A Hard Reckoning for Capitalism

We’re witnessing a watershed moment in history that will redefine the parameters of our global economic system. The traditional capitalists who created this system believe the sole purpose of business is to make money regardless of the cost to our environment, people, or the rule of law. This short-termism ignores the consequences of corporate practices and favors regulatory policies that benefit the largest businesses (as well as the politicians who depend on them to preserve their power).

Yet the harmful effects of systemic self-interest have become increasingly obvious—from inequality, exploitation, and injustice to the collapse of natural systems—spurring a movement of people around the world who want business and government to address these problems and raise operational expectations for business.

Although the sustainable, responsible, and impact investment (SRI) industry has been championing the latter position for decades, conventional financial firms and investors are only now beginning to value the SRI approach as a proven, credible method for mitigating risks and making investment decisions. This broader acceptance is welcome but comes with a risk: the mainstreaming of SRI has led some of the biggest corporate offenders (and their well-funded friends in the Republican party) to dumb down long-held standards and limit shareholder influence. These traditional capitalists see SRI principles—as well as new, more long-term values applied to consumption and investing—as obstacles to business as usual.

This past year we have seen how the lines are being drawn. Conventional investment firms are now eager to capture the socially responsible market segment they once ignored (or even criticized). Unfortunately, they are sharing poorly informed ideas that receive outsized media attention, such as vague statements about the need to value stakeholder concerns, while heavily marketing new products that operate well below industry ESG standards. With their stature, influence, and substantial marketing budgets, these investment firms are peddling a kind of SRI-lite.

The response by leaders of the SRI industry have fallen along two starkly different approaches. The first, unfortunately, is the watering down standards by larger SRI money managers so as to appear less radical and more attractive to institutional investors. Thankfully, other industry leaders have responded by articulating best practices, publishing research, and educating clients on how to achieve good results. For example, there is now a Chartered SRI Consultant credential offered by the standard-bearing College of Financial Planning. As a principal of Natural Investments and member of US SIF – The Forum for Sustainable and Responsible Investment, I’ve provided input into the curriculum for the credentialing course—and I am encouraged that hundreds of people have already received the designation. The US SIF is also publishing a variety of white papers on industry best practices geared toward institutional investors, asset owners, and industry professionals, as well as running the online and in-person Fundamentals of Sustainable & Impact Investing course.

Meanwhile, Natural Investments, whose Heart Rating has assessed the breadth and depth of ESG criteria and advocacy used by SRI mutual funds since 1992, succeeded in persuading Morningstar® to improve its fund sustainability rating. Morningstar® has moved from its best-in-sector curve rating scale toward a more objective standard; it has also agreed to recognize the commitment of managers that engage in shareholder advocacy and use ESG criteria to construct funds. Additionally, MSCI, the longtime securities indexer, is making its previously private ESG rating system public. Such competition should continue to lead to the evolution of higher  standards.

Unfortunately, the SEC has succumbed to the pressure of big business leaders seeking to prevent shareholders from holding them accountable. The agency is moving to create new rules to address the nonexistent problem of undue shareholder influence on ESG matters. If you share our concern that the proposed rules would exclude small investors from participating in advocacy and limit the resubmission of shareholder resolutions, please read the news brief on the In The News page of this newsletter on how to submit testimony. The deadline to submit is February 3, 2020.

Email michael@naturalinvestments.com if you want a sample testimony letter.

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Michael Kramer

Michael Kramer

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