Absolutely, it’s a pleasure to be sitting here with you.
I know that you’re fond of quoting Voltaire saying that “the perfect is the enemy of the good” and I think that you’re seeing some of that in the impact space. Everybody is talking lately about how it’s reaching a tipping point, “Now is the time,” “It’s the moment,” but you’ve actually been there long enough to see it happen, so I want to know, what are you seeing now?
First of all, I don’t think we’re at a tipping point. I think we are on a continuum of a trend. Those of us who are in the ever-growing echo chamber of impact investing see all the relatively new entrants and feel the enthusiasm and look at the media attention and say, “Yeah, we’re there!” But all it takes is a five-minute walk from this office and you look up at these huge buildings that are filled with offices of people who are all managing money, and none of them care about impact investing or ESG.
As convinced as we are that this is the future of the capitalist system, we are all a rounding error on the global capital markets. And we need to be intellectually honest with ourselves about that. And that’s not to be a cynic or negative or depressed or any of that; I am incredibly excited to be where we are and the tailwinds are cool but—what was what was that ad from the Virginia Slims 1970’s campaign—?
“You’ve come a long way, baby!”
Yes, it’s like “You’ve come a long way, baby” and I want to add, “And we’ve got a long way to go!”
So there’s a constellation of forces at work that are creating the appearance that we are at a tipping point. And they’re all legitimate. I’m not here to deny the force of change that they represent and I recognize that they are a relatively limited, in the scope of things, set of forces. So when I talk about “le mieux c’est l'ennemi du bien,” the perfect is the enemy of the good, what I mean by that is that, in the impact investing world, we tend to be the impact Taliban where we say it’s this way or it’s not. And everyone has their own little vision of what it is or what it isn’t and that sense of perfection being the enemy of good is, I think, a hindrance to the continued evolution of impact, but that’s sort of what I mean by that.
I can tell it, people are going to love that you called them the impact Taliban. That’s gonna go over real well.
Well, I mean, it is that fervor. I mean, as an example, BlackRock is coming to market with what they are labeling, with a broad marketing splash, an impact fund. It takes about five minutes of research on the BlackRock’s website to realize what they are effectively doing is re-branding an existing fund. That here to for was called an SRI fund.
Okay, so if we in the impact world believe that there is some kind of evolutionary force at work that took us from SRI to ESG to impact and as a relative evolutionary force, there’s some recognition that there is a difference between SRI and impact, that evolutionary continuum means that if we’re going through a rebranding exercise at BlackRock, then it’s not really impact.
Okay, let’s just use that as a baseline set point. Nevertheless, it’s the largest asset manager in the world, and the woman they hired to run this initiative [Deborah Winshel] is awesome. She is great. They hired a powerful woman. It’s not a marketing ploy for them. And structurally she is reporting to the CEO. She’s not reporting to some Assistant Vice President of Structured Products.
It’s a legitimate serious initiative inside the largest asset manager in the world. So, we as a discipline, as a collection of people have a chance to look at that and say, okay, we can either decry the fact that they are re-labeling their SRI product as impact and thereby lowering the standards, blah blah blah. Or we can say, okay, we’re gonna embrace these guys and we are going to inspire them to raise the bar.
So what does that look like to actually embrace and inspire to push to the next level, as opposed to rejecting it because it’s not good enough or saying okay, this is good enough?
It’s going to be that sort of pride-swallowing, seige tactic of engagement which is the exact same thing that we see in proxy voting, and shareholder engagement in publicly traded companies. It wasn’t a single meeting that convinced Home Depot to only sell certified forest products in their lumber department. That was a multi-year initiative led by the guys at Walden and Trillium, and it was the long game, and the net result was a fundamental shift in the supply chain management for Home Depot, which is huge impact! And did it really change Home Depot? Eh, I don’t know, maybe not.
I was at the B-Corps champions’ retreat a few years ago and I was at a table with a bunch of really impressive, thoughtful, committed B-Corps CEOs, presidents and founders, and this idea came up around whether or not Walmart should be permitted to be a B-Corp. And first of all that verb, “permitted,” I found totally offensive, because I don’t think we have the right to decide that in the first place. But the general consensus was, no. Walmart should not be permitted to be a B-Corp because it’s an evil company.
And I just said, okay, here’s a thought exercise for us: what would it look like for Walmart to become so inspired by the message of B-Corps that they would go through the wrenching, cataclysmic transformation internally to actually become a certified B-Corp? I mean, what would that mean to supply chain management, employee relationships, community engagement and environmental stewardship, from the largest employer in the world?
That would be incredible.
It would be incredible. And they said, “Oh! Right.” It was like, I have to now drop my subconscious and nevertheless somehow intentional tribalism. Which is hard for people. Because, you know, capitalism is not good nor evil. Capitalism is an optimization mechanism. And the question is not, “Is it good or evil?” The question is, “To what end do we seek to optimize?” And that’s the question we’re not asking ourselves because the antagonists to the idea of incorporating non-financial return into the evaluative matrix of the success of an investment, the antagonists to that perspective would say, as many people do, “The business of business is business.” Milton Freedman is my hero.
The tension between those two is, I think, the tribalism that we see between the activists’ mentality—which, again, there’s no criticism there. I’m an impact investor. I get that. I want capitalism to be doing better. It can! We need to inspire the people who are capitalists to do better. But that tribalism that has emerged, I think is really constructive on some level, but it’s also not productive.
Tell me about how it’s constructive and how it’s maybe destructive?
So, from a constructive perspective, anytime you seek change, you need extremes, so that people can move towards the center and feel less extreme. The story of the conservative movement over the last 35 years has been the gradual pull to the right by virtue of the power of the extreme voice. And all you have to be is moderately less radical and you look like a centrist.
It has become culturally permissible to have extreme wealth and income inequality. A cynic would say that the game is rigged, or a Bernie Sanders supporter would say that the game is rigged, by those who have power and wealth. Well, that’s pretty much the history of power and wealth in the Western world, right.
And yet, in the 50s and the 60s, Congress was more white, more male and more privileged than it is now. And in the 50s and 60s, it was not culturally acceptable to celebrate the massive pay packages for CEOs. In the 90s, they were on the cover of every business magazine and people were celebrating Jack Welch’s pay package. Broadly, there was societal approval of that, broadly. And I’m not saying, like, everyone sort of looked at the numbers they would’ve said, “Oh yeah, it makes a lot of sense”, but the celebratory nature of the cult of the CEO and the celebratory nature of the cult of the technology billionaire, that all happened. And we celebrated that as a culture, so on some level we said, “Yes, that’s okay.”
And now we’re looking at that and saying, “You know what, it’s not okay," or "Maybe it’s not okay," or "Something is really screwy.” We are now at a position of wealth and income inequality/lack of distribution that hasn’t been seen since the gilded age.
"I don’t think of wealth and income inequality as the problem; I see as the symptom. To me the problem is opportunity inequality."Discuss
And yet, there are some people who are saying that this is totally horrifying and others who are still in favor, who think, “I don’t know, maybe I’ll win the lottery and become a CEO, and then I’ll get to benefit from that distribution of wealth.” But, is this reasonable or does it represent a lack of opportunity for people?
It’s funny you use the word opportunity, because I don’t think of wealth and income inequality as the problem. I see it as the symptom. To me, the problem is opportunity inequality. We as impact investors have the opportunity to invest in businesses that increase access to opportunity. Its essential services; it’s quality education; it’s transportation; it’s all these things that are the on-ramps to opportunity for whole layers of our society who have effectively, because of structural impediments, political impediments, tax and composition impediments, those rungs on the latter have been made much much harder to grab.
This sounds really critical, but I’m not actually critical about it because I feel as if it is what we have asked for ourselves, what we have built for ourselves. You know we all went—we as a country, not as individuals—we all went through the 50s and 60s and 70s, and at some point we decided that that’s not what we wanted.
So, what’s the role for capital markets, large public companies, in creating this opportunity? And what’s their incentive?
Hmm, those are two totally different things.
Yes, and my hope is that there’s a big opportunity and there’s a big incentive, but my hope does not necessarily translate into reality.
We don’t know what our roles and responsibilities are until we ask ourselves that question. I think you’re asking, "What is the role of business?” And I think 50 years ago, the role of business was really simple: job creation.
I think the role of business has simply shifted. The corporations are so big right now that to think they are exempt from the responsibility to steward the environment, or that they are exempt from the responsibility to think about their role in the community, is just sort of weird now, because of what we know.
And similarly, in impact investing, the reason I think that, while I don’t think we’re at a tipping point, the reason I think we are on an inevitable path, is that I just simply don’t feel that at some point in the future it will be acceptable to invest with utter disregard to the environmental and social consequences of doing so. It will just not be acceptable.
In the lead up to World War I the most valuable employees in ammunitions factories were children, because their little hands could get inside shell casings. In the lead up to World War II, it was utterly unacceptable to have child labor in ammunitions factories. Just unacceptable. Even in the depth of armament consumption and munitions consumption, when every country in the world was making as much as they could to pour into the battlefields of Europe, even then, children were not employed to increase production. It was just simply culturally unacceptable and nobody would do it.
I think you have a really good point that we’ve become aware, in a way that we cannot become unaware, of the damage that it is possible to do to society and the world especially by a large company. But seeing what damage is possible also suggests what good is possible, and what good exists already.
That’s beautiful, right. That’s a great way to observe it.
And I personally come out of an anti-human trafficking background, and that is what happens when people don’t have an ability to effectively participate in a good, functioning economy, so I’m very pro-business. But I think that what we’re seeing is a real opportunity to do more. What are the next opportunities and how do we grasp them?
Yes, I think businesses are starting to recognize that there is an opportunity around, at the very lowest common denominator, branding themselves as some kind of mission-oriented, purpose-driven company. And as a cynic, I’m going to fully own that that kind of bugs me, right, but when you look at the Wharton research that was released earlier this year around exit valuations for mission-driven companies, and they did some somewhat arcane categorization around the depth of mission: the deeper the mission, the higher the IRR [internal rate of return], which was counter-intuitive.
Now you could sort of explain a lot of it away with a bunch of counterfactuals. You know, first to market, or more blue sky in the valuation of the company in the trade sale because they wanted to acquire the brand. I mean, there was a bunch of reasons where you could’ve sort of explained that. With an n of about 450, which is statistically significant, it was compelling research. Now, problematically, the persistence of the mission was questioned.
You mean after exit, the persistence of the mission?
Yeah. And that could be addressed with term sheets and stuff like that, but that’s a different conversation.
But I think businesses see the opportunity to capture market share, and to increase the value of their company, and maybe de-risk their business a little bit, by becoming more sensitive to environmental stewardship or resource efficiency and stuff like that. And there’s a business case in there and that’s an opportunity. There’s a branding case in there. There’s a valuation case in there; that’s an opportunity. There’s a bunch of almost second order, but in aggregate it becomes a first order opportunity for business. In a sense, it kind of doesn’t have anything to do with impact investing. It has more to do with that cultural shift that we’ve been talking about.
Thank you so much for your time. This has been an incredible conversation.
With Heron.org this Deirdre Hess, signing off. Have a good one Matthew.