Articles / 05.07.2014
(Advance apologies for a lengthy post. It’s been a while since my last one, so I’ve got a lot to say.)
One of the more powerful and pervasive shibboleths in the SRI/ESG/Impact community is “values alignment”.
Organizations like First Affirmative Financial Network define themselves by marketing values aligned mutual funds. Bulge-bracket banks like Merrill Lynch and Morgan Stanley have constructed elaborate marketing campaigns on the notion of “values-based investing”. Enterprises ranging from Confluence Philanthropy to the numerous purveyors of public market SRI/ESG data (think of MSCI KLD, Sustainalytics, HIP or the FTSE4Good) see values-alignment as central to their business models. Even asset managers like Trillium and Walden, both bright stars in the SRI firmament, rely on the concept of values-alignment to compete for market share and inspire their clients.
And this is all very much to the good. Defining one’s values, and then expressing them through allocation strategies is one way to harness the power of the capital markets for change. The subject at hand is not the efficacy of values aligning. Rather, the question is whether values aligning actually has the capacity to effect change and, if it does, at what scale must it be organized to do so?
(As a lengthy aside, as I’ve written before, and in contrast to some of my peers in the SRI/ESG/Impact community, I believe that there is extremely limited “impact” in simply values-aligning portfolios of public securities. Impact investing is, at its core, about harnessing the power of the capital markets to create social and/or environmental value; seeking outcomes that have not historically been considered material to capital allocation decisions. Trading securities in the secondary market does not create value. At best, it captures value.
True, if an enormous number of people shared the same values and acted on them, a clear price-discovery signal would be sent to the market and corporate behavior would change. But there is no evidence – with a handful of exceptions – that screening portfolios has more than a gestural influence on corporate behavior. If Carl Icahn can’t induce Apple to distribute some fraction of their $140bb cash horde to shareholders, what hope do a small group of environmentalists have in convincing Peabody Energy Corporation to voluntarily put themselves out of business by doing nothing more than not buying Peabody’s shares? Without the parallel effort to engage the companies one owns, screening portfolios is nothing more than a personally important – but functionally immaterial -navel-gazing exercise.
Full disclosure: despite the cynicism implied by that last sentence, I am a huge proponent of values-aligning one’s portfolio. See bullet points below. Further, we have excellent relationships with As You Sow, Proxy Impact, and a roster of committed, passionate asset managers who walk their values every day. To say that I am proud to be associated with these fine organizations and the outstanding people who have built them is an understatement.
But I digress.)
A thought exercise:
Who is the most effective values-aligned investor in the US today? Who is manifestly transparent about their vision for America? Who effectively (and unabashedly) harnesses every pool of capital at their disposal – political, human, personal, commercial, professional and philanthropic – in a coherent, effective, multi-pronged strategy to shape public perception, inform policy and public debate, and extract economic value from the markets?
Calvert? Trillium? The Kellogg Foundation? Impact Assets? Nope.
At the risk of flaming my Impact street cred, I’m going with Charles and David Koch… the Koch Brothers.
While one might disagree with the Koch’s mission – advancing the cause of libertarian and conservative thinking, rejecting the idea of universal health care and undermining climate change legislation – one cannot argue with their results. I would suggest, in fact, that few important issues in America today – health care, hydrocarbon extraction, tax policy, climate legislation, infrastructure spending, foreign policy, etc. – are not in some way shaped by the Koch brothers’ efforts.
What fascinates me is that this is precisely what values-alignment in a democracy is all about: waging a war of ideas in an open, public, spirited debate. Sure, we can (accurately) complain that they are distorting democracy by buying elections and mind-share through the cynical exploitation of PAC regulation. And, yes, their desire for self-enrichment is more than just a wee bit transparent. But would we complain if, say, Tom Steyer were as effective at getting climate change legislation passed as the Koch brothers are at getting it blocked? I think not. We would celebrate the results as proof that democracy works!
Which brings us back to the subject of my blog: values alignment and the impact investor. To me, values alignment is a critical, simple first step in the evolution of an impact investor. (Even more bluntly, I would argue that to self-identify as an impact investor without engaging in some form of values-alignment is to risk some level of hypocrisy. But I digress. Again.). But why is it important? A few reasons, off the top of my head:
- Doing so helps identify an investor’s motivation as she contemplates an unconventional approach to deploying capital.
- Doing so can contribute to a sense of harmony with one’s money in a world where climate science is increasingly clear that just being a part of the 21st century Western World is deeply problematic.
- Doing so helps to define one’s theory of change…. which is, after all, the whole point of Impact Investing.
- Doing so can contribute to the voice of small groups of committed activists who seek to influence corporate behavior, particularly if the exercise includes proxy voting and shareholder engagement.
- Doing so, to state it bluntly, puts one’s money where one’s mouth it (speaking of which, I recently invented an emoticon for this concept :-$)
Which leaves us with an interesting situation. There is limited proof that values alignment actually has any effect. There is a sizeable industry surrounding the exercise, and a lot of people make their living off the notion that values alignment is important. Both concepts are linked by one idea: the power of collective voice. If only EVERYONE acted in concert, change would be imminent. But EVERYONE acting in concert is, well, not going to happen. So where does all of this leave us?
1) We must be intellectually honest about the limits intrinsic in screened public portfolios. In terms of using the capital markets to create a better world for our grandchildren, SRI/ESG screening was state of the art in 1992.
2) Values-aligning works… but only when done in a comprehensive way. For example, to strip one’s portfolio of carbon and not leverage that decision with a political ask is like planting seeds and never watering them.
3) Impact investing risks falling prey to what I call “the cocktail party syndrome” – pursuing impact only in ideas that you want to talk about at a cocktail party without doing the hard, tedious work of harnessing every part of your portfolio (or every pool of capital) to that end. Do we think that the Koch brothers feel their mission is fulfilled by the sour oil refining start-up they funded? Not likely. They understand that they need to pull every lever at their disposal, and they do so without apology.
4) We must be passionate about using our position as fractional owners of companies that must do better. Vote proxies. Engage in dialogue. Communicate. None of which is easy, but all of which is important.
5) We must get over our collective squeamishness towards the idea of pulling pull all the levers of our 21st century political process (on this point, I sing Tom Steyer’s praise – that dude is heavily armed and striding into battle!)
6) And, most importantly, we need to dispense with the claim that values alignment is the exclusive bailiwick of enlightened, progressive investors. It is an intellectually bankrupt notion.
My next post: “Forty Shades of Grey – why values are so hard to align.”