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EP52 · Economy · first published 2020-12-12

Responsible capitalism | Tiina Landau | Negotiator 52

Tiina Landau, co-author of a book on earning excess returns through responsibility, unpacks the mechanics of responsible investing from a practitioner's standpoint. The episode opens by correcting Milton Friedman — he never said profit should be made at any cost — and moves on to Maersk's Indian shipbreaking beaches, where Norway's KLP did not sell but stayed to engage. It covers the three letters of ESG and how their order came about, the toolkit of influence from exclusion to activist funds, Stora Enso's Chinese pulp mill as a genuinely contested case, green bonds and the EU taxonomy — and Landau's daily question: is responsibility risk management or impact?

Sami Miettinen · Sections: AI and the Economy + AI and Society

Responsible capitalism | Tiina Landau | Negotiator 52

Summary: The episode opens with a correction that reframes the whole debate: Milton Friedman never said profit should be made at any cost. He objected to collecting money from shareholders and giving it to somebody else — at a time when responsibility meant charity.

Its governing question is Landau’s own, and she says she thinks about it daily: is responsibility risk management or impact? The answer dictates practice, because risk management withdraws from difficult countries and impact goes into them.

And its best single case is Maersk and the Indian shipbreaking beaches, because there the investor did not sell but stayed to ask — and eventually went to see the situation for itself.

A note on reading this. Landau corrects the introduction immediately: she is not a researcher but a practitioner; the research half of the book is Hanna Silvola’s. She discusses the industry rather than naming her current employer. Miettinen for his part discloses his own background: he worked at Pöyry Capital on forest industry, did M&A for Stora Enso at Translink, and in February gave a talk on responsible M&A at a Castrén & Snellman seminar — which explains both his examples and his sceptical angle.

Friedman, corrected

The episode starts where this debate usually starts in Finland: with the claim that a company’s only duty is to make a profit for shareholders. Landau’s correction is the episode’s most important single point:

When he made those famous remarks, responsibility was thought to mean charity. So he was thinking that you should not collect money from shareholders and then give it to somebody else. He never at any point said profit should be made at any cost.

And from that follows the conclusion that dissolves the supposed conflict: classical economics does not rule responsibility out. Responsible business can be done inside it, and it is often very profitable.

Miettinen states his prior openly — he has considered ESG the most boring thing in the world — and the episode is built around him asking the sceptic’s questions out loud.

Maersk, the Indian beaches, and what the investor did

The case Miettinen picks as the book’s best: the shipbreaking yards on India’s coast, where ships are dismantled by hand. The method is called beaching: at high tide the ship is driven onto the shore, at low tide it is left there and dismantling begins.

Landau supplies the proportion, and it is the episode’s harshest figure: the industry in India is far more dangerous than Indian mining — many times the deaths. Standards in health, safety and environment vary from yard to yard.

But what puts the case in the book is the investor’s behaviour. Norway’s KLP did not sell its shares but started asking questions, and joined in developing standards — and after the book’s publication went to verify the situation on site. The case has been updated for the international edition.

Landau separates two perspectives that should not be conflated: Maersk’s own account is that certain Indian yards have improved, which is why ships can once again be sent there for breaking after years of not doing so. The investor’s account is a different one. The burden of proof is on the company.

Which comes first, return or responsibility?

Miettinen puts the question in a cold capitalist’s form, and Landau’s answer is more precise than the question: either can come first, and both routes have been measured.

Route 1 — selection. Buying the shares of the most responsible companies on the secondary market has little direct impact: the company got its money at issue; after that shares move from pocket to pocket. A multiplier can arise if enough investors favour the same firms. But research has found that investing in them can produce better returns — so return comes first and impact perhaps later.

Route 2 — engagement. The Maersk kind of case, where an investor engages because it wants responsibility. That too leads to better returns, on Landau’s account: when engagement succeeds, returns are better, particularly during the first year of engagement.

And she immediately enters a caveat about the book’s title that is honesty rather than modesty: the title does not mean all responsibility is always profitable — it means this is a way to make returns, and these are the places where the benefits have been observed most.

E, S and G — and why that order

Landau unpacks the letters: E environmental. S social — human rights, responsibility to society, labour rights, product safety. G governance — board independence, insider practices, anti-bribery.

The concept dates from 2006, when the UN-supported Principles for Responsible Investment were drafted. Here the episode offers an anecdote Landau marks as hearsay herself: the order was much debated, and the UN Environment Programme was pleased that E did not end up first — because that was how everyone got round the same table. That is what I was told by a person who claims to have been there.

The distinction most people miss: companies talk about corporate responsibility, in which governance has not been included. ESG brings in what has been the investor’s focus all along.

Responsible M&A — do deals actually die on it?

Miettinen says he thought the subject artificial when he was handed it as a seminar title: is this not just sensible KPIs brought into a deal?

Landau’s answer is blunter than the question:

I have been doing responsibility due diligence in deals that collapsed entirely because of responsibility findings.

The examples are concrete: a company’s level may be so poor that the risks are unmanageable; chemicals in use may eventually be banned, putting the whole business in question; or significant liabilities may surface that the buyer wants carved out.

And what cannot be carved out: legal liabilities can be excluded, reputational ones cannot. Landau adds the investor-side version: if you buy exactly the part of a company that puts the whole firm on, say, the Norwegian pension fund’s exclusion list, you had better have a very clear plan for getting off it.

Miettinen describes the logic of his own slide deck: in due diligence you have a funnel of opportunities, and ESG works above all as an exclusionary pre-filter — targets that obviously do not fit the framework are not taken into DD at all.

The toolkit of influence

This is the episode’s most practical passage, running from lightest to heaviest.

Exclusion. The oldest technique: blacklists. Landau notes it usually covers a very small part of the investment universe, and that the talk today is increasingly about opportunities — firms solving sustainability problems. But exclusion has not gone away, because it supplies the deterrent and the credibility: engagement bites harder when selling is a real alternative.

Champion selection. Picking the best in a sector on ESG criteria. Miettinen offers a hypothesis — that being a champion might itself correlate with excess return — and Landau confirms it: those are exactly where research has found the most excess return.

Asking. On Landau’s account the most underrated tool. Nordic investors organised a session training large Nordic companies on human rights — and quite a few had a moment of realising they should probably start doing something. A question with no sensible answer creates the expectation that next year there will be one. If the investor is large and makes it public, even a small hint is enough.

Escalation. The tone hardens if something comes to light. Ultimately: we will sell all our shares if you do not resolve this.

Activist strategies. Traditionally hedge funds forcing management changes, but now also pushing responsibility. The book’s example is Jana Partners, which proposed to Apple that parents should be able to limit children’s screen time — and it went through, once CalSTRS, the Californian teachers’ pension fund, joined in. What is new is precisely that large institutions take part. Landau still considers it marginal and bold.

Miettinen’s parallel: this used to be Wall Street-movie greenmail, threatening takeovers for financial reasons. Now the same club is in hand for a more useful purpose.

Two cases where Miettinen disagrees

The episode’s most valuable passage is the one where the interviewer does not buy the answer.

FSC and PEFC. From his forest-industry background, Miettinen says he was irritated that the investor side favoured the FSC certificate at the expense of PEFC — even though FSC is a commercially competing organisation. His suspicion: do investors understand what they are pushing, or is this regulatory capture, where one body manages to brand itself as the only good one?

Landau’s answer is a precise line, and it is the episode’s best single explanation of the investor’s role:

Environmental organisations’ job is in a sense the ideal world. Investors are more in the same boat as companies — in a world where compromises are made. An investor rarely says you must obtain this particular certificate, but asks how you guarantee sustainable forestry and what practices you have.

And she adds an observation that is honest and uncomfortable: any company, if you look closely enough, will usually have something.

Stora Enso and the Chinese pulp mill. This is the episode’s longest disagreement. Miettinen says he admired Stora Enso’s position as the world’s largest maker of liquid packaging board, and that the company was going to China to build a mill, for which land-use rights covering a million hectares had been assembled and whose environmental standards would have been among the world’s best. Irregularities were found in the wood supply chain, and the company withdrew from the pulp line.

Miettinen’s position is that the wrong decision was made from China’s point of view: responsible pulp technology was not taken there. Good things happened in the wood supply chain; bad things happened in world pulp production.

Landau neither concedes nor disputes, but does what the case is in the book to do: it is an example of the fact that investors do not have uniform expectations among themselves — and that investors rarely intervene in strategic choices. It provokes thought, it remains interesting, and everyone can learn from it.

Risk management or impact — the episode’s core question

Miettinen takes the disagreement to the level of principle with an argument that turns ESG logic against itself: China scores badly on the G, so bringing a Western company there would improve the system’s governance. If the ESG framework becomes a reason to stay out of difficult countries, what remains is their own structures.

Landau’s answer begins by conceding that this is the heart of the matter:

This is what I think about daily: is responsibility risk management or is it impact?

And the split is, on her account, straightforward:

consequence
Risk management you do not go into difficult environments, because a Western company is expected to follow international standards even where local law permits less
Impact you go — but it takes work, study, expertise, and it costs something

And the honest addition that keeps the discussion from becoming a sermon: nobody goes to a difficult country for impact alone. There has to be a business logic — profitable business and impact at the same time.

Measuring impact

Miettinen connects this to his earlier episode with Marko Kyyrönen, whose Sparkmind invests in education technology — impact that does not appear directly in ESG criteria.

Landau describes her own frustration from the investor side: analyses looked at how much revenue came from which SDG solution. Interesting but unsatisfying, since revenue says nothing about how good the solutions are. The direction of travel is towards checking a scientific paper for what this type of solution achieves — but a company-specific measure does not yet exist.

Kyyrönen’s message, which Miettinen relays, sums up the problem: the quantitative is easy (a million children got an app), the qualitative is hard (what happened to that child’s learning). Landau does not dispute it but notes that even that is better than the revenue figure they started from.

And she names the scale problem: a private equity investor with ten or twenty companies can develop measures with them. A portfolio investor with hundreds or thousands needs AI, or needs companies to start reporting themselves.

Miettinen adds a point about liquidity: in a fund you cannot vote with your feet — you have to engage as an owner. In a listed portfolio you can sell. Those are two different logics of influence, not merely two asset classes.

Green bonds and the EU taxonomy

Green bonds arose, on Landau’s account, from the question of how to invest in a positive opportunity through debt — in equity you get the upside, in a bond only your coupon back. Credit risk does not change, but some issuers have set targets for them.

And she raises a side effect more interesting than the instrument itself: the CFO has started talking closely with the responsibility team, perhaps for the first time, because a green bond requires a strategic-level conversation.

Practices vary: some have different shades of green — dark green or light green — others merely a label attesting that principles are followed; and there are service providers who rate issuers separately.

The EU taxonomy is the closing regulatory topic. Landau describes its two properties: it is tied to the EU’s strategic objectives — and can therefore change if they change — and it goes further than current legislation. The open question is whether enough qualifying investments exist or whether the classification stays marginal.

But one change is certain in her view: you can no longer simply say you have a sustainable fund — it has to be justified against the EU’s criteria.

For the private investor

Miettinen’s closing question is practical: Finns hold little investment wealth, though it has begun to rise — what can one do?

Landau’s advice is concrete:

  1. Responsible funds come in passive (investing in the most responsible) and active (selecting) forms.
  2. Holdings can be checked: MSCI and Sustainalytics publish responsibility ratings for both companies and funds; Morningstar’s globes are another quick check.
  3. You can look at how the fund acts as an active owner — funds usually report this themselves.
  4. You can look for companies that either solve a sustainability problem or do their existing business well.

And the single best piece of advice on reading reports: look for numerical data and targets. Detail — how many audits, what coverage, what findings — tells you the processes exist.

Is it greenwashing?

Miettinen puts the sceptic’s question directly: is this greedy capitalists’ greenwashing, laughing all the way to the bank?

Landau’s answer starts from where the money comes from: much of it is pension money, which is all of ours — and negative effects fall back on the same society. That is why she thinks a genuinely large wheel has started turning.

And then she draws the episode’s most philosophical distinction: she is not sure whether this is about consequences or motives — but finds what the consequence is the more interesting question. People can have all sorts of motives; the observed effect on companies exists.

Green swans

The episode ends on a book reference that ties two threads together. Miettinen recalls his March 2020 episode with Tuomas Malinen, which dealt with Nassim Taleb’s thinking on tail risk and the fragility of the capitalist system in the face of a black swan — and offers a hypothesis: could responsibility work as a vaccine against fragility?

Landau says she had read that very year the book Green Swans, whose idea is exactly that counterforce:

If black swans are the things that can cause major collapses, then green swans are counterforces that can produce major solutions and shift the whole paradigm positively.

And the pandemic year’s observation supports it: responsible funds have done particularly well relative to conventional ones — consistent with the assumption that responsible companies weather a downturn better.

What the episode leaves you with

  1. The Friedman correction removes a false opposition. It settles no individual question, but it moves the discussion from ideology to mechanics.
  2. Risk management versus impact is the right question. It predicts behaviour: whether you withdraw from a difficult country or go into it. And Landau says plainly that she does not have a settled answer either.
  3. The disagreements were left visible. Stora Enso’s China decision and the FSC/PEFC question stay open, and that is the episode’s merit rather than its flaw.

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