No Time to Lose: A Call to Action for Impact Investors
Aug 23 2010
This is the sixth and final entry in a series by Leslie Christian on rewriting modern portfolio theory to recognize the reality of ecological limits to economic growth. To read Leslie’s previous blog posts on the subject, use the links at the bottom of this post.
By Leslie Christian
I began this series by questioning the assumption of infinite growth, which is embedded in modern portfolio theory and underlies the asset allocation practices of the majority of investors. Ecological limits will eventually constrain the expansion of gross domestic product (GDP) as natural capital is depleted and the ecosystem services upon which we rely for survival and prosperity can no longer meet our demands. In the face of ecological limits, investors have choices in how we respond to the very real possibility of negative GDP and how we choose to allocate our investment assets. I offered a new asset allocation framework based on long-term economic value and integrated risk in place of short-term individual returns and risk defined as volatility of returns.
This new framework flies in the face of conventional theory and investment strategies. And, no matter how logical the argument or reasonable the concepts, these ideas will be dismissed by many investment professionals, including members of foundation investment committees, consultants to pensions and wealthy families, brokers, Wall Street investment bankers, and advisors to Congress and the White House. They are part of a system that equates speculation with investment and looks with doubt upon those who suggest that investing might mean more than that.
Nevertheless, we need a new framework. It is not physically possible to continue the same kind of growth we have experienced, and we can’t try to fit what we know about ecological limits and growth into the existing investment framework. If we don’t seriously consider the long-term impacts of ecological limits, we will encounter one unpleasant surprise after another. And the term “unpleasant” is an understatement. Already, vast numbers of people are suffering as a result of climate change, but they are primarily poor and live at the economic margin. Eventually, no amount of money will protect us, and the entire global economy will be affected.
As we shift to a new investment model that replaces short-term financial returns and the risk of price volatility with long-term economic value and integrated risk, we face significant challenges. First and foremost, we have to shift our thinking from “I” to “We” and recognize that our financial decisions don’t exist in a vacuum. Everything is interconnected. Increasingly, long-term economic value will depend upon cooperation, collaboration, and adaptation. In the face of ecological limits and the potentially wrenching social changes that may ensue, the riskiest investments will be those that depend on the existing economic order to continue. Investors who consider the big picture—the whole system—will benefit, and those who remain fixated on short term exploitation will be exposed to increasing risks. Even ecological carpetbaggers will find it increasingly difficult or impossible to financially exploit our natural systems.
As I write this, I am reminded that I am asking a lot of myself and you. I am suggesting that our investment process consider the long term condition of all members of the economy, including the environment. We risk not being taken seriously by “real investors.” While that may be true to some degree, I have been encouraged by the openness and interest of many professionals who sense that this new framework addresses issues that are increasingly relevant. At this early stage in the rewriting of investment theory to address the reality of ecological limits, we must be bold and courageous.
I believe that if investors truly understood their investments, they would want to make changes. Just as well-off travelers who witness poverty and starvation find it hard to return home without “doing something about it,” investors who really understand what they own are more likely to take action. By seeing a place as it truly is, tourists transform. By rigorously examining all aspects of our investment portfolios, investors transform. As Don Shaffer has said (and as I quoted last time), “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.” In the face of ecological limits and associated risk, this is the route that promises the highest long-term economic value.
I am ending this series with some suggestions for evaluating your current and potential investments.
- Follow the money. Whenever you do not personally know the recipient of your investment dollars (which is the vast majority of the time!), go on a fiduciary hunt to trace the flow of funds through every intermediary until you get to the end. Try to figure out how much of your money actually gets to the end user and what they are doing with it.
- Investing in publicly traded stocks is like buying used cars. You aren’t really giving your money to the company, so it’s hard to follow the money in the way I’ve described above. However, even though your money doesn’t actually go to the company, you are supporting the company by buying its stock. Higher stock prices are generally favorable to businesses and management. So, go find out whether you want to “help out” the companies whose stocks you own.
- Avoid being an apologist for corporations. If you’ve invested in publicly traded, multinational corporations, acknowledge it and the associated risks and problems. Don’t try to make the case for the sustainability of a fundamentally flawed system.
- Consider the life cycle. If you invest in a small company or a start-up, find out what the company’s plans are. Does it intend to remain in the community, or is it planning to sell as soon as possible? How big does it want to get, and what is it willing to sacrifice in order to achieve that growth?
Stand your ground. Speak up. Teach others. Walk the talk. Question everything and everyone, including your investment advisor!
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:
1. Getting Serious About Long-Term Investing
2. Allocate Your Risk Response: Ostrich, Musical Chairs, or Plan B?
3. Investment Strategies: From Carpetbagging to Community
4. Investment Strategies: Getting Down to Details on Eco-Carpetbagging, Global Good, and the Transition to Community
Increasingly, long-term economic value will depend upon cooperation, collaboration, and adaptation. In the face of ecological limits and the potentially wrenching social changes that may ensue, the riskiest investments will be those that depend on the existing economic order to continue…