Charting a New Course for Impact Investing: The Emerging New Paradigm of Living Systems for Capital Markets

“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]