José Luis Jiménez, MAPFRE Group Chief Investment Officer
The Great Depression and the 1970s recession brought about changes in economic theory thanks to the contributions of Keynes and Samuelson respectively. In this new era, which began with the Great Recession of 2008 and is deteriorating during the Great Lockdown of 2020, we still await new contributions to help improve the population’s standard of living. This is a source of great frustration for many economists, working with a model that does not fully respond to current needs.
Socially Responsible Investment is likely to be a key part of the solution, where our financial investments also make a measurable social impact. In other words, they are not just profitable, but also contribute to improving society. For something that seems so obvious, it has not always been automatically accepted. In 1962, Milton Friedman, a professor at the University of Chicago who won a Nobel Prize in 1976, included a critique of corporate social responsibility in his book Capitalism and Freedom, saying that in a free economy, “there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” While Friedman’s contributions to the economy are beyond brilliant, his critique of corporate social responsibility has not endured the passage of time. The current crisis provides the best example of this, where many Spanish companies have contributed much more than mere profit (and associated taxes) to society. MAPFRE mobilized more than 200 million euros to help SMEs and the self-employed, donated money and health supplies, and created a 50-million-euro mutual fund to help finance the extraordinary expenses suffered by the Community of Madrid due to the pandemic. Why did MAPFRE and so many other companies including Inditex, Banco Santander, Bankia, Iberdrola and Telefónica respond like this? Because it was the right thing to do and, for many, because it is part of their corporate culture. Corporate social responsibility was included in the company bylaws of MAPFRE on June 10, 1965.
This new dimension to the investment world is gradually gaining traction among private and institutional investors. Although the definition of Environmental, Social, and Environmental (ESG) criteria has become a global trend, until very recently, the ‘S’ was the weakest component. MAPFRE wanted to boost this through its Inclusión Responsable fund, which aims to invest in profitable European companies that seek to include people with a disability in their workforce. The ultimate objective of the fund is to demonstrate that, long-term, companies that take these factors into account are much more sustainable and profitable than those that do not. The initiative has been cited as an example of best practice in the world of finance by the United Nations.
The recurring question is ‘Is this type of investment really profitable?’ Or rather ‘Is it more profitable than traditional investment?’ At the end of last year, Bank of America Merrill Lynch published an interesting study called ESG Matters. According to their estimates, in both the US and Europe, companies with the highest ESG standards saw better stock market returns than those with lower ESG standards; they had more stable profits in subsequent years and their cost of debt could be up to 200 basis points cheaper. A very pertinent statistic for investors is that 90 percent of S&P500 bankruptcies would have been avoided had investment in companies with below-average metrics in the past five years been avoided. In addition, given that the main lever for a company’s success is its employees, the sense of purpose and the spirit that comes with making a difference provide strong motivation and instill in employees a feeling of belonging to the group.
In any case, even if empirical evidence told a different story, more and more people and entities, especially among younger generations, are willing to do the right thing with their money. So, if this crisis can be said to have a positive, it will certainly be the strong growth of Socially Responsible Investment.