Leaving irresponsible capitalism behind

Capitalism has been very successful in moving much of the world from subsistence to affluence. Then as today, economic growth remains a priority, even in the wealthiest of nations. “Conventional wisdom” suggests that high rates of growth result in economic and social welfare. An IMF survey paper concludes the impact of growth on inequality is ambiguous. Capital in the Twentieth Century took a stronger view. But there is an even larger “inconvenient truth” about capitalism: Over the last 150 years we developed a ruinous addiction to cheap hydrocarbons. Given what we know about the impact of carbon emissions today, is it responsible to continue fossil fuel exploration and extraction? As the Secretary General of the United Nations put it at COP27: “We are on a highway to climate hell with our foot still on the accelerator”;  and Dante’s inferno had nine circles. This raises the broader question, what is irresponsible behaviour and when does it become irresponsible?

Williamson (1975: 255) famously defined “opportunism” as “self-interest seeking with guile”. In the same spirit, irresponsible capitalism can be defined as a system where opportunistic economic actors sell goods and services that cause harm for people or the planet, in the pursuit of profit or power. How can such a system exist? Why would consumers buy something that is harmful? Unfortunately, we are programmed to crave things that were scarce in previous times, or simply not available: alcohol, nicotine, meat, sugar, online gambling, opioids, screen time and credit card loans. We also like convenience: fast fashion, single use plastic bottles, front door delivery and individual transport.

So, when does economic behaviour become irresponsible? Was it irresponsible of the investors in the proposed Stockton and Darlington Railway Stephenson to agree the switch from horse-power to Stephenson’s steam engine in 1822? Could they foresee that the use of coal at scale would cause asthma, heart problems, cancer, neurological disorders, and premature death? Probably not. Since when have fossil fuel executives known that extracting more coal, oil or gas will make large parts of the planet uninhabitable for mammals, including humans? Since the 1988 Toronto conference, the signature of the 1997 Kyoto Protocol or when Hansen et. al. (2008) made it clear that “if the present overshoot of [.. 350 ppm] CO2 is not brief, there is a possibility of seeding irreversible catastrophic effects”? Scientific American reported that Exxon executives knew well before 1988, probably as early as 1977.

Is the quest for responsible capitalism “woke”, “paternalistic” or orthogonal to Milton Friedman’s widely discussed view that “The Social Responsibility of Business is to Increase its Profits”? Not necessarily. Recall that Friedman argued that it is the responsibility of corporate executives to “conduct the business in accordance with [the owners’] desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” [emphasis added]

Leaving aside ethical custom and, for the time being, the law, do all owners always want to maximise profit, even when it means doing harm? Hart and Zingales (2017) argue that there are shareholders who care about more than money and should instruct executives to maximise “shareholder welfare” not market value. Hart and Zingales (2022) point out that this is the case already, for example when looking at advisory shareholder proposals in the United States during latest proxy seasons.

For example, in 2022 the Coca Cola Company accepted a shareholder proposal to reduce its use of plastics before the proposal went to a vote. However, the commitment is limited to reaching 25% reusable packaging by 2030. Brand Audits found that the Coca Cola Company has been the top polluter for the last five years, when the survey was started. In its 2022 annual report, the Coca Cola Company cites “health-related public concerns surrounding consumption of sugar-sweetened beverages” as a financial risk factor. The company also discloses that a  20 fl oz (592 ml) bottle of Coca-Cola Original contains 130% of the recommended daily value of sugar. Coca Cola is informing its investors that it believes that reducing the amount of sugar in Coca Cola Original will have an adverse impact on the share price; behaving responsibly would be costly. There are of course many such examples.

Will the principle of “do no harm to people and planet in the pursuit of power or profit” become a basic rule of society in the 21^st century that is embodied in ethical custom and law? There are reasons to be pessimistic. Those who profit from selling harmful products also have the biggest incentive to lobby. Also this year, the Coca Cola Company had a shareholder proposal citing allegations that it “sponsored advocacy that may interfere with public health policies”. At COP27, the fossil fuel industry was once again accused of running “a very complex and elaborate operation to attack climate measures, usually hiding its hand behind front groups”. Worse, many of the largest emitters, historic and current, are state controlled.

Paradoxically it might be markets and prices that instil responsibility. There are 139 countries that have made net-zero commitments and several through laws, yet many financial centres remain overexposed. If markets believe that these commitments will be enforced, through regulation, carbon taxes, R&D subsidies or by other means, a failure to reduce carbon emissions will negatively impact market value. It will not require ethics or law to persuade investors to purge portfolios of carbon. Risk averse investors will have an incentive to perform net-zero alignment. Equally, corporate executives will have an incentive to implement net-zero commitments. Encouragingly, there are signs that carbon emissions have already started to be reflected in market values and thus the cost of capital. The same logic applies to sugar, plastics or any other product or service where public anger about irresponsible behaviour turns into a material risk.

It is the widespread acceptance of the “inconvenient truth” that has persuaded many countries, regions, cities and companies to finally act on carbon, despite the lobbying efforts of self-interested parties acting with guile. Responsible capitalism requires independent scientific research, science based policy advice, investigative journalism, civil society and responsible social media to ensure that people learn about the irresponsible. It is then that the basic rules of society can set effective limits. To borrow from Galbraith again:

“The affluent society is not without its flaws. But it is well worth saving from its own adverse or destructive tendencies.” On carbon we must quickly take the foot off the accelerator and change direction, before we slam into the wall.

-------------------------------

Marco Becht is a Professor of Finance and the Goldschmidt Professor of Corporate Governance at the Solvay Brussels School for Economics and Management at Université libre de Bruxelles. Prof. Becht is also a Founder Member, a Fellow and the Executive Director of the European Corporate Governance Institute,

This article reflects solely the views and opinions of the authors. The ECGI does not, consistent with its constitutional purpose, have a view or opinion. If you wish to respond to this article, you can submit a blog article or 'letter to the editor' by clicking here.