Welcome to all of the beautiful new good young moneys who have joined us since last Thursday. We’re building a values movement. Join us.
Hi 👋 hello. So glad to be back here. This week we’re diving into the strangeness that is ‘impact investing’ - and I work in this field. Let's get to it!
Ethical investing is having a bit of a moment. Whether its Environmental Social and Governance (ESG) investing, Socially Responsible Investing (SRI), or even the much smaller field of impact investing. Each term means different things, ranging from avoiding harm-causing investments (e.g. tobacco), to investing intentionally to generate positive impacts for society and/or the environment (e.g. clean energy).
Impact Investing is a much smaller field than ESG or SRI, being much more involved to implement (expensive) and harder to measure (also expensive). To illustrate, there’s about $3199 billion assets under management (AUM) in Australia. The 2021 Responsible Investment Association of Australia report found that of all the AUM in Australia, about 40% is invested ‘responsibly’, and 2.26% of that (or 0.9% of all AUM) is 'impact investing.'
So here we have a field that represents about 0.9% of Australian investments, which also happened to be a featured topic last week in the Motley Fool. In the article, a Fool contributor wrote:
‘Money can and should be used for more than building wealth, and sometimes society needs to come before profits.’
My guess is that Aristotle would quit humanity upon reading this, a guy who believed in the natural purposes of things. The natural purpose of money is not, more money - else earning interest would not have been banned until the 16th century.
So yeah. This statement, that money should be used for more than wealth building, isn’t exactly controversial. Everyone needs to eat, many of us go on holidays, and we own clothes which we presumably have purchased - none of these things directly relate to building wealth. This is, however, a statement on society before profits coming from a company dedicated to ‘helping millions of people achieve financial freedom,’ whose purpose is to make ‘the world smarter, happier, and richer,’ through ‘outstanding business and investing advice.’ I.E., by way of increasing profits.
Not exactly pure altruists. So, as we said - social investing is having a bit of a moment.
But isn’t this idea of delineating between ‘ethical’ investing and everything else, well, kind of strange? Separating ‘investing’ from ‘impact investing’ implies that it’s possible to invest without impact. In reality all investments have impact, it’s the direction of impact that counts.
Writer and journalist Anand Giridharadas sums this strangeness up well:
‘If you drop your kids off at school and there was one room that was like the responsible teachers room, you’d be quite alarmed about what was going on in all the other rooms. So I’m interested in what’s going on in all the other rooms.’
That being said, investing in an S&P500 ETF isn’t exactly unethical, just because it’s not labelled as ethical. It’s kind of like saying bread is bad for you because it doesn’t come with a sticker saying it’s good for you. Albeit, investing in the S&P 500 won’t change the state of the world. What it does do is advance ‘market’ values. The impact of this is something we discussed in Market Living a few newsletters ago. Nor does an ESG investment in publicly listed equities really change the state of the world. The key difference between the two is in using your money to vote for a different set of values.
It’s up to you which values you believe in.
One set of values could be maintaining the status quo - valuing tradition. In doing so, the very concept of indexing could be pushing the world to more ‘ethical’ investments. In a recent Bloomberg article, author Matt Levine wrote:
‘If the big diversified shareholders own all the companies, they care relatively less about any one company’s profit maximisation and more about increasing the overall value available to all companies, which is not quite the same thing as increasing the overall welfare of the world but which is related to that…[they] care more about the externalities created by any one company because they own all the other companies.’
Where this strategy falls down is that it’s not quite the same thing as increasing the overall welfare of the world. We know that improving lives and livelihoods and the health of the planet is good for the economy. It sounds to me like if your goal is to increase the value of all companies, taking a direct approach to doing that is the best path. But a related approach? It’s indirect. Surely there’s value being left uncaptured?
Another indirect approach is what Ross Baird calls the two-pocket blindspot. The idea that we have one pocket for making as much money as we can, and another pocket for doing good, giving back. This can lead us to miss opportunities to have a greater impact, because we can’t think in the fuzzy middle area between donations (-100% financial return) and achieving ‘market’ returns. Whereas, a one pocket approach helps us think in the fuzzy middle, but it doesn’t always have to mean sacrificing financial returns. That’s because One Pocket is a way of thinking more than an investment approach, as Access Ventures’ white paper demonstrates:
‘The key is understanding that one-pocket isn’t just an approach to investing—it’s a way of outwardly expressing your deeply held value systems. Moving beyond understanding money as a tool and towards understanding money as an expression of our core identity is what the one-pocket mindset is about.’
Integrating investments to achieve both profit and good is at the core of one pocket thinking. It’s an approach notably taken up by eBay founder, Pierre Omidyar of the Omidyar Network, who once said;
‘Giving back implies, at one point, that you were taking. We’re dissociating what we do from what we value, and it’s becoming very difficult to improve the world as a result.’
AKA, how you do anything is how you do everything. We’re all resource owners, but we can choose to be resource stewards. We can choose to see money and our investments as representing our value systems. What values are you choosing?
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