‘Has capitalism actually been a force for good globally?’, ‘Dare to declare capitalism dead – before it takes us all down with it’, ‘Six people who prove capitalism is broken in America’.
These are some of the top recent news headlines on the state of capitalism. The publications are left leaning. But even more centrist outlets reflect the growing malaise. The FT and the Los Angeles Times are reporting anxiety about a neoliberal future.
At the recent Milken Institute annual gathering in the US, big names CEOs, politicians and investment chiefs such as Bridgewater’s Ray Dalio worried about the rise in popularity of socialism among young people, and the likely related growth in inequality: “It’s not whether we should be capitalist or socialist. It’s how do we make sure that capitalism is working the way it has in the past,” said Alan Schwartz, a managing partner at global investment firm Guggenheim Partners, who warned of “class warfare” at the gathering.
These issues keeping the global elite awake at night have been worrying the individuals driving the Global Steering Group for Impact Investment (GSG) for decades.
The GSG was established in 2015 following the work of the Social Impact Investment Taskforce established under the UK’s presidency of the G8. It has 22 country members who lead ‘National Advisory Boards’ or NABs that catalyse activity in their region. Private equity pioneer Sir Ronald Cohen, who chairs the GSG, has warned for years that inequality leads to social unrest and that impact investment could help prevent this. As far back as 2007, he said that the gap between the richand poor could eventually lead to violence and rioting on the streets. Fast-forward to today and the ‘Gilets Jaunes’ are marking their sixth month of protesting in France, and generally global unease is rising.
Amit Bhatia (pictured above), CEO of GSG, notes: “We are seeing this around the world based on economic inequalities. It highlights that the social contract has broken down.”
Prior to GSG, Bhatia was CEO of WNS Knowledge Services, India’s first outsourcing company to list on NYSE with a $1bn IPO. He was a founder of McKinsey’s Knowledge Centre, before pursuing a career in the impact sector. He founded Aspire, the social enterprise education & training business, and India’s Impact Investors Council, during which time impact investments in the country grew from $400m in 2013 to $1bn in 2015. This growth and that of the wider market signals momentum behind impact investment, says Bhatia.
“There is about $200trn in assets under management. Of this about $26trn is already in responsible investing, sustainable investing or impact investing. Some will look at it and say just over 10% of the whole market is a drop in the ocean. But I think the fact that in less than two decades it has grown from 0 to nearly $26trn talks about this potential.”
He predicts the trajectory will continue to 2030 with around 50% of asset under management – a shift from “pure wealth maximisation to impact optimisation”.
And looking further, Bhatia sees the goal of GSG not to just help move money towards impact, but towards broader systemic change where corporations, governments and individuals shift to what he describes as the “impact economy”. He explains: “A lot of people are arguing for moving beyond capitalism. People refer to it as capitalism 2.0. We call it the ‘impact economy’.
Still built on the principles of free-market capitalism, Bhatia envisages a world where “impact will become a variable in all business decisions, investment decisions, policy decisions or consumption decisions”. It means an average household buys products made by a B-Corp (businesses with verified social and environmental standards), explains Bhatia. For corporates it is the circular economy (economic system aimed at minimising waste) or demonstrating societal purpose. These are big ideas – maybe even unrealistic. But Bhatia believes there are shoots of hope. He cites BlackRock chief Larry Fink’s recent support of the sustainability agenda, though he admits “he has gone back and forth on it” and the growth of GSG’s network of NABs around the world. Some high-profile politicians are moving in this direction, take US Presidential challenger Senator Elizabeth Warren with her Accountable Capitalism Act. And there is a plan. Bhatia charts GSG’s advocacy to the G20 last year, where impact investment was mentioned for the first time in a document adopted by all heads of states.
He says this will continue with the new G7 under the presidency of France – a country that is already considered a leader in the area of responsible and sustainable investment. It is already in talks with Japan, who is president of this year’s G20. GSG is also working with law firms in Europe to draft an “Impact Act”. Bhatia says it will redefine the social contract with governments and include elements such as mandatory impact reporting. Is this viable for such an immature market when concepts such as the relatively new and voluntary Task Force on Climate-related Financial Disclosures (TCFD) is still trying to gain traction.
Bhatia says the GSG is working hard with the Harvard Business School to launch what it calls “impact-weighted accounts”. He explains: “It will allow a co-efficient approach so annuallyall corporations alongside their regular financial accounts, balance sheet, profit and loss, publish their ‘impact-weighted accounts’. It would allow the earnings per share on profits to be higher and lower compared with their impact. So the markets at large will be able to value impact in the wisdom of markets: “When markets learn to value that. That can power a new social contract and then the whole economic system will work for the poor and the climate.” Bhatia acknowledges that the business lobby will be a big hurdle to these plans, “turning a ship is never easy. We are aware that there will be enough vested interests that are going to stand up against this. But the issue will be decided democratically.” Citing the book Leviathian, where political philosopher Thomas Hobbes argued for a social contract (and also an absolute sovereign), Bhatia says: “The popular opinion – the upsurge – is so much that the issue is no longer an economic issue. It’s a political issue.” And what about product? While impact investment is rising in interest many say there is a lack of viable offerings.
Bhatia says: “When I talk to very large institutional investors they say we don’t see the product but we want to invest. This is what GSG is trying to do….” He says its Latin America NAB is working on a $1bn outcomes fund (where investors are paid on the achievement of measured outcomes) and GSG is also working on a $1bn outcomes fund focused on Africa and the Middle East. Involving former UK Prime Minister Gordon Brown, Bhatia says it is in the market with an investment memorandum: “We want to demonstrate that you can unlock capital at scale. Those things are much needed and it will be a great service to this movement by all our NABs,” he says.
Responsible Investor is partnering with The Global Steering Group for Impact Investment (GSG) for The GSG Impact Honors. The awards recognise global champions that are catalysing impact investment.
We are inviting entries in two categories:
Impact asset owner of the year
This award is for asset owners to impact, including pension funds, philanthropies, high net-worth individuals, family offices, corporations, banks, governments, and, development-finance institutions.
Impact asset manager of the year
This award is for impact fund managers and other banks, dealmakers or intermediaries impact capital.
The awards will be presented at the GSG Impact Summit 2019 in Santiago, Chile, which takes place on 18/19 November.
Winners will be flown to Santiago to receive the honors from Sir Ronald Cohen, founding chair of the GSG.
GSG will reimburse return travel and accommodation expenses up to an agreed amount for both category winners.