As planetary boundaries become evermore clear, does EDI hold the promise of ushering in "ESG 2.0" and the prospect of a resilient world economy?
By John Fullerton
Despite the monumental progress of the responsible investing movement into the mainstream, proponents of “ESG” on the corporate side and the investor side face one major obstacle: too many investors simply don’t care. And even when institutions care, signing onto The United Nations-supported Principles for Responsible Investment (PRI) for example, changing investment decision-making at the portfolio manager level is slow at best. How come?
We have lost the distinction between investment and speculation.
Keynes well understood the vital role of speculators in a market system, but also understood the importance of its appropriate scale in proportion to real investment and the primacy of enterprise over capital markets in a healthy economy. We now refer to speculators of all stripes, from George Soros all the way down the food chain to criminal enterprise operator Stevie Cohen, as “investors,” suggesting a more genteel legitimacy. Similarly, JPMorgan has a Chief Investment Office not a Chief Speculator Office. Although if it walks like a duck and talks like a duck…
Less in our conscious awareness, however, is the fact that as a trading culture has taken over our financial markets in the new millennium, even what we think of as “real investors” – the portfolio manager at Fidelity for example – have been sucked into the short-term speculative stock price valuation game, in stark contrast with the real capital investment decisions being made by corporations themselves in the real economy.
CSR, ESG: Does It Make a Difference?
We find ourselves with “CSR” focused largely on supply chain management, while the responsible investment movement using its “ESG” framework is focused largely on speculators (who don’t care really) rather than the real investment decisions being made in the capital budgeting process of corporations themselves. Similarly, the investment budgets of government entities such as the largest single energy user in the world, Uncle Sam, must be the focus of our ESG lens. I recently asked the Chief Financial Officer of a “CSR” leading Fortune 100 company how they factored their social and environmental metrics into their capital investment decisions. He smiled, essentially saying, “those decisions are hurdle rate-driven” (with no imputed price on carbon, for example). That is the real world today.
Rerouting the Capital Investment Process
But imagine a different world. Imagine a world where real, large-scale investors with clear long-term stewardship responsibilities such as pension funds, endowments and sovereign wealth funds take a more direct role in the capital investment process. Rather than eating off the short-term speculator-dominated menu our conflicted, modern Wall Street serves up, imagine stewardship-minded investors negotiating direct relationships with corporate management with an explicit requirement to build long-term ESG values and parameters into the enterprise capital investment process, even if it entailed some short-term negative consequences. And imagine more mature corporations with stable cash flows following the successful example of MLPs and REITs that pay out the vast majority of their cash flows to investors rather than hoarding their capital, requiring them to go back to investors for their capital investment needs.
Contrast the 10- or 20-year investment performance of the MLP and REIT sectors, with that of the S&P 500, or the stock MSFT for that matter. Paying out cash flow to owners disciplines the capital investment process, which translates directly into strong investment performance and rewards long-term investors. Warren Buffett understands this.
Leading a Sustainable Economy—For the Long-term
Now imagine merging the imperative of integrating ESG values and objectives responsible investors have signed up for in the PRI, with a direct enterprise investment method centered on long-term private partnerships among stewardship investors and enterprise leaders that truly want to lead the transition to a sustainable economy.
At Capital Institute, we call this Regenerative Investment and the method is called Evergreen Direct Investing (EDI), conceived by our Senior Fellow Tim MacDonald, leveraging his practical experience in the world of private real estate partnerships. The latest case study in our Field Guide to Investing in a Regenerative Economy initiative describes the EDI method in more detail. Importantly, it describes how investors can earn acceptable and resilient returns by investing directly in the stable cash flows of mature, slow- or no-growth business enterprises that the valuations-game-driven speculators leave on the trash heap. Does EDI hold out the promise of ushering in “ESG 2.0” and the prospect of a resilient but low growth developed world economy that is our reality in the face of planetary boundaries? We think the answer is an emphatic, “yes!”
In part two of this column, we will look at Evergreen Direct Investing from the perspective of enterprise leaders.