On May 5, 2017, I addressed a group of people convened in the Vatican by Cardinal Peter Turkson, President of the Pontifical Council for Justice and Peace. The subject of the conference was the link between impact investing and the principles outlined in the papal encyclical Laudato Si’ (“Praise Be”): On the Care for our Common Home.
In Laudato Si’, Pope Francis addresses the subject of the care of the environment. The central theme of the letter is what His Holiness calls “the integral ecology,” the idea that a culture of excessive consumption and waste threatens both our natural environment as well as our social fabric. “Caring for our common home” requires a holistic embrace not solely of the physical environment or the social good but both simultaneously, while rejecting materialism and consumerism.
Cardinal Turkson, let me express my gratitude to you for convening this event, and to my colleagues in the Right Now! Coalition for inviting me to present to you today. I am going to speak today about the connection between the principles embodied in Laudato Si’ and impact investing. Specifically, I would first like to explain how I think that Impact investing is one way to bring about an integral ecology, and second to offer some considerations or even cautions to impact investors arising from the text.
To start, I want to point out that there are really only two purposes of investing, whether impact investing or otherwise: a private purpose and a social purpose. The private purpose is to meet our long-term material needs through prudent management of our wealth. Some examples are an individual saving for retirement, or a Church organization creating an endowment to carry out its mission.
The social purpose of investing is to deploy capital towards the most effective possible use. This is the question of what activities we choose to fund with our capital. The challenge is to decide what “effective” means? This is an important question, because investment decisions have real influence over which economic activities go forward and which do not. The priorities of the financial community can play a strong role in shaping the “real economy.”
The problem is that over time, the private purpose has come to overwhelm the social purpose. An effective investment is seen as one that returns the most to the investor. The social purpose is not seen as intrinsically valuable except in how it returns cash to investors. The “real economy” exists for no other reason to serve the “financial economy.”
However, we can see that this approach is self-defeating. The global financial crisis began because of certain investments that were profitable, for a time. The results of the global financial crisis were terrible in human terms, but it is also the case that investors themselves suffered as returns fell. Moreover, it wasn’t just investors who made poor choices that suffered: the financial crisis harmed “saints and sinners” alike.
The unfolding climate crisis is a similar problem. There is the danger of both environmental damage and human tragedy. There is also the likelihood that in the long term, the value of investments will be affected if we don’t turn away from investments in fossil fuels and polluting methods of production and consumption.
Beyond this, we can see the effects on certain individual companies who put profit at all costs over the impact on human beings in the experiences of companies like Wells Fargo, Volkswagen and United Airlines. By ignoring human considerations, these companies have also put shareholders at risk.
So, we see that the philosophy of profit at all costs is not only unacceptable in human terms. It also is a poor way to serve the private purpose of the investor, when viewed with a long-term perspective.
The integral ecology offers a different perspective. The investor is not part of a separate “financial economy” that controls the “real economy” to serve its own ends. Rather, the investor is one participant in the economy along with every other person. Investors prosper when the economy prospers; the economy prospers when all people and communities are able to participate to their fullest potential. Therefore, investor serves the economy and society as an enabler of human creativity.
Here I am not just talking about the recipients of capital, but the broader group of people who are affected by business activities supported by investment: customers, workers, communities, and those who care for the natural environment – the stakeholders. The impact investor with the perspective of the integral ecology considers the impact of investment on every stakeholder who is affected by that decision.
The integral ecology perspective restores a balance between the private and social purpose of investing, and brings greater sustainability to both.
But how do we do that? We have two strategies available to us.
First, we have influence through our investment decisions. Impact investors will look at possible investments through the lens of financial value and also the lens of social values. There will be some investments that so violate our core values that any investment is unacceptable. For some people for example, fossil fuels falls into this category because of its damaging effects of the environment.
Most investment decisions are not so clear-cut, however, because investments have both good and bad effects. For example, many people are concerned about fossil fuels effect on the climate, but also recognize that, at present, society needs fossil fuels to function. We were all able to come here today because of fossil fuels, for example.
For these more complicated questions, we need criteria to evaluate the consistency of these investments with our values. There are many such lists of environmental and social issues of concern, many of which are very useful for impact investors.
However, not all issues are important for all companies. A more general approach is to examine the relationship of the company, project or business activity with its stakeholders. I suggest three steps, suggested by a framework used frequently in Catholic Social Teaching: “See, Judge, Act”
- First I consider whether the company has the awareness of the stakeholders who are impacted by their activities, and the intention to balance the interests of all stakeholders.
- Second, I consider whether the evaluation of stakeholder interests is inclusive of stakeholder perspectives. Does the company listen to the voice of its stakeholders?
- Third, I consider whether the company has concrete plans to integrate stakeholder concerns into its business operations and strategy. It’s important to understand that this does not mean that the company perfectly balances all stakeholder needs. This is impossible. Instead, the question is whether there is a commitment to continual improvement towards this goal.
And it is in this third criteria where the second tool — engagement — is so important. An investment is not simply a transaction that ends when money changes hands. It is an ongoing relationship, where the shareholder is in dialogue with the company to ensure that the commitment to stakeholders remains strong and increases over time. Because investors have a holistic and long-term view, they are interested in the well-being of all stakeholders and thus can become the “voice of the voiceless” — or even better, an advocate for all voices to be heard.
Lastly, I want to raise three words of consideration for impact investors that grows out of the perspective of Laudato Si’. Even as we undertake investments intended to address social and environmental problems, there are some things to avoid.
- It is important not to impose our own solutions on recipients of our investments or their stakeholders. This could replicate the model of a separate “financial economy” that controls the “real economy.” Recall that investors are meant to be enablers of human creativity and productivity. As an example, early efforts to prevent the cutting down of the Amazon rainforest did not take into consideration the needs of those who lived in the forest. More recent efforts have taken place in collaboration with local people and have been much more successful.
- Avoid “technocratic” solutions to social and environmental problems that rely on technology alone, to the exclusion of the human considerations. I am thinking here of a company that is known for its efforts to produce technology that will help solve climate change. But there are concerns about the safety of the workers in its factories as well as pollution in the communities where it obtains raw materials. I am concerned that these problems may place at risk the good the company intends to do through technological development.
- Finally, impact investors should not limit themselves to the tools of finance alone. Right now, there is a trend towards creating on quantitative “impact metrics” based on more traditional financial metrics. These are useful and important, but they do not tell the whole story. For this we need to turn to other disciplines, which may include such disciplines as ethics, sociology, anthropology, ecology and even theology. Only through a broader lens can we truly understand the impact of our investments on the integral ecology.
John K.S. Wilson is the Head of Corporate Governance, Engagement & Research at Cornerstone Capital Group. John has close to 20 years of experience in socially responsible investing and corporate governance. Previously, he was Director of Corporate Governance for TIAA-CREF, where he oversaw the voting of proxies at CREF’s 8,000 portfolio companies and engaged in dialogue with corporate boards and management to promote sustainability and good corporate governance. An Adjunct Assistant Professor at Columbia Business School, John is also a member of the Advisory Council to the Sustainability Accounting Standards Board. He writes and presents widely about the relevance of social responsibility to investment performance.