Capital has a tendency to get invested at the perceived highest rate of return, and so we have a tendency towards doom.
(Sci-Fi author Kim Stanley Robinson)
Not Business As Usual: A Sustainable Economy for All
What would it mean to place human and planetary health at the center of our future economy? Can digital society be supportive of a health-focused economy? As governments around the world respond to the extraordinary disruption to business as usual caused by the coronavirus pandemic, is there a unique opportunity to push for an economy that works for everyone? What is the difference between stock market performance and the health of the economy? These are the questions I am asking myself in the extra time I have for reflection during the pandemic now that my nearly two-hour commute back and forth to my office at Pier 17 has ceased for the near term. I believe many others in San Francisco, where I live, and all around the world are asking similar questions.
In the coming months, I’ll explore questions like these more in depth through a mixture of articles, podcasts, and digital events as part of swissnex San Francisco’s exploration of three key focus areas: human & planetary health, digital society, and future economy. If you’d like to be part of the conversation, drop me a line.
This first piece nibbles at the very large topic of sustainable finance. In this piece I explore the investing side of the financial system and the decision making criteria used by investors in public and private equity markets.
WHAT KIND OF SYSTEM DO WE WANT TO SUSTAIN?
The word ‘sustainability’ is a difficult one that doesn’t exactly roll off the tongue, lacking as it is in mental imagery and difficult to type correctly every time! It’s also a tricky one because we need to carefully consider what kind of systems we want to and can actually sustain in our biosphere, particularly as we rebuild our economies in the aftermath of global pandemic-induced shutdowns.
In early conversations once the shutdowns started, I heard a number of people talk about experience as being like a veil was lifted, like the moment in The Wizard of Oz when Dorothy’s little dog draws back the curtain and you see a mere man pulling the levers behind the ominous spectacle of the god-like Wizard. The combination of witnessing record-setting bailouts across the world totalling over 10% of global GDP and the extra time for reflection many people have had on their hands has functioned something like that curtain being drawn back, unveiling the plain fact that our economy is operated by man. And that the machinery of it is also engineered by man and can be made to function differently than it did before the pandemic.
Generally speaking, the rich have been getting richer and the poor getting poorer in many countries around the world over the last few decades including, sadly, in my own country of the US where wealth inequality has doubled since 1980. Unfortunately it is probable that the pandemic will exacerbate this trend; recent IMF research has shown that the last five viral pandemics contributed to rising inequality as measured by the Gini coefficient which is a commonly used metric that ranges from 0 to 1, representing perfect equality to complete inequality respectively. The US’s Gini coefficient is significantly higher than other advanced economies, e.g. at last measure in 2015 it was 0.296 in Switzerland vs 0.39 in the US and it has risen here since then. Rising inequality threatens the social contract that connects citizens and residents of a country to their democratically elected government and if left unchecked, threatens democracy itself in the long term. While the US is a stark example of income and wealth inequality, many countries in Europe have also become less equal in the last decades.
The pursuit of extreme wealth is also associated with environmental destruction and barriers to political reform according to new research titled Scientists’ warning on affluence co-authored by Lorenz T. Kysser at ETH Zurich and published in the journal Nature Communications. The abstract states: “The affluent citizens of the world are responsible for most environmental impacts and are central to any future prospect of retreating to safer environmental conditions.”
The economic system that has supported that phenomenon of rising inequality is often referred to as neoliberalism, an economic philosophy emphasizing free market-centric policies that tends to favor those on the supply side of industry. Neoliberalism is often associated with “trickle down” economic thinking whereby it is assumed that it is necessary to craft fiscal and monetary policies to support those economic actors with the most assets, arguing that incentivizing people and companies at the top is an efficient way to get large parts of the economy moving and that this will naturally lead to trickle down effects for those with less resources and end up lifting all boats in the end. It depends on how you measure the health of the economy though, which is not the same thing as stock market performance regardless of the prominence of those metrics in our economic discussions. The evidence that trickle-down economics works is wholly lacking and belief in it was already starting to crumble before the pandemic. As governments like the US respond to the continuing dual crises of the coronavirus pandemic and climate change, the insistence on incentivizing consumption without thought on whether that consumption is healthy for us and the planet we inhabit–the ultimate source of all supply chains for all industries–has taken on a bit of spectacle, a bit like the Wizard’s fearsome show as Dorothy’s dog is starting to walk over to the curtain…
SUSTAINABLE FINANCE IN THE ECONOMY
That brings us to the basic idea behind sustainable finance. Money runs the world, but money is a creation of man and we can redesign the financial system to target better outcomes. We can value different, or additional things that matter to people like good corporate citizenship, social equity, and environmental responsibility. There is a growing body of research and practice indicating that factoring in these additional parameters of performance, environmental and social governance (ESG) has a beneficial impact on long-term shareholding, that being added to or dropping from the preeminent Dow Jones Sustainability Index has a positive or negative influence on share price respectively, and that the way companies handle ESG considerations is actually information that is material for an investor’s decision making and hence needs to be disclosed. Whether focusing on ESG requires a tradeoff between financial performance and ESG performance is a hotly contested matter, partly because there is no common standard for how, or even what, to measure when it comes to ESG. A San Francisco-based nonprofit called the Sustainability Accounting Standards Board (SASB) has been working on what makes sense to include in a publicly traded company’s 10-K SEC filings by industry to bring transparency around these investment decision criteria.
In the entrepreneurship world, impact-oriented investors like Kapor Capital in Oakland, CA are demonstrating that investing in startups who build social equity into their business plans provides a profitable investment thesis, and some of the largest private equity investment funds in the world have increasingly been pursuing climate-positive opportunities. For example, the recently announced Prime Impact Fund based in Cambridge, MA targets startups with breakthrough climate technologies with its recently announced $50M raise. Pale Blue Dot is another big startup fund from Sweden that was recently announced. These new funds join existing giants like Breakthrough Energy Ventures which announced a $1B fund with some of the world’s largest investors back in 2015 after the Paris climate accords.
As our knowledge of the risks to our way of life and economy brought on by climate change and inequality increases, and our carbon budget diminishes, the time horizon for considering ESG factors narrows for the financiers that facilitate business growth and public infrastructure projects. As Greta Thunberg has repeatedly said, we must listen to the scientists when they tell us that our way of life in this exploitative paradigm is severely threatened and we don’t have much time to turn things around. According to the Intergovernmental Panel on Climate Change (IPCC) we have roughly a decade to entirely transform our economies to be sustainable within the carrying capacity of our planet. This is now a short-term issue we must face. And why wouldn’t we when there is plenty of opportunity in a redesigned economy, one that has regeneration instead of exploitation at its heart? We have the experience of the pandemic and all that it has revealed about how things work. It’s now time to figure out how to put human and planetary health at the center of our pandemic- and climate-changed economy. We have the knowledge, so we must act.