An Early Morning Meditation On Being A Pioneer

A recently-published article in the Stanford Social Innovation Review on “closing the pioneer gap” (if you want to read it, which I heartily encourage, here’s the link) got me thinking.

We are fortunate – really, really fortunate – to count among our clients some serious, no-BS pioneers in impact investing. Not the so-called “thought leaders” who swan around the world, dipping in and out of conferences and opining on how to transform the world with capital. Nope. Legitimate, committed, passionate impact investors who, by the simple virtue of putting capital to work in pursuit of creating environmental or social value, have earned for themselves the title of “pioneer”. They are willing, excited actually, to take an unconventional risk in pursuit of an ideal. They are keen to imagine that their small gesture of intent might catalyze others. Their ability to think independently, to act accordingly and to disregard the skeptics and cynics is both breathtaking and unnerving.

Without the slightest hint of irony, I am humbled to serve them. Far too often, in fact, I find myself counseling caution in the face of their passionate pursuit of impact, urging a most measured cadence, encouraging more modest goals.

Which has recently forced me to consider – perhaps “re-consider” is a more appropriate term – how I think about the nature of being an impact pioneer, what this term says about the investor, and how it informs the work that we do together. After all, if just about anyone who is actually putting money to work in the discipline can be considered a “pioneer”, what exactly does that mean? I had the distinct pleasure of listening to our friend Drummond Pike (OK, if the rest of us are pioneers, Drummand is an explorer) interview Tom Steyer, the founder of legendary hedge fund Farallon Capital Management at the Equilibrium Capital annual meeting.

Aside from being intimidatingly organized in his thinking and just as unconventional, Tom is a committed environmentalist, an extraordinarily successful investor, a deep believer in capitalism, a steadfast supporter of investing in community development… and does not shy from expressing his opinion. In his remarks, he outlined his rationale for impact investing, presenting a compelling case for the long-term drivers we all know: increased resource demand, climate change, the energy question, food security, etc. Nothing new there. He then shifted focus to what he saw as the root cause of many of our current problems. Briefly, he believes that capitalism has the power to solve the world’s apparently intractable problems, but only if the rules change. Capitalism is, after all, nothing more than a “optimizing mechanism” that operates within an exogenously-imposed set of regulations, expectations, and behavior. To claim, for example, that coal is a cheaper source of carbon is to ignore the very real, well-documented but essentially ignored collateral damage that comes with its use. Mercury poisoning. Lung cancer. Etc. The list is long.

Tom’s point (and I’ve heard it argued before, but always from the purely environmental perspective… which tends to get a bit idealistic and impractical in terms of implementation) is that using coal is not evil. Quite the opposite. Coal use is the inevitable consequence of failing to set the rules such that the actual cost of using the commodity is reflected in its price. Full-cost accounting is no new concept, so I don’t want to imply that Tom is somehow waving a magic wand over a problem that nobody has been able to crack. But he is the first person I’ve heard talk about it from the perspective of the CFO rather than from the perspective of the guy who lives downwind from the coal-fired plant.

And what does he say about the CFO? Any CFO worth his title will be looking to optimize profitability within a set of regulations. If the CEO lays out a strategy that results in a sharp increase in energy use (I’m making this up, obviously), the CFO will look for the most efficient way to increase energy use without increasing variable costs. In almost any situation, coal is a likely contender for the title of “cheapest energy source”. But if the rules where changed to, for example, include the health care costs associated with using coal in the cost of the commodity itself, this would no longer be the case. In fact, with health care costs representing likely THE biggest problem facing our country’s long-term economic viability, I would humbly suggest that coal might not even make the top five.

But what does this have to do with being a pioneer? I’ll likely touch on this subject in the future, as it is one that I find relentlessly fascinating, but for now let’s restrict ourselves to the risks associated with pioneer behavior… specifically unconventional or unexpected risks. In the case above, the risk to any investment is that the rules change. Just look at wind power. As an industry, it contracts and expands in near-perfect lockstep with government incentives. As an investor, you must be aware of this cycle before you commit capital. Or look at usury laws in emerging economies. These can, and will, have a direct bearing on the success of microfinance investments.

And regulatory risk is by no means the biggest one. Lack of infrastructure. Thin talent pool. Inexperienced management. Unfamiliar collateral. Cultural and political preconceptions. Rudimentary supply chains. These are fundamental risks to many impact investments, but they are unfamiliar – and hence uncomfortable – risks to many developed-world investors (particularly their advisors – and I count myself among them, despite my decades of travel in the emerging world).

As a result, there exists a yawning “pioneer gap” between the companies that offer the chance to do the most good, and the capital flows necessary to support them. I’m not saying that we have the answers. But having the sheer, undiluted good fortune and pleasure to work with people who have self-identified as being willing to embrace those unconventional risks is one way to begin finding the answers… and slowly, intentionally, bridging that gap.