Capitalism, heal thyself
13 Pages Posted: 11 Oct 2021 Last revised: 7 Dec 2021
Date Written: October 25, 2021
A paradigm shift is underway. The corporation -- much reviled as an externalizing, short-termist, inward-focused, politically manipulative machine – is undergoing a fundamental change. A real metamorphosis.
This is good news. Capitalism has developed mechanisms to start a transformation of the world's economy. Already this is underway. The corporations that undergird Capitalism are beginning to confront the harm they created. Capitalism is in the process of healing itself.
There are three powerful forces at work. First, large institutional investors (all of which hold both managed and indexed portfolios) are either focusing on ESG investing in their managed portfolios or using their voting power in their indexed portfolios to demand ESG actions by portfolio companies. Why? These big investors – as they seek better financial returns -- are realizing that portfolio companies that externalize harm ... are not sustainable investments.
Second, it has become clear (and is becoming clearer) that corporations have better financial returns when they seek to pursue environmental, social, and governance actions (ESG) – often much better than corporations that continue their delusional thinking that the world is not interconnected, that externalizing harm is a profitable business strategy. All big corporations – motivated to seek profits -- are now pursuing real ESG.
Third, there are the (almost miraculous) communication and information advances of the Internet. Investors learn in milliseconds what is happening with companies. And corporations can learn, coordinate, and implement new ESG tactics almost overnight.
And there are also powerful feedback loops that only accelerate these phenomena. Companies that infuse real ESG into their operations – not the fake stuff that the financial markets are getting better and better at ferreting out – attract money from the big institutional investors engaged in ESG investing. And with additional capital or a higher stock price, these real ESG companies increase their real ESG operations, attracting further real ESG investing.
But there is a timing issue. Just as these developments are happening exponentially, Mother Nature has begun her own feedback loops. For example, the fires in Siberia -- which make the West Coast fires (as devastating as they’ve been) look like a kid playing with matches -- are thawing the tundra and unleashing ungodly amounts of methane. Next year will probably be worse. And this is just one of many feedback loops. It’s sometimes hard to take.
Can Capitalism catch up? The race is on, and Capitalism started late and is behind. But Capitalism, unlike Mother Nature, does not work on an annual, solar cycle. It works on at least a quarterly cycle when companies file their financial 10-Qs. And, given the way that financial analysts have every incentive to know as much about public companies as the companies themselves, Capitalism is really working on an almost minute-to-minute cycle.
And Capitalism has allies. Regulators around the world are looking at how to make ESG disclosure more useful. The nonprofit sector, including foundations and NGOs, is pressuring the institutional investors and the banks to push even faster both their ESG investing and their ESG engagement. Although motivated to save the planet and serve humanity, the sector is a powerful catalyst for even more focused and data-driven ESG investor and corporate activities. The motive to seek profits and the motive to do good come together!
So, as we watch and participate in this race, much is about guessing the future. But we humans don't grasp exponential change very well. Our brains don’t seem well designed to handle it. We are linear thinkers - extrapolate from past, draw a straight line. Some of us notice the tangent - the rate of change at a specific moment. But we can't really imagine the future – our future – is being written by the second derivative.
It’s a short, rollicking 13-page read, interspersed with about four pages of graphs and drawings. I’ve tried to keep it simple so everyone can see what’s happening and what we face. And to identify the roles each of us must take on.
Keywords: Capitalism, ESG
JEL Classification: A00, B00, C00, D00, G00, K00, N00
Suggested Citation: Suggested Citation