THOUGHT LEADERSHIP ARTICLE
Challenging our capitalist ideals By Jon Duncan, Head of Responsible Investment, Old Mutual Investment Group
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ooking around the world today, it’s clear that we are currently in the midst of a major transformation of our capitalist system - one driven by deep recognition of the interconnectivity between the markets, society and the biophysical systems. The need for this shift is well-motivated on a scientific basis. Think, for example, of climate science or the latest thinking about Covid-19 mutation rates and vaccine deployment. At the same time, there are clear signs of human behavioural change, some of which challenge foundational capitalist ideals: • Venture philanthropy, which questions the profit motive • Open Source, which redefines and challenges competition • Sharing economy, which challenges ownership rights • Shared value, which places stakeholder primacy over shareholder primacy This transformation is also evidenced in the investment industry’s shift to an approach that seeks to balance not only risk and return but also impact. The risk-return trade-off is an investment principle that links high risk with high reward. Investors demand a higher reward from investments where the chance of permanently impairing capital is high. Balancing this trade-off is determined by differing investor risk tolerance levels, retirement ages, liquidity requirements and earning potential, among others. For the most part, this is how markets have operated since inception and it is the basis of free-market capitalism. In 1952, Nobel Laureate Harry Markowitz introduced the theory of the Efficient Frontier, the curved line that most efficiently connects the risk and return axes on a graph. The efficient frontier theory is a cornerstone of modern portfolio theory (MPT) and is used by asset allocators and investors alike.
Jon Duncan, Head of Responsible Investment, Old Mutual Investment Group
Markowitz’s work is an important example of how capitalism and its operations can and do, evolve. History shows that capitalism has shifted over time and across continents in ways that are
Targeting low-carbon, resource-efficient and socially inclusive outcomes, these strategies balance both the quantity of growth and the quality of growth.”
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FINANCIAL MAIL ESSENTIALS • GREEN ECONOMY 2022
