“Ethical Markets highly recommends this reframing of the global
issues surrounding mainstream finance and its inability to move beyond
its anthropocentric, theoretical models derived from obsolete textbooks,
now encoded in ETFs, the millions of indices, benchmarks, algorithms
and theme-based portfolios.
We refer to these kinds of “theory-induced blindness,” identified as
cognitive biases by psychologist Daniel Kahneman in “Thinking Fast and
Slow ( 2011)” and in our latest Green Transition Scoreboard ®:
“TRANSITIONING TO SCIENCE-BASED INVESTING: 2019-2020” (downloadable at www.ethicalmarkets.com)
as unrecognized financial risks: “science-denial.” (beyond the
climate-denial exhibited in stranded fossil reserves still in too many
portfolios).
The anthropocentrism in the conceptual framing still taught in
business schools and used in the global mainstream financial system
blinds asset managers to the real world science of planetary processes
reported in real time by the 120 Earth-observing satellites of NASA,
ESA and other nations’ space programs, which we cover on our Earth
Systems Science page.
We hope this thoughtful re-appraisal by two expert financiers, will
help sharpen this needed debate we cover in our global TV series
“Transforming Finance” distributed by www.films.com. Comments welcome.
~Hazel Henderson, Editor”
Charting a New Course for Impact Investing:
The Emerging New Paradigm of Living Systems for Capital Markets
Nick Sramek & Greg Wendt
July 1, 2019
Summary:
Despite efforts to bring the two closer, impact investing and
traditional finance suffer from a misalignment challenge. Since the
goals of traditional finance are inherently separate from the
qualitative dimensions of values-based investing, creating mechanisms to
bridge the gap has been ineffective up to this point. A new framework
is needed – and is currently being constructed. All investors must
coalesce around principles that have been with us for millennia; the
same principles that dictate a natural order have the power to build
long-term profitable companies, positive economic returns for investors,
resilient communities, and sustainable ecosystems.
Expanding the role of finance is necessary to build long-term
resilience which must start with multi-layered systems thinking.
Listening to the needs of communities, cities, companies, investors and
bioregions – the building blocks of a sustainable society – as a tree
listens to its roots – will allow for far greater alignment between
companies, investors, communities and the environment. For all of these
building blocks, creating systems that have a 100-year vision must be
the goal (to create the necessary preconditions for the
intergenerational transfer of true prosperity). Taking a long view of
how we live today and want to live in 100 years – and perhaps 10,000
years – has the power to not only stave off negative externalities but
also repurpose our current systems for a greater good.
I. Remembering the Past
“The whole wilderness in unity and interrelation is alive
and familiar … the very stones seem talkative, sympathetic, brotherly …
No particle is ever wasted or worn out but eternally flowing from use
to use.” – John Muir
Imagine yourself strolling below the towering redwoods of Muir Woods
in Northern California, needles crunching below your feet, just as John
Muir and his friends must have felt when they walked the same path. Can
you hear the stones, and perhaps trees talking together? Can you? Even
if trees could think, would we be able to listen to their thoughts?
Could we imagine what those trees feel, strolling underneath their
canopy?
Perhaps Muir has asked himself: are we thinking for the rocks and trees or with them?
In simple moments of reflection on the big picture, we can see that
we are part of a living system, what visionary biologists call Gaia. And
even reductionists would admit Earth is a system of living systems, an
ecology of ecologies.
In order to connect ecology to economic development, in 1988 the UN coined the phrase sustainable development
and asked how do we create “development that meets the needs of the
present without compromising the ability of future generations to meet
their own needs” ?
Or perhaps a more relevant question is:
How do we harmonize the systems of economic development,
wealth creation, and finance into greater coherence, to align with
living systems upon which our very civilisation is built to actually
improve them for future generations?
The good news is that attention is increasingly focused on the
challenges of today and tying in the ecology of ecologies of our own
systems. Leading groups across the planet have charted a course for this
new economic framework based on a whole systems approach. And even
established firms such as Goldman Sachs, Bloomberg, Nuveen and Blackrock
who in the past resisted weaving environmental and social values with
markets, are moving in this direction, perhaps simply motivated to serve
the growing demands from customers who want their money managed in
alignment with their values (yet movement is being made nonetheless).
Many leading impact investing and ESG organizations are touting
deepening strategies within values-based investing, promising that
billions of dollars of capital will funnel into sustainable investment.
They claim to have a real impact on people and the environment; from
most accounts, a monumental shift is upon us.
However – is this really the case? Can this growth really be
attributed to a growth in investor sentiment? Or merely a growth in
opportunities that provide market rate returns? In other words – is the
financial community truly creating strategies for long term
sustainability, or simply reacting to short term trends for money-making
opportunities? I.e. is the growing investment in renewable energy
simply due to economic viability or does this represent true growing
environmental awareness in the investor community? Which axis is moving?
Greater openness to values-based investing – or the emergence of market
returns for areas that were previously not economically viable?
One of the challenges we observe is that traditional financial
markets operate as if the players are children vying for the attention
of their parents rather than for the benefit of the whole family. The
dynamics in the wall street model with stakeholders working in
competition is antithetical to the necessity of cooperation to build the
field and move the whole marketplace to an entirely different paradigm.
This is already happening in many circles such as SOCAP, CERES, GIIRS, B-LAB, TBLI, GIIN
etc. yet many actors in the “impact investing space” are playing with
the old wall street rules, which do not encourage cooperative behavior
and implicitly require zero sum competition. Yet we are no longer
competing children building sandcastles on the beach, expressing the
virtues of our castle over all others. We must be aware that the very
act of creating the castle inspires others to create even better
castles, and the impressions we leave on others is the act of creation,
letting the castle itself dissolve into the sea. The irony here is that
impact investing aspires to be much more inclusive, cooperative and
holistic in it’s approach, yet often vies to compete directly with
traditional financial markets.
Fortunately, we see a new pattern emerging, a new way of relating,
and building the outcomes desired by impact investors. This new pattern
shows much promise to improve every community across the planet.
II. Breaking Through: Building New Models for Investors
What you’re supposed to do
when you don’t like a thing is change it.
If you can’t change it,
change the way you think about it.”
-Maya Angelou
What does it take to reinvent finance to achieve the desired outcomes
for our planet while building resilient communities and strong
economies?
Investing traditionally lives in a two-dimensional spectrum. On one
end of this line lies pure capitalism – one hundred percent
transactional in nature and uncompromising in it’s goal of profit. On
this end, everything goes. Environmental degradation for a quick buck?
No problem. Exploitation of underprivileged groups to increase
productivity? Why not. At the other end of the spectrum lies pure giving
– where economic goals do not matter at all, and every dollar spent
towards non-economic returns – such as environmental sustainability and
human rights – completely justify the means. No financial return here is
necessary or expected. Every other transaction can then be attributed
to some point on this continuum.
This continuum has been the focus of modern finance in recent decades
as investors choose their position along this line. Chief Investment
Officers interpret, re-interpret and occasionally reframe their
investment thesis to justify ways their strategy serves the evolving
priorities of their stakeholders in light of fiduciary responsibilities.
Sometimes, positions change – many point to the glacial evolution of
impact investing down the river as a sign of the next great wave of
investment into social and environmental causes. Due to announcements
such as the 2018 US SIF report, many conclude a sea change is right around the corner.
But what if that sea change is not right around the corner? What if a new paradigm is necessary to achieve these goals?
Finding True North
What if instead the final goal is not sacrificing economic returns
for environmental/societal benefits, but leaving the era of
transactional finance vs philanthropy and arriving at an era of
longevity?
In this space, there isn’t an argument as to which side is right or
where we need to land along the continuum. We simply need to ask better
questions together. How do we support the betterment of all of our
stakeholders, both tangible and intangible? How do we ensure our company
will be around in 100 years? Do we want customers to be proud of what
our company has embraced toward a shared long-term vision? .
In this space, there is room not only for short-term profit (which
will exist, it’s important to note), but also greater coordination –
economic, environmental, social – between the needs of communities and
the needs of investors. This is not economic development – that misses
the point of fully leveraging the financial wealth that has the power to
save the world. Financial reform also misses the point – as financial
reform without a new sense of a shared long-term goal will only amount
to a burdensome regulatory regime that will be actively thwarted by
those seeking to return to the status quo. Equally important to creating
a shared vision is to honor what each force brings to the table. As we
disassemble the spectrum, pieces cannot be discarded, but repurposed in a
way that actualizes their best characteristics while heightening the
overall impact. Since impact investors have already taken the leap
toward weaving all of these factors into investing process, an entirely
different mindset and whole systems paradigm is needed.
In order to best utilize these pieces, greater coordination is
absolutely necessary between traditional players and the impact
investing community to find common ground in every economic development
context. A new lode-star must be calibrated to zero degrees, where the
long term aims of financial institutions, impact investors, retirement
portfolios, sovereign wealth funds, and development dollars are aligned.
Perfect alignment should be the goal; but for the time being, the
financial sector needs to at the very least be able to sit down and
dream about what they want their considerable assets to accomplish. As
an example, the growing number of actors working to create development
initiatives, funds and investment pathways for opportunity zones are
growing faster than ever, yet many in the space are presuming by simply
bringing more money to such communities, wealth will spread. Yet very
few groups are actually building investments which explicitly measure
and incorporate the range of opportunities and factors to meaningfully
improve the quality of life in the communities within and surrounding
the zones. Applying this larger set of tools and processes to measure
all dimensions of wellbeing is needed.
Creating a New, Powerful Framework of Systems
“You never change things by fighting the existing reality.
To change something, build a new model that makes the existing model obsolete.”
– Buckminster Fuller
The next step in the development of our financial institutions is
absolutely crucial to stave off the dual threats that have the power to
forever change communities in virtually every corner of the world –
inequality and environmental degradation. Resolving this conundrum is
quite literally the trillion dollar question – creating the appropriate
structure to move trillions of dollars to developing robust communities
and resilient ecosystems has the power to transform our world and build
wealth in a new and profound way. Greater coordination is at the center
of this challenge – which is far outside the bounds of any written
expose. Here, the goal is to not pitch a solution, but simply articulate
our current standoff and provide an actionable context to create living
laboratories.
This article, first of a series, is not an attempt to answer
questions, but to outline the range of questions and allow for community
and state leaders, financial institutions, and economic development
bodies to lay out guiding principles for future inquiry and to build
contexts sufficiently robust to fulfill the promise of impact investing.
These principles should include actions that allow for long-term
alignment for companies, investors, governments, and communities;
allowing for all of these groups to build a common resilient structure
based on systems thinking must be the ultimate goal.
While our lives are unquestionably global, we reside in communities.
We attend state universities, travel on county roads, use city fire
departments, and rely on neighborhood watch groups. As communities are
and will continue to be the building blocks of society, it is important
to base solutions to challenges on the needs of our neighbors. A
localized approach to development and financing will allow for greater
coordination – financial institutions can then respond and provide long
term solutions for community challenges. It is here, where these
institutions can clarify a long term vision of what they want their
assets to accomplish and thus create a context to find shared values,
common language and context of cooperative behavior, community by
community.
These building blocks can then be stacked – from individuals, to,
community to city, city to state, and state to nation, allowing for a
coordinated capital flow where incentives are tied to creating better,
safer and healthier communities. This would of course rely on a massive
leap of faith from those who benefit from inequality and extractive
industries. A new Modern Portfolio Theory must be constructed for the
21st Century – one that takes into account sustainability, biomimicry,
and economic development – in order to coordinate long term incentives.
Luckily, since our wealth and power are tools can be used in many
different purposes, with the power to build up or tear down; multiply or
disappear. It is incumbent on us to build on the success of over 50
years of values driven investing to organize in a new form, like
creating 21st century buildings with new mortar and the bricks of the
current system’s players. From this simple shift of approach of weaving
impact investing with economic development we can transform unlike any
economic development agency has the potential to do. Finance transformed
can help build a new world – if we allow it to.
No Institution is an Island
Shared prosperity requires the ability to see the forest for the
trees – while not losing sight of the path in front of us. The ability
to see the forest floor, to listen to the animals at our feet, while
also soaring above with a birds-eye view. Unfortunately, while proper
coordination is far and few between, it is central to reducing
inefficiencies and maximizing the potential of investment dollars,
governments and communities. Coordinating public and private
institutions at the regional and sub-regional level will allow for a
heightened understanding of our unique challenges – and shared goals.
Pockets of community-based thinking are beginning to emerge in
regions across the world. One small example is the “pledge LA” program
in Los Angeles that seeks to connect venture capitalists across the LA
basin with community development organizations, government groups and
economic developers in order to accelerate investments into startups and
initiatives that will have a positive impact on communities and the
environment. Pledge LA seeks to address equity, diversity and inclusion.
This type of coordination has the ability to build new conversations
among traditional players for the public good, while sharing risk,
ideas, and innovations in communities.
In turn, this allows investors to do more with their influence and
dollars and provides regional civic leadership and economic development
authorities the means to accelerate their own mission for improving the
quality of life for all participants in the regional economy. What
remains to be addressed is the creation of robust and effective tools
and incentive structures to allow for this high level of coordination
to take place and demonstrate measurable results for communities from
the dollars and influence invested. Here, a consensus needs to be
reached on appropriate risk-sharing and profit-sharing mechanisms.
Similarly, in Silicon Valley, a community we have all looked at as a leading example for innovation and wealth creation, Victor Hwang
of the Kauffman Foundation once compared the successful tech market of
ideas and capital to a rainforest. Yet was he studying the way a forest
really works in order to listen and learn from it? Or simply
projecting his views into a transactional understanding of what a forest
actually is? Does one tree stand triumphant over all the others, or is
there some coherent order beneath the soil, which every tree knows, and
every critter knows, to create a system designed to be regenerative?
In both examples the question remains; are the traditional tools for
investing, economic development, measurement and decision-making on a
regional level sufficient to take on the grander aspirations of
regenerative development?
III. Joining a Community: The Transition is Happening All Around Us
“They always say time changes things, but you actually have to change them yourself.”
– Andy Warhol
Luckily, programs as inspirational as Pledge LA and the Kauffman
Foundation’s efforts continue to inspire brilliant people to continue
building the components for a new economic reality toward a true triple
bottom line economy. All of these building blocks are heading in the
same general direction. These communities of practice continue to create
novel impact investing frameworks which provide the meaningful
preconditions to fulfill the promise of full economic transformation and
to create living laboratories to test and apply novel development
frameworks.
In recent years, a growing number of thought leaders have been
articulating the systemic shift needed for impact investing to truly
accomplish its goal of transforming the economy. The vision we are
calling for here is well underway.
Each of these perspectives are speaking toward a more comprehensive
and inclusive set of activities to build on the success of the past, and
weave a more coherent fabric for investors to support advanced economic
development for the well being of communities across the world. We’ve
compiled a list of recommended pathways to explore this revolutionary
change:
Now, a coherent throughline is emerging, where all of these voices
are speaking to a central theme of a more systemic approach to the key
challenges of our time. We aim in future articles to further explore
this growing coherence and common themes arising from the community of
thought leadership.
IV. Towards Greater Cooperation
“We’re like bees, you see, bees that go out looking for
honey without realizing we’re performing cross pollination” –
Buckminster Fuller
Yet, we are not bees, we are humans, so it is time to
cooperate to create an even better system of cross pollination as it
were, in context of every bioregion and evolve the system together as
many are calling for.
We must change our approach, as outlined above, and then apply this
new vision and methodology in the context of communities and bioregions
across planet earth. From this, there is an opportunity to accelerate
toward a blue ocean shift that weaves these evolutionary efforts to
transform the paradigm which guides us.
Many groups are well under way with exploring and applying the
possibilities of these new approaches, such as Impact Assets, RSF Social
Finance, Regenerative Communities Network, BluePrints, Ethical
Biomimicry Finance, Social Capital Markets, Transform Finance, Transform
Community, and many others. Yet the vast majority of investors and
economic development professionals in these circles are still encumbered
with siloed thinking – by simply focusing on one issue or one dimension
of the system. Many have been listening to the call for collective
action for some time, yet in order to weave our thinking and evolve
traditional approaches to economic development and finance, we must
build novel approaches and perspectives outside the box.
It’s encouraging that new pathways are being developed all over the
world that aim to expand on the central ideas outlined here today – to
revisit our assumptions about capital markets evolution, to increase the
efficacy of impact investing, and to build in systems thinking to our
long term plans. It’s through the development of this long-term plan
that we can first ensure that we create resilience for the next 100
years, repurposing the effective but incongruous models of today for the
needs of future generations. Here, we are creating fertile soil for an
intergenerational transfer of stewardship to improve our environment,
communities and economy, and create the preconditions for a regenerative
capital markets framework to fully take root.
“There is not a fragment in all nature, for every
relative fragment of one thing is a full harmonious unit in itself.” –
John Muir
Now, with our feet firmly planted in the dirt, feeling the roots
beneath our feet and under the canopy of leaves over our head, we must
walk together on this path towards long-term resilience.
NS & GW
[Obviously, the ideas contained within this article go far beyond its
intended scope and should be seen only as a place of departure. If you
wish to continue this conversation, and contribute to future articles or
join the events we are creating – please reach out to us on LinkedIn
Nick Sramek &
Gregory Wendt]
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