There have been several investment movements that promise to make capitalism sustainable during the last 25 years. These include environmental, social, and corporate governance as well as impact investment, socially aware investing, corporate social responsibility, shared value, and conscious capitalism. All these efforts, however encouraging, operate on the assumption that there is no need to balance financial gain with social and environmental damage. They are based on the notion that businesses and investors may make money while solving some of our most pressing issues, or “do good while doing well.”
Creating a strong impact with sustainable finance
While there are niche opportunities for this kind of “win-win” investing at the firm level, the current regulatory framework won’t support anything close to the level of investment required to address our social and environmental challenges. Without a supportive regulatory environment, for instance, industry would have to absorb losses of nearly $10 trillion by 2030 in order to fulfill the 1.5-degree Celsius global warming goal set out in the Paris Agreement. Win-win investors just aren’t ready to accept sub-commercial profits and won’t make the necessary investments, regardless of the issue at hand—whether it’s global warming, biodiversity loss, poverty, or social isolation.
Instead, we must seek conventional win-win investment while also engaging in “trade-off” investing that has an effect but offers returns that are below the market average, as well as investing in advocacy for altering economic policies. In this article, we examine the functions and difficulties of the latter two strategies and provide a novel investing tactic that is scalable and reproducible for a broad range of investors.
Movements for Sustainable Investment and their Limits
A chorus of once-lonely criticisms of sustainable investing initiatives has emerged during the last year. Additionally, they’ve gotten more abrasive. Instead of advocating for the mainstreaming of sustainable investing in March 2021, Tariq Fancy, who had been hired by the investment giant Blackrock, said that “sustainable investing and the narratives that surround it” are “a fatal diversion that are actively damaging society.” These initiatives “even facilitate the prolonged dominance of fossil fuel,” said corporate sustainability specialist Auden Schendler in a post shortly after.
Kenneth Pucker, a professor and advisory director at Berkshire Partners, said in May that these movements have turned into an “obstacle to development,” while Duncan Austin, a sustainability economist and investor, said that they “perpetuate complacency” in the face of a “race against time.” Six management academics went so far as to compare corporate sustainability initiatives to a disease that may “kill our possibilities of reversing the environmental catastrophe” in the same month.
Perhaps going to “Cancer” is going too far. Despite the fact that traditional win-win investment cannot potentially be implemented at the scale required to address social and environmental issues like climate change, it still has some positive effects and should be pursued at the corporate level. But the first responsibility of an investor is to admit that the ability of win-win initiatives to have a significant effect is constrained by an unsupportive regulatory environment.
The role played by advocacy
Win-win and trade-off investments are ineffective in addressing pressing social and environmental concerns. They are significant but specialized activities in a sizable economy when the majority of trade just adheres to the rules of the game. Even while carbon emissions, for instance, are very expensive for the environment, they are mostly free for the economy—and free things tend to be abused. Similar to this, spending money to lessen social isolation has a beneficial social impact but brings in no money for the investor.
Thus, altering the rules such that solving social and environmental issues is lucrative is the only way to revive our enormous global economy. ICMA noted that for instance, putting a real price on carbon emissions would significantly increase the possibilities for win-win investment. A carbon price would increase returns on low-carbon or carbon-capturing alternatives like renewable energy and the manufacture of low-carbon steel while decreasing returns on all carbon-intensive activities across all sectors to which it applied, including manufacturing and electricity.
In support of a carbon pricing in 2019, more than 3,500 US economists, including 45 Nobel Prize winners, signed a declaration. By making all essential investments lucrative, it may completely eliminate the $10 trillion gap and is the finest market-based approach for enabling investment at scale.
Advocacy can help in this situation. Businesses and investors may start by raising their voices to demand regulatory improvements. A recent Global Investor Statement signed by 457 investors representing $41 trillion in assets demanded quicker regulatory action. However, although such initiatives are commendable and aid in cultural change over time, little is really done to motivate and substantively alter the conduct of politicians. Businesses and investors must connect with voters to do that. They need to spread their message farther, which costs money.
A New Approach to Impact Investing
We suggest the following broad approach so that investors might help at the appropriate scale in resolving social and environmental crises: A wider group of investors may argue for and position themselves to benefit from supporting a future we must reach—a future that includes a healthier climate and more cohesive communities—when special interests agitate to prolong and exacerbate a social or environmental catastrophe.
Asset management companies, a group that comprises the majority of the investors who signed the Global Investor Statement, are especially well-positioned to execute this approach. However, it may take diverse shapes for various investors and businesses. Additionally, they cater to a wide spectrum of customers, including impact investors. According to Adrienne Buller and Benjamin Braun at Common Wealth, these companies are “the dominant shareholders in corporations throughout the global economy,” and as a result of their extensive ownership, they are significantly exposed to threats to capitalism that affect the entire economy, such as climate change.
Final words
The advocacy method described here, in our opinion, is the only realistic way for business and investors to really create a “win” for both them and society. Additionally, for early-moving asset managers, the rise in management fees may exceed the expense of advocacy investments. In fact, ethical campaigning and win-win investment may pave the path for a more sustainable future in the end.
