Aligning Capital with Purpose to Sustain Humanity
Updated: Aug 3, 2021
Published July 30, 2021 on Clean50.com
By: Hari Balasubramanian (c) 2021
Our current version of economics has separated profits from purpose.
This cannot sustain humanity.
It is a wicked problem that has gotten worse over time, and no one entity can solve for it. Government decisions and regulations, investors making values-aligned decisions, corporate sustainability commitments, people on the ground executing impactful projects can each make incremental gains. In order to accelerate our impact and solve the world’s greatest challenges we need to collaborate, but that is not easy. We also need the pieces in between: the mediators, the connectors, the translators, the execution partners. These linkages are at the core of moving capital seeking impact to the people executing amazing projects on the ground. We need to extend the table leaves, gather more voices, make more connections, collaborate more effectively and bridge the capital to community divide. And we need to do it quickly.
How did we get here?
It’s about values. When I ask people what truly motivates them, it is not about money, power or prestige. It’s about values. And in most cases, the values around humanity, society and the planet. For me, I learned this on a beach in the Algarve researching seahorses when I was 20 years old – you should ask me about it! The challenge is that these social and environmental values haven’t been entirely consistent with how to get ahead professionally. Why? Well, in simple terms, we’ve arrived at a system whereby capital is split in two. On the one hand, money is used to make money – and that is the primary goal of capital markets. On the other hand, money is used for constructive outcomes aligned with our collective values. This has largely been the purview of governments and philanthropy. And we are taught that rarely shall the two meet.
At the same time, we know that roughly half of global GDP is highly or moderately dependent on nature. Yet a similar amount, some U$40T, is being spent actively damaging the environment. Consider that for a second – every year we use the same amount of money to destroy the very thing that underpins the creation of that value. This cannot continue.
Why is capital split in two? Why the separation?
A century-old story might help. We know the Ford and Dodge brands today as competitors who are synonymous with the American automobile industry. What we sometimes forget is that the Dodge brothers were top suppliers to Henry Ford. More than that, they were also significant shareholders in the company. What must have begun as a happy collaboration among three tremendously ambitious men met resistance as they started to butt heads. The dispute definitely wasn’t helped by the fact that Dodge was manufacturing a direct competitor to the Model T while still supplying Ford parts. Meanwhile Henry Ford wanted to reduce shareholder distributions in order to increase worker’s wages and provide health coverage. The shareholders brought a suit that ended up at the Michigan Supreme Court. In the 1919 decision, ruled in favour of the shareholders, Judge Russell Ostrander wrote, “A business corporation is organized and carried on primarily for the profit of the stockholders”. The powers of the directors are to be employed for that end.” And so, over 100 years ago, the legal basis of “shareholder supremacy” was cemented.
Where are we going?
From shareholder supremacy in capital markets over a hundred years ago to the notion of stakeholder value resonating in the upper echelons of corporations today, where does that leave us? Well, the good news is that we are evolving!
The dawn of socially responsible investing and negative screens. ESG has an interesting history in capital markets and has evolved from what is known as SRI (socially responsible investing) into a few different forms. Conventional thinking dictates that the market should pursue anything with material financial value so long as it generates income and profit, but that can lead to some sticky situations. SRI said, 'Hang on, some things can be profitable but are morally objectionable. Sure, you can make money through these activities, but you may not be able to sleep at night – at least, you shouldn’t be able to'. SRI basically said that investors have a responsibility to try not to finance and promote horrible things.
Creating a common language and thinking about the positive. The notion of investing for positive impact began to take shape under Kofi Annan’s leadership. In 2005, he convened about 50 CEOs of major financial institutions to see if and how capital markets could not only exclude investment in the worst things, but could they advance some positive outcomes as well? The group was unsure of the plausibility of this request. However, they decided to categorize and measure what they could – ESG became that categorization, and it manifested in one form under the Principles of Responsible Investing (PRI).
The challenge in this first iteration was creating a common language for ESG and then tying these factors to financial materiality – or, said another way, demonstrating how doing the right thing can make you money. To its credit, the PRI has signatories representing over U$100 trillion. A critique is that it largely leaves ESG as separate from core business, finance and decision making. So ESG has been captured and reported, but separately from finance – and one has much more clout than the other in corporate decisions.
The next big shift is ESG integration. Environmental, social, and governance characteristics aren’t just good things to think about after you set up an efficient core business, but rather they can help your core business thrive today and in the long term. If you find that hard to believe, you’re not alone. But it turns out that with enough disaggregated data, we can demonstrate that strong performing companies on ESG are more profitable, have higher valuations, attain better multiples on exit and outperform their peers in both public and private markets. Simply said, if done well, they make more money today and are more likely to be around tomorrow.
More clarity is on the way. We now need better clarity and agreement on measurement, transparency and disclosure and then concerted action on positive outcomes. Recent initiatives are helping with this and give hope. The Taskforce on Climate-related Financial Disclosures (TCFD), EU taxonomy, Taskforce on Nature-related Financial Disclosures (TNFD), several government commitments on natural capital accounting, and disclosures, among others, are a good sign.
How do we get to positivity – and sustaining humanity?
It is estimated that we need between 3 and 5 trillion dollars spent each year to achieve the Sustainable Development Goals (SDGs) by 2030. This article speaks to nature, but there is a similar story for all environmental and social goals. The Paulson report estimates that we need about U$900B annually to sustain nature globally. It sounds like a lot, but that amounts to less than 1% of global GDP. Plus, we are already spending ~U$130B, and perverse subsidies make up twice that. Switching public funds from environmentally destructive subsidies to nature positive investments, means that we just need to double financing from other sources (~U$170B).
We often lose sight of the fact that these investments aren’t sending money down a black hole – they can often generate value; so, it is not a cost to organizations in any given sector, but an investment for future prosperity. For decades, we have known that natural habitats typically have a higher net present value than what they are worth through conversion. Now we need to align our investment decisions with sustaining the underlying value of our economy.
A call to action.
We all have a role to play. Remember, half of everything depends on nature and half of everything we currently spend destroys it. I want to leave you with the realization that profit and purpose can be compatible and in fact can be mutually reinforcing.
Now that we know roughly how we got here and where we are going, I urge you to think about:
Your role in the system: are you a capital provider, a mediator, a translator, an execution partner?
Your underlying values: are they out of sync? And if so, can you align your capital decisions and activities with purpose?
Your voice: can you speak a common language, collaborate more effectively and influence constructive outcomes?
Your future: how can you be part of the solution?
The path to a sustainable and thriving future requires fixing our broken system through a series of systemic changes. It begins by pulling up a chair, joining the conversation and making those linkages. By communicating the business value of nature across sectors, asset classes and the capital divide, we can begin to repair the system, the planet and ourselves. The great thing is that everyone benefits! By working together we can help create a healthy planet on land and in the ocean, a stable climate, abundant and diverse wildlife, prosperous communities and flowing, clean freshwater. We can avoid burdening our society with destructive practices and support previously under-recognized business values through sustainable investments and practices. Why does it matter? As we have heard from environmentalists, business leaders, heads of state and even Harrison Ford, "In reality, nothing else matters".
Join us at EcoAdvisors. Let’s collaborate to sustain humanity.