By David Crosoer, PPS Chief Investment Officer

The debate around whether asset managers and corporates more generally, should explicitly take “social issues” into account in terms of their investment decision-making, is not without its controversy.

For what it is worth, I am a strong believer in the need to tackle the challenges facing our society today, and like many South Africans deeply sceptical about the ability of the state in its current guise to do much about it.

While I am also sceptical that the incentive structures facing the asset management industry and private sector make it difficult for both to satisfactorily resolve many of these pressing social challenges, at the same time I am excited about how an inter-generational mutual organisation like PPS can increasingly play a purposeful and enabling role on behalf of our members.

Many of the pressing issues facing our society today are linked to state failure – either its inability to regulate the private sector adequately to prevent the private sector from over-supplying goods with negative externalities (e.g., tobacco, alcohol, or carbon) 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 the government imposes societal costs on private companies in supplying negative externality goods, the private sector will oversupply them.

At its most basic level, then, the private sector responds to the price mechanism. In all the above examples, 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. Importantly, the private company that pollutes the environment because it does not bear the full social cost, or the private company that only provides education to the marginal benefit of the individual user, is not a bad company or a company that hasn’t fully integrated Environmental, Social & Governance (ESG) into its decision-making, but rather a company that is appropriately responding to the price signal.

And likewise, the asset managers we appoint are incentivised to respond to the price mechanism. No matter how much we wish it, and no matter how much they say they embed ESG factors into their decision-making, they are not paid to invest in something beyond its marginal (private) benefit or paid to take costs into account that are not captured by the (mis)functioning price mechanism.

In many ways, the price mechanism is the markets equivalent of Darwin’s natural selection. Natural selection works on what is most effective today – there is no long-term planning embedded in natural selection and (partly) because of that, it is unsurprising that most organisms that have ever existed are now extinct – they over-optimise for current conditions and then fail when conditions change.

Could this change?

Most externalities only exist over short time horizons – the longer the individual’s time horizon the more likely they will place a similar value on public goods as society, and the more likely they will consider the negative societal implications of their own behaviour.

Do you by your own behaviour consider the impact you will have on future generations, or rather focus on your own immediate interest? Unfortunately, most of us fall short of this ideal most of the time.

Mutual organisations like PPS exist to serve both their present and future members. By implication, these organisations have a much longer time horizon than a typically private company (and many individuals) and need not respond predominately to the shorter-term price mechanism. Such organisations should be better at building robustness and dealing with both positive and negative externalities and increasingly will be at the forefront of driving a more sustainable agenda.

The failure of the state is highly problematic in terms of building a just and equitable society. However, mutual organisations like PPS can play an important and enabling role. Today we are engaging with other mutual companies from around the world in terms of how they support the communities they operate in, and we look forward to engaging with our members and affiliate organisations around the kinds of initiatives we can support in the communities our professionals serve.