How we spend our money is an expression of our values.
Buying power is a moral power and the way we spend has the ability to shape the world.
While most people would agree with that statement many people who care about the environment are simultaneously invested in Exxon Mobil. People who want to see a reduction in gun violence in America may also be invested in arms companies. Those who have lost family members to lung cancer may also be invested in tobacco companies.
The truth is, a vast number of those who are invested in the stock market have very little understanding of what they're invested in. They rely on fund managers to buy and sell and only pay attention to whether their portfolio is going up or down.
The practice of screening out bad investments called Environmental, Social and Corporate Governance (ESG) is one way to pay more attention and be a little "less bad".
ESG is a step in the right direction. However,if we believe that how we spend our money is a reflection of our values being less bad, then this is not enough.
To build a better future for our children, there must be a collaboration between all of us who care and all of us who believe it is our responsibility, in order for the future generation think in a new and different way. This new thinking is especially true for the world of finance.
The entire world of investment needs to be reshaped based on the values of those who are doing the investing.
A wholesale reset is needed in the financial approach for millions of people around the world.
Investors who care about making the world a better place should put their investments into companies that proactively address global, national or local problems while simultaneously making a profit.
Commerce should have a conscience. Profit should have a purpose.
The research is clear. Companies that do good in the world return more profits to their share holders than their counterparts -- those who do harm:
A factory the dumps toxic materials into the river down the road may profit in the short run but in the long run will destroy not only its reputation but also the health & livelihood of the employees; and customers who live nearby.
An apparel company that pay workers a tiny wage and force them to work in slave- like conditions might make a faster profit in one year but over the long run will pay the price for their short-term, myopic thinking.
A meat producer who abuses the animals that it farms may make more money than its competitors due to its lower cost, until the public finds out about what it has done.
Those who believe that capitalism requires exploitation and domination are a dying breed. They are dinosaurs who operate in an antiquated mindset. The good news is that things are changing.
So what needs to be done?
What's needed is a financial architecture that allows for proactive, long-term sustained change. While ESG screening can help investors stop supporting companies whose values they don't share, it doesn't actively use capital to address social problems.
We need to move beyond ESG to the next era in social impact investing. We must move from passively participating through funds to actively investing in operating companies who return generate long term profits and sustained social change.
By their nature funds encourage short-term thinking.
Funds also have far less power to encourage and monitor social impact than operating companies who will buy and hold a long-term position in other companies.
There's no question that a fund that generates true innovation-- for example a battery that harnesses the power of the sun for longer periods of time--can be very important but most funds back less impactful technologies and companies.
To generate sustained social impact, capital should back companies that have a proven model that can be brought to scale.
I am not aware of any companies with this model. While there are many companies who have deeply incorporated social impact into their business plans, the world of finance has yet to create an investment platform with permanent capital to support them as they grow.
The best model for this in finance outside of impact investing is Warren Buffett's Berkshire Hathaway--arguably the greatest company in the history of finance.
It is also clear that this model is also the best model for generating real profit. An analysis in the Financial Times of what would have happened had Warren Buffett been a hedge fund manager instead of the owner Berkshire Hathaway shows the dramatic difference between the two:
"The extraordinary mathematical conclusion was that, siphoning off "2+20" fees and investing them in the same underlying assets as Berkshire - compounded over a 42-year career - would have yielded Mr. Buffett the investment manager a $57 billion fortune. By contrast, the Berkshire
fund, reduced each year by the fees and therefore compounding at a much lower rate, would have grown to a meager $5billion."
The Oracle of Omaha's model for profit-making should be the model we adopt for impact investing.
How we spend our money is an expression of our values. Buying power is also moral power and the way we spend has the ability to shape the world.
It's just not enough to only be "less bad", but it is essential to be "actively good".
If investors who care about addressing the many problems of the world move their investments into companies who proactively do good in the world over long periods of time, we will unlock a revolution in finance.