Investment Strategies: Getting Down to Details on Eco-Carpetbagging, Global Good, and the Transition to Community
Jul 26 2010
By Leslie Christian
This is the fifth entry in a 6 part series by Leslie Christian on rewriting modern portfolio theory to recognize the reality of ecological limits to economic growth. To read Leslie’s other blog posts on the subject, use the links at the bottom of this post.
In my last blog post, I discussed three investment strategies – Ecological Carpetbagging, Global Good, and Transition to Community. Following is a more detailed discussion of each strategy, including examples of investments that fit them.
Ecological Carpetbagging is defined as profiteering through exploitation of human and planetary resources. This strategy depends upon a relentless pursuit of short-term profits without consideration of the likelihood that these activities could destroy the possibility of long-term economic value.
Examples of Ecological Carpetbagging Investments
Unfortunately, examples are rampant. In the stock market, the focus on “shareholder value” (a.k.a. quarterly profits and rising stock prices) causes companies to engage in, and investors to overlook, risky behavior. Recently, we have observed BP and other oil companies taking on riskier and riskier exploration and production activities as oil reserves become increasingly elusive. The deforestation of the Amazon and other tropical areas in favor of short-term profitable pursuits destroys essential carbon sinks and contributes to global warming. Hedge funds and investment banks routinely construct opaque, convoluted financial vehicles such as collateralized debt obligations, credit default swaps, and even “longevity swaps” that serve no obvious long-term economic purpose; rather, they purport to distribute risk through financial engineering while revealing little or nothing of the underlying assumptions and profit spreads.
Why Use This Strategy?
One might wonder why anyone would intentionally engage in Ecological Carpetbagging. I think the main reason is that this type of investing is not typically seen as exploitive. Instead, we have come to equate these activities with prudent investment management. Let’s call it what it is: while claiming to value long-term results, we are still fixated with quarterly returns and short-term profits.
Allocation – How Much?
I cannot prescribe for others how much to invest in a particular strategy, but I would like to suggest that allocations to short-term profiteering be aggressively reduced, if not eliminated, in favor of a commitment to long-term economic value that considers the integrated risk of an investment strategy.
Global Good is defined as an investment strategy that seeks to identify industries, sectors, and companies that will survive and even thrive as ecological limits impose transition and transformation on the global economy. Global Good investing at its most effective requires rigorous risk analysis, a willingness to confront conventional wisdom regarding diversification, and integration of the possibility of zero or negative GDP growth. Effective Global Good investing is based on the premise that the global economy is not going to disappear or completely break down; however, certain kinds of industries and companies will dominate while others will become obsolete or socially unacceptable. The stock market does not fully price this kind of risk, so it is up to investors to be discriminating, granular, and specific in their analyses and choices.
Less effective Global Good investing takes a more conventional approach by seeking to track the current stock market, invest in “best of class” in all sectors, and perpetuate faith in growth.
Examples of Global Good Investments
My blog posts here have not had an agenda of promoting my company or anyone else’s. However, at this point, I must cite our company, Portfolio 21 Investments, as an example of what I consider effective Global Good investing. We are careful to acknowledge that none of the companies we invest in is completely sustainable. We instead work to identify beneficial goods and services, and the companies we believe can most effectively provide them in the face of the threats arising from ecological limits.
There is a growing universe of mutual funds and investment management firms that claim to be sustainable investors, applying environmental, social, and governance analysis in their analytical processes. A fairly comprehensive list can be found at www.socialinvest.org. I strongly encourage anyone who is interested in Global Good investing through mutual funds or separate account managers to assess the implementation of advisors’ stated strategies. Read the fund’s annual report and study not only the general statements, but the actual holdings in the fund(s). Unfortunately, there are many marketing materials and advertisements that promise more than can be delivered.
In addition to publicly traded stocks, there are private funds that are offered to wealthy individuals and institutions. In general, venture capital and private equity funds invest in companies they expect to grow and enter the global economy. Some of these private funds have begun to focus on companies that are developing technical innovations and solutions to the threats presented from ecological limits. For example, the London-based firm Generation Investment Management LLP offers a private fund called Climate Solutions that invests in both public and private companies that are working to solve the problem of global warming.
Why Use This Strategy?
Investing in Global Good is an act of faith — faith in capitalism, innovation, and ingenuity. It is also, to some extent, the default position for investors with a long-term focus. It is difficult, if not impossible, to envision a world without stock markets, growth, and capital gains. Even when we understand the reality of ecological limits, we may still choose to invest in the global economy, trusting that innovative companies that understand the problem are also figuring out ways to prosper in the face of a changing world. After all, no one knows how the future will play out. It is therefore reasonable for most investors to commit some portion of their portfolios to the Global Good in its current, albeit evolving, state.
Allocation – How Much?
Most people and institutions are 100% invested in the global economy and could quite easily shift all of their investing to the Global Good strategy. For institutions and wealthy individuals, there are more choices, particularly in innovative private companies. Most individuals are still limited to investing in publicly traded stocks through mutual funds or brokerage accounts. What I find among the clients with whom I have worked for five or more years is a shifting of allocations from Global Good investing to Transition to Community investing (see below). Some have exited the public stock markets completely, choosing to invest in various types of bonds and community investments. Again, this is not a prescriptive process or percentage, but more of a process over time.
Transition to Community is defined as investing to build strong local and regional economies in the face of ecological limits. The biggest difference between Global Good investing and Transition to Community investing is the attitude toward growth and profitability. No matter how thoughtful and forward thinking a publicly-traded global company may be, it is still part of a system that values share price appreciation most highly. In contrast, Transition to Community investing, as I define it, remains committed to profitability, while recognizing shareholders as just one constituency. Employees, community, the environment, customers, and suppliers all contribute to building strong companies and deserve consideration in the allocation of revenues. There is a subtle, but critical, shift from an emphasis on maximizing profits to allocating revenues — to pay living wage salaries and engage in profit-sharing with employees, to restore and preserve physical resources, to support community activities, and to give customers and suppliers a “fair shake” now and over the long term. In so doing, Transition to Community investing takes an interest in economic value rather than in short-term profits for shareholders. It also views risk as an integrated proposition — a function of ecological limits as well as trust, relationships, and transparency.
Examples of Transition to Community Investments
Investment opportunities in this strategy have to date been limited, largely due to securities regulations, and also because the concept of local and regional economies has only recently begun to regain legitimacy as a necessary component, if not an alternative, to the global economy. Thanks to the efforts of organizations like BALLE (Business Alliance for Local Living Economies), RSF Social Finance, Ecotrust, Slow Money, B Lab, and many others, investors are seeing the qualitative and quantitative attractiveness of investing in one’s local economy or in local economies throughout the world.
Accredited (wealthy) investors have access to a fairly wide variety of investment options that place a high priority on building local/regional economies. Our company, Portfolio 21 Investments, has co-founded a regional holding company called Upstream 21, as well as a fixed income fund, Local Economies Income Fund, which invests in bonds and other vehicles that support the local economies of the Pacific Northwest. Ecotrust offers a forest fund that is committed to long-term sustainable management of the forests it owns and operates in the Pacific Northwest. These are only a sliver of the opportunities available. Accredited investors should aggressively require that their advisors and managers help them identify and evaluate these opportunities (and should avoid advisors who refuse to do so, for whatever reason).
Non-accredited investors (the vast majority of individuals) can invest in local economies via community banks, some community loan funds (see www.communityinvest.org), and targeted notes such as those issued by the RSF Social Investment Fund and Calvert Foundation. I encourage all of us to dig deep, ask questions, and request information in support of more local investment options.
Why Use This Strategy?
The most pragmatic reason for Transition to Community investing is risk management. In the face of ecological limits and the very real possibility of wrenching changes to the global economy, it is no longer prudent to place all of one’s investment eggs in the global basket. We also need to invest in local self-sufficiency and economic diversification, seeking reasonable returns on invested capital.
Allocation – How Much?
Why not 100%? For some (relatively few) investors, this is the right percentage at this time. For most investors, the appropriate allocation to Transition to Community is more than zero and less than 100%. Finding the right allocation for oneself or one’s organization is a worthy pursuit and a prudent use of one’s time, especially when compared with the fixation on short-term financial returns that has heretofore masqueraded as responsible investing. In the words of RSF Social Finance President and CEO, Don Shaffer, “Instead of having all your money tied up in a financial system that has become increasingly complex, opaque, and anonymous, based on short–term outcomes, you can now help create an alternative that is direct, transparent, and personal, based on long-term relationships.”
This blog post has been quite matter-of-fact in describing the different options that exist today for investors, but I hope it has provided tangible food for thought. In the next and final post in this series, I will discuss how shifting investment strategies affect us on a personal level — both in our daily lives and in the way we experience the world.
Leslie E. Christian is Chief Investment Officer and Chief Executive Officer of Portfolio 21 Investments. She has more than 35 years of experience in the investment field, including nine years in New York as a Director with Salomon Brothers Inc. She received her bachelor’s degree from the University of Washington and her MBA in Finance from the University of California, Berkeley. Leslie is Chair of the Board of Upstream 21 Corporation and Portfolio 21 Investments and serves on the RSF Social Finance Investment Advisory Committee.
Other Posts in This Series:
I cannot prescribe for others how much to invest in a particular strategy, but I would like to suggest that allocations to short-term profiteering be aggressively reduced, if not eliminated, in favor of a commitment to long-term economic value that considers the integrated risk of an investment strategy…