21st Century Investing: Redirecting Financial Strategies to Drive Systems Change is one book we hope investment fund trustees are reading and taking advice from. There are far too many green-washing funds trying to appeal to our green wishes. Money is flowing into ESG funds faster than ever. Many of us recognize that investing and shareholder advocacy can have a positive impact. But how do ensure they contribute to lasting change? One of the authors, William Burckart of The Investment Integration Project (TIIP) will join our Corporate Accountability Forum on 2/28, along with Meredith Miller, the Managing Partner of Corporate Governance and Sustainable Strategies LLC (CGSS). Join us at 10am Pacific, 1 pm Eastern – Register.
System-level investors are not satisfied with divesting fossil fuel companies or advocating clean up their act. They also invest in renewable energy and call for mandatory disclosure in greenhouse gas (GHG) emissions. They join collaborative efforts like Climate Action 100+. They urge companies to disclose lobbying and political spending, including indirect activities by trade associations and dark money channels. System-level investors focus not just on their own investment but on the long-term health of the social, financial, and environmental systems on which their investments depend.
Seeking alpha could be misdirecting resources when 90% of the variation of return is defined not by the specific stock you pick but by the universe of securities available. The authors identify six key elements and devote a chapter to each: set goals, decide where to focus, allocate assets, apply investment tools, leverage advanced techniques, and evaluate results.
In chapter 7 the authors use their framework to discuss income inequality. Some statistics:
- 44% of increased global income 1988-2008 went to the top 5%
- Inequality between countries reduced, as people moved out of extreme poverty, but increased between countries
- Inequality polarizes politics and erodes trust in institutions.
How Did We Get Here?
Fissuring. Companies concentrated on core competencies and contracted out almost everything from security and janitorial services to manufacturing and human resource management. Many are not only fissured but financialized.
CEO compensation. Tying CEO compensation to stock performance led to 1% owning 40% of the stock market. Between 1949 and 1953 77% of income growth went to the bottom 90%. Between 2009 and 2015 75% went to the top 10%. As I argued in several shareholder proposals this year, the IMF finds trickle-down hurts GDP growth a little, while trickle-up helps significantly. GDP growth is 0.08% lower in the five years following a 1% increase concentration of wealth. In contrast, increasing the share of income to the bottom 20% by 1% is associated with a 0.38% rise in GDP.
Tax avoidance. Corporations rely on the infrastructure (judicial, security, social benefits) but rely on others to foot the bill.
Data collection and distribution initiatives such as the Workforce Disclosure Initiative and responsible contracting policies (e.g. CalPERS) to improve labor relations. See also a Freedom of Association proposal SHARE filed at Amazon.com.
Regarding taxes, some funds, such as Norges, have stated “maximizing long-term value does not require aggressive tax behavior.” A little more spot-on is a proposal this year at Amazon on Tax Transparency by Missionary Oblates of Mary Immaculate, Sisters of the Order of St. Benedict, Rock Island.
To address CEO pay, the authors cite an investor who votes against plans that are “100 times the minimum salary in force in the country in with the company’s registered office is located.” They also cite annual CEO pay reports by As You Sow.
The authors then go on to discuss how portfolios can be reconstructed to de-emphasize some companies while engaging and setting industry-wide standards through self-organizing. Steps taken should be evaluated and public policies strengthened. The final chapter provides useful examples of different types of investors in transition.