Sustainable capitalism requires 'outside-the-box' thinking and systemic change, panelists say at WEF in Davos

Hiromichi Mizuno

Mike Blake/Reuters

Hiromichi Mizuno Executive Managing Director and Chief Investment Officer at Government Pension Investment Fund in Japan and Co-Chair at Global Capital Markets Advisory Council for Milken Institute, speaks during the Milken Institute's 22nd annual Global Conference in Beverly Hills, California, U.S., May 1, 2019.

  • Economists need to change their base-case to one that necessitates a push for environmental, social, and governance (ESG) factors, Hiromichi Mizuno, chief investment officer for Japan's Government Pension Investment Fund, said Thursday at a World Economic Forum panel.
  • "It's been criticized that ESG has not been proven, but when it's proven it may be too late," the CIO added.
  • Though ESG investing surged in popularity through 2019, systemic change is necessary for companies to prioritize sustainability over profits, Katharina Pistor, Columbia Law School professor, said.
  • AIG CEO Brian Duperreault argued a rapid shift away from poor ESG scorers is "too imprecise and impractical," and that companies should instead support firms transitioning to better practices.
  • Visit the Business Insider homepage for more stories.

DAVOS, SWITZERLAND- Economists need to quantify the risk of ignoring environmental, social, and governance (ESG) factors and maintaining capitalism's status quo, Hiromichi Mizuno, chief investment officer for Japan's Government Pension Investment Fund, said Tuesday.

The instruments required to measure ESG risks don't yet exist, Mizuno added while speaking on a panel at the World Economic Forum in Davos, Switzerland. The current framework often couples ESG investments with a premium, while firms neglecting such factors can focus solely on profitability. Investors need to change their base-case to one that necessitates long-term sustainability, the CIO said.

"We've never been told to manage this kind of systemic risk," he said. "We have zero financial tools, that's why we have to think a little outside the box. It's been criticized that ESG has not been proven, but when it's proven it may be too late."

The panel, titled "Stakeholder Capitalism: How to Enable Long-Term Investing," covered the pivot to ESG capitalism from a shareholder-focused system. The panel also featured Columbia Law School professor Katharina Pistor and AIG CEO Brian Duperreault.

Interest in ESG vehicles has soared in recent years. The relatively new type of investing covers everything from gender-equal pay to energy conservation, all in the interest of sustainability and using capital for good. Investors sank more than $20 billion into US ESG funds last year, nearly four times the previous record for net inflows set in 2018, according to Morningstar data.

Though the type of investment has grown in popularity, systemic change is necessary for companies to prioritize ESG factors alongside profitability, Pistor said.

"When you look at the hardwiring of the system, it's really the law that hardwires the system. A corporation can be written in hard law in different ways, but it has been written in a particular way, especially in the US and the UK," Pistor said. "And that basically means that shareholder value does trump, in the end."

Duperreault took a different stance, arguing that, while AIG supports sustainable investing, the insurance giant isn't ready to cancel business with low ESG scorers like coal companies. Instead, the firm can shift capital to "good" companies actively improving their ESG considerations.

"There's coal being taken out of the ground because people need it. You've got to recognize that you can't just cold-turkey it now, but you've got to find ways to transition," Duperreault said. "We need to be part of the solution here and just a simplistic 'no' is too imprecise and impractical and it doesn't get the job done that we need to get done as a world."

Additional panels on stakeholder capitalism are scheduled for Wednesday and Thursday at the World Economic Forum in Davos, Switzerland.

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