How can sustainable investing increase its impact? And what comes next? Experts look at the future of finance and “re-personalizing” money.
Money is powerful. It shapes our society and our lives.
And money is complicated. It’s a tool for corporate investment and innovation, and a source of personal status and well-being.
How could money’s impact be more positive?
NBS brought together two far-seeing finance experts to discuss how money is used today and how that could change for the better.
Dr. Fabrizio Ferraro is professor of strategic management at IESE Business School in Spain. He studies responsible and impact investing. As an economic sociologist, he examines how financial markets and capitalism evolve.
Joel Solomon is a pioneer in the field of responsible investing, a founding partner of Canada’s largest mission venture capital firm, and author of the book The Clean Money Revolution. His book calls for reinventing capitalism.
Together, they describe what sustainable finance means, whom it impacts, and why changing our views of money may require “spiritual evolution.”
Listen to their Conversation
Why does society need a new approach to money?
Joel: We continue supporting an imbalanced system which is pushing wealth, capital, and power to a smaller percentage of the population. And this will create a pressure cooker.
Fabrizio: This is also how I feel about the sustainable finance revolution. It’s really the only alternative for capitalism in liberal democracies. It will be increasingly difficult to defend and maintain capitalism as it is in liberal democracies because of its inability to deal with major crises of inequality, climate change, species loss.
The sustainable finance revolution also improves investment generally. It focuses more on the risk side, which I think the financial sector has not been able to evaluate correctly — the 2008 financial crisis is probably the most obvious example.
What’s the current state of responsible investing?
Fabrizio: Globally, responsible investing is almost 50 per cent of the global assets under management, or $30 trillion. Responsible or sustainable investing involves integrating social and environmental performance into the investment process.
More than 90 per cent of that money is large institutional investors, like pension funds. Only 10 per cent of that money is actually individual investors.
University endowments and foundation endowments have been somewhat surprisingly laggards in this game, as have high net worth individuals. I think that the next battles in terms of asset ownership are these three groups.
Progress has been made. For example, fiduciary duty is being interpreted quite differently now. In many countries, it’s no longer possible for pension fund trustees to say “I cannot consider environmental and social factors because this is against my fiduciary duty to the pensioner.”
We also have a much better infrastructure of ratings, metrics and accounting, basically built in two decades. We do need to invest more in it: for example, hire more people who understand environmental and social issues.
Joel: That’s the exciting part of these last couple of decades, as an entrepreneur on these issues, to see how much innovation and movement and demand for better products is now there.
It is important that this rises to the point of a millennial change, a transformation.
Why does venture capital matter?
Fabrizio: The public equity (stock) world is all about steering the tankers, moving existing companies. Mission venture capital, or impact investing more broadly in venture capital, is a key piece of this puzzle. We need experiments in radical, innovative, sustainable solutions, and startups and venture capital (VC) are the way we usually develop these in a capitalist society.
I think it’s been quite disappointing to see that from the VC in Silicon Valley and even globally, many of the “unicorns” are relatively unsustainable companies. Many of these companies that were going to be the darling of financial markets — WeWork, Uber — have actually shown up to be risky businesses, and they are risky primarily on their social aspect.
Joel: I recently got into conversation with someone who has an incredibly ambitious venture capital fund for breakthrough technologies: the most significant sustainability-oriented ones. Opinion leaders will move into forward-thinking fields and deploy capital and take the risk to find technologies that might make major shifts. This is happening, but it’s not the mainstream yet.
The reason I’m in the business of mission venture capital is to prove that there’s plenty of money to be made in investing in things that matter, supporting entrepreneurs who actually care.
How do individuals need to think about money differently?
Joel: I think that we need to re-personalize our relationship to money. We have responsibility for where our money came from and who it has affected. We have created a system that enables us to be a moral and ethical person in our daily life, but with our money, think a lot less about the full cycle of what happens and what that involves us in.
I also feel that it’s important to ask how much is enough. There’s clearly some amount of money after which I am simply accumulating a number. I like the incentive that capitalism can give for creativity and innovation, but I want to know why I need to have more than 5 million, 10 million, 100 million, a billion dollars. What is the purpose of that?
The answer is often because “then I can do good with it.” But we see these fortunes usually only grow, and work harder to make more money. That is the wrong motivation for humanity, to assemble the most money.
I think it may take us a spiritual evolution to reclaim what our role is being alive on the planet.
Who should care about responsible investing?
Fabrizio: Everybody should care, in my view.
If you are a pensioner, you many not receive a pension, if the investment has taken on too much risk.
Any CFO of a publicly listed corporation cares about cost of capital. It will go up without good social and environment performance.
If you’re the CEO, your shareholders increasingly care about the social and environmental impact, and so do customers and employees.
If you are a banker and you’re lending money, you need to evaluate the risk that you will not get your money back.
Environmental and social factors translate into risk for almost any type of financial transaction. It’s difficult to find individuals or groups that would be immune.
Joel: If you poll people about their pension funds, though, they still will vote for the higher return rate, and ignore that those other consequences. So, these are conundrums.
Is change happening fast enough?
Joel: We’re being told that there’s less than a decade to turn around climate. Why is everything not shifting towards that?
Fabrizio: If I look back at the history of shareholder engagement on climate change, ICCR and CERES started this work almost two decades ago. And I think by now, almost all companies are acknowledging that climate change is a risk for them.
Frankly, I think that it will be difficult for shareholders, asset owners, even asset managers to move a lot faster, lacking the level playing field that regulation should provide.
I think we have to compare these changes to similar changes in history. The financial accounting system was not created in a decade. It took at least three decades to get to quality financial reporting.
I think a lot of infrastructure for responsible investing has been built in the last two decades. Will this generate change at the pace we need? I have my doubts too.
Joel: There’s reason to be hopeful. We just have a ticking clock.
Share Your Ideas
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Habermas in the Boardroom? Evidence from Shareholder Engagement (Fabrizio Ferraro and Daniel Beunza)
What is Responsible Investment(United Nations Principles for Responsible Investment)
The Global Sustainable Investment Review 2018 (Global Sustainability Investment Alliance)
About Fabrizio Ferraro
Fabrizio Ferraro is Professor of Strategic Management at IESE Business School. He received his PhD in Management from Stanford University. His current research explores the emergence of responsible and impact investing in the financial sector.
Previously he studied the institutionalization of the Global Reporting Initiative (GRI), the robust action strategies to tackle grand challenges and the role of economics language in organizing. His work has been published in Administrative Science Quarterly, Academy of Management Review, Academy of Management Journal, Organization Science, and Organization Studies, among others.
About Joel Solomon
Joel Solomon is a Founding Partner of Renewal Funds, Canada’s largest mission venture capital firm, at $250m assets under management. Investing in Organics and EnviroTech in Canada and the USA, Renewal Funds is GIIRS-rated, a founding Canadian B Corp (5x “Best for the World”), a “1% for the Planet” member, recognized as ImpactAssets “Top 50 impact fund managers.”
He is a Founding Member of Social Venture Network (SVN), the Tides Canada Foundation, Business for Social Responsibility, and the BALLE Local Funders circle.