What/How Series Introduction: What’s Around the Corner?
Stace and I used to meet at a coffee shop in Somerville, then he moved to Montana. In the midst of the pandemic we caught up this week – sitting in the spring sunshine, sipping tea, and enjoying the calm of an old friendship. Our conversation was suspended from the tumult of the COVID-19 health crisis. While people suffered and people died, we were talking about how and what our unique purposes needed to be.
The next series of essays that we want to share will center on the “how and what” of our work to reimagine a new investment paradigm. How does an investor: a family office, a permanent endowment, a corporation – either an individual or an institution - participate in a regenerative economic system? During the past six weeks we have explored why regenerative investing deserves our attention. For those seeking a primer, consider the works of John Elkington. If you are unfamiliar with Elkington’s work, he crafted theories of “triple bottom line” investing in 1994 that provide the foundation for ESG investing – his recent article Welcome to the Chrysalis Economy helps to frame where we are headed. Elkington and other thought leaders are guiding investors to explore the emergence of a new investment paradigm and TILT is working with our clients to convert these ideas into an investment practice. The practice that we are building is a collective effort. We believe in both collaboration and transparency, and invite you to join us on “the journey.” We know that there are no simple answers. We also know that the requisite tool set begins with new attitudes and behaviors. The conventions of modern portfolio theory and the application of Freidman’s theories of shareholder primacy need to change. The techniques that we are developing show promise, and we believe that more practice will support satisfied clients, healthy communities, and a better world.
The outline of ideas will include some radical revisions of existing practice and some innovations. The series suggests a linear approach. This is misleading. We know that each client will come to the process of regenerative investment from a different perspective, with a unique set of lived experiences and organizational constraints. We are committed to working with people that bring curiosity and courage to the journey. We will do more than tweak the edges of an existing “sustainable” investment strategy. Einstein (paraphrased) offers us this thought: "The significant problems we face cannot be solved at the same level of thinking we were at when we created them." Let’s jump into the line-up:
First, we want to explore measure. Investment performance, like theories about capital market finance, has been stuck for at least 50 years. Practitioners - particularly the ones that hold power over wealth – owners, CIO’s and the like, affirm this stasis. Moreover, the money management industry (traditional and impact-branded) - asset owners, consultants, asset managers, third party ranking services/rating agencies and the echo chamber of countless conferences - affirm benchmark relative performance measures. TILT and our clients are advancing a multi-capital investment framework where absolute return measure (expressed in relationship with the communities - an idea/investment theme, a place or a group of people - where we invest) defines success. If we can shift the system of measure to meeting the real needs of investors, supply chain systems, ecological systems, value formation, and the world’s overall well-being – we might regenerate the capital that is in deficit.
The second theme we want to explore is how we move beyond ESG investing. In simple terms, we celebrate investors who have shifted from a singular focus on making financial returns to making financial returns while doing less harm. Since Elkington started the movement in the mid-1990s, 75% (or more) of Australian institutional mandates, 50% of European mandates, and 25% of the US (playing catch-up) deployments have been directed to ESG managers. Twenty-five years is a long time to modify conventional investment practices. At TILT, we are confident that we can transform conventional investment practice within a much shorter time frame. If we are to regenerate the capitals that are in stark deficit, our clients will be able to say they played a leading role in tilting the capital markets to doing good.
We want to share our thinking about a multi-capital approach to selecting investments in the third piece. We will explore the practical “how and what” of an investment program that looks across asset classes and aligns with the mechanics of both the public markets and the private (illiquid) markets. We will outline the three on-ramps clients can take to experiment with TILT’s investment philosophy and process: exploring the application in the public markets, exploring the discovery of opportunities in the private market, and examining the steps involved in making a private market investment. (Note: this submission might violate our goal of “short and simple”!)
In the fourth theme we will examine organizational change, and the challenge institutions and individuals face when they embrace the concept of trade-offs. Current investment management practice is objective and binary. In some periods, portfolios return a financial gain, and in some they return a financial loss. During the past 50 years we have created a colossal framework to optimize financial returns and risks: data series, algorithms, and optimizers. Organizations are managed to produce the highest risk adjusted financial return possible. TILT and our clients are applying some of these structures to be able to make evidenced based trade-offs between financial and non-financial returns. Beyond making or losing money, we consider questions like: what is more important – financial capital return or human capital return? These questions create discomfort, and they may change the culture of your current investment process. Over the last few years, working with its clients, TILT has learned a lot about the challenges and potential pathways to developing a mission aligned approach to investing - and we want to share these lessons learned.
The fifth piece challenges skeptics who argue that there is a paucity of investable deals. As healthcare delivery systems collapse under the weight of COVID-19, we have an unobstructed view of the enormous social capital investments that are needed. An assessment of the physical infrastructure in the country offers a similar view. Investors willing to collaborate with communities and like minded partners have enormous opportunities to deploy capital in a regenerative economy.
The final article in this series puts regenerative investment into perspective. Tim Ferguson will share how his thoughts have evolved over the last ten plus years. In 1990 a small group of investors led the industry to “discover” a new asset class called Emerging Markets. As noted, a small group of pioneers began a “sustainable” investment movement in the mid-1990s. Hedge funds, private equity, and many other “fringe” approaches have grown to become main-stream practices too. What trends are emerging today that support why the moment for regenerative investing is now?
Thanks for participating in the discussions around “why.” We are excited to explore “how and what” with you. Keep the questions, ideas and reactions coming!
Old friends give each other license to go deep – and Stace and I went deep. After a couple of hours of challenging each other’s ideas and offering supportive criticisms, we gave each other a virtual hug. I felt lighter and more hopeful that we could each contribute to making our world better for more people and the planet. COVID-19 is destroying people’s lives. At the same time, the virus provides the time and space to prepare ourselves for action, to decide how and what you are going to do with your purpose.