3 Ways to Make Investment Decisions Without Compromising Values

image.png

By Aaron Fairchild

I recently spent a couple of days at SOCAP18. After the conference, I had the opportunity to screen a soon-to-be-released Australian documentary called, 2040. 2040 is a beautiful “future-fit”, utopian depiction of a potential future made possible by incorporating carbon drawdown methods and technologies. 
 
The week before the screening a new environmental philosopher friend shared a concept she has written about extensively — the Precautionary PrincipleShe explained this by saying, “One can’t use uncertainty as a justification for inaction. One must use precaution to mitigate harmful outcomes even in the face of uncertainty.
 
Appling this to positive impact investors could translate to: “Investors and their financial fiduciaries can’t use financial uncertainty as a justification for inaction. Given the urgency of our social and environmental challenges, investors must use precaution to mitigate harmful financial outcomes — And still identify ways to invest in positive social and environmental opportunities even in the face of financial uncertainty.”
 
Unfortunately, in the face of our pressing social and environmental problems, the Precautionary Principle is often used as a reason not to invest in opportunities that generate positive impact outcomes. Even given our good intentions, the traditional structures of finance don’t legally allow moral social and environmental convictions to negatively influence financial outcomes. If the financial outcome is uncertain, but the social and environmental outcomes are clear and measurable — the existing legal frameworks and institutional structures justify inaction in the face of uncertainty.
 
As my mental turntable plays the paradoxical precautionary blues, I see images of the amazing people in the theater moving to a rhythm of positive change, but are we a little off the beat? 
 
How many times have you heard, “In order to attract more capital, the social and environmental enterprise must prove its ability to create market-rate returns. We need proven strategies.”? This thinking may lead to a slip-and-slide of marginalized outcomes in the pursuit of “market-rate” returns. Furthermore, the Precautionary Principle can create a disincentive to invest in positive social and environmental outcomes in uncertain market cycles or in investments labeled “concessionary.” In uncertain markets or uncertain categories, investors may justify putting the pursuit of positive outcomes on the shelf in favor of “proven” and more certain downside protection investment strategies.
 
According to Paul Hawken in the film 2040, 80% of the world’s agriculture is grown by small farm holders. However, in 2018 small farm holder investments are flat to down. Unfortunately, this is not an anomaly. Small to medium enterprise investments are flat to down, and renewable energy investments globally are flat to down as well. I recently learned of these alarming statistics on the Impact Alpha podcast, Getting to Yes. The decline observed in this podcast may be a result of investor’s growing uncertainty in the financial markets. Are we employing the Precautionary Principle? This may forecast a potential disturbing trend for urgently-needed investments in social and environmental solutions as the US economy advances into a market cycle already long in the tooth.
 
Understanding how we may be employing the Precautionary Principle helps clarify that even as we face urgent need to invest in social and environmental solutions, our desire for positive social and environmental outcomes often are left waiting on the side in the face of financial uncertainty. It is a difficult paradoxical dance to pull off. If true, I have three recommendations:

  1. Engage and collaborate with the impact entrepreneurs.When the social and environmental outcomes are clear, measurable and convincing, but the financial outcomes are uncertain — engage! Offer to work directly with the social entrepreneur or fund manager to help craft precautionary strategies within the investment opportunity that mitigate potentially harmful financial outcomes. Assess the investment opportunity thoroughly, do your due diligence and collaborate to mitigate harmful financial performance while maintaining the positive social and environmental outcomes. 

  2. Change the legal framework of professional financial organizations to align to the Benefit Corporation structure. Benefit Corporations structurally embed expanded fiduciary obligations to include social and environmental considerations.

  3. Work with a separate advisory committee or due diligence team. As an individual investor that is not constrained by the fiduciary obligations of professional wealth management, consider working with a separate advisory committee or due diligence team or conduct personal due diligence on impact investments.

 
After the 2040 film screening, I left the theater in a crowd full of optimism and inspiration. Even with the Precautionary Principle burrowed deep within the financial structures and investment psyche of America, I am optimistic that by becoming more aware of how and why we make decisions— and the structures within which we make them— we will continue to learn how to better align capital to the future we envision.