 trillion), Fidelity ($6.7 trillion) or Schwab ($2.5 trillion) follow BlackRock’s lead, a fundamental philosophical shift in how companies operate could be forced upon them by their biggest shareholders.
This trend is still in its infancy and may be too-little-too-late.
We just had the second warmest year on record, the Arctic is literally melting and Australia is literally burning.
Regardless, I’ll take any good news that I can. There is precious little of it in the environmental arena these days.