Pope Francis' encyclical on climate change puts forth a vision of an economy that is familiar to the impact investing community.
Pope Francis's planned visit this week to New York City, Philadelphia and Washington D.C. is making more people happy than only Catholics. Environmentalists and the impact investor community, cheered by his recent 180-page encyclical on climate change, are keen to hear him further the message of social good.
In the bold, at times scathing letter, the pope takes aim at what he sees as a great “techno-economic paradigm” that encourages compulsive consumption, wastefulness, exploitation of natural and human resources and ignorance towards the suffering of the poor. Climate change, Pope Francis suggests, is one consequence of an immoral pursuit of advancement for the sake of advancement, rather than for social improvement, and profit for the sake of immense personal wealth, rather than the enrichment of society as a whole.
The pope points out that while businesses tend to focus exclusively on financial costs and returns, there are various costs and impacts external to the financial balance sheet that these enterprises ought to take responsibility for:
The principle of the maximization of profits, frequently isolated from other considerations, reflects a misunderstanding of the very concept of the economy… In a word, businesses profit by calculating and paying only a fraction of the costs involved. Yet only when "the economic and social costs of using up shared environmental resources are recognized with transparency and fully borne by those who incur them, not by other peoples or future generations" , can those actions be considered ethical.
The pope isn’t whistling into the wind. The criticism of exploitative business set forth in his encyclical reflects an observation made by impact investors across the globe: All actions have an impact, and all business operations carry costs beyond those that are easily quantifiable on a balance sheet. These include impacts on the environment, impacts on local economies and labor markets, and impacts on human capital. Often, these impacts are considered as an afterthought or get treated as collateral damage – a notion that pope’s encyclical vehemently rejects.
These impacts and resulting issues are not random, uncontrollable, or even unintended. They are a direct result of business practices and investment decisions. The pope demands that business owners, as well as those who invest in these businesses, do not continue to ignore the environmental and social costs of their operations while leaving their waste behind for others to clean up. Pope Francis puts forth a vision of an economy that sounds familiar to the ears of the impact investing community, one in which values are baked into investment decisions and business operations rather than considered as external factors or costs.