Allen White: my response to investor reporting on both portfolio and systems-level performance

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The Investment Integration Project (TIIP) has made an invaluable contribution to debates on the future of finance by opening a line of inquiry on systemic risk. Deep scrutiny of how investing affects, and is affected by, systemic ecological, social and economic risk is long overdue. Indeed, without it, we are destined to repeat the recent financial crisis as well as witness social and ecological disruptions, signs of which are already visible across the globe. Inequality, mass migration induced by conflict and ethnic repression, and climate-driven dislocation portend the perils that lie ahead. TIIP’s paper is a wake-up call that business-as-usual investment behavior is a recipe for spiralling disruptions that can be avoided only by rethinking the fundamentals of how capital in all its forms – natural, social, human, financial – is defined, allocated and enriched.
At this early juncture of the dialogue, my primary concern is this: that the debate around systemic risk is unlikely to probe the fatal flaws of “the system” at a level commensurate with the dangers it presents to long-term human and ecological well-being. In a recent paper on www.greattransition.org, Richard Norgaard describes the system in an essay entitled “Church of Economism and Its Discontents” as a form of secular religion that reduces all social relations to market logic rooted in attributes such as the primacy of the individual, competitiveness, the belief that unlimited growth (including returns to capital) is not only possible, but desirable. In a similar vein, Robert Johnson, President of the Institute for New Economic Thinking, argues that economists use theories that freeze human values inside antiseptic and sterile notions such as utility. (http://ineteconomics.org/ideas-papers/blog/dancing-in-the-dark-creating-an-economics-for-the-21st-century-1) And in a commentary on Norgaard, John Fullerton describes “finance-ism” as a denomination within the Church Economism in which a race to beat market benchmarks overwhelms all other values (e.g. well-being, social inclusiveness, ecological resilience) and, moreover, that winning entitles the victor to influence the body politic in ways that reinforce the defining values and prevailing rules of the game.The beliefs underlying both economism and finance-ism, it should be noted, depart from those of Adam Smith, the godfather of modern economics. Well before Smith articulated the “invisible hand” of the market, he made clear in The Theory of Moral Sentiments that human interactions are driven as much by empathy, pity, and compassion as they are by selfish individualism and wealth accumulation.
If we are to truly grapple with systemic risks such as climate instability, financial market collapse, and mass, involuntary migration, we must be ready to challenge the very raison d’etre of financial markets and the dominant definitions of “success.” As long as asset owners and asset managers are wedded to the notions that ROI, EBITA and EPS are the end all and be all of success, it will be very difficult – indeed, probably impossible—to effectively confront systemic risks. Asset owners will continue to promise beneficiaries limitless and unsustainable growth in pension fund assets. Asset managers will pursue speculative, short-term strategies to beat the market. And companies will engage in financial engineering to match or beat analysts’ quarterly expectations.
In short, the challenge of addressing systemic risks is not simply one of defining, measuring and managing such risks, though all are critical to progress. Without grappling with the underlying and, to date, unquestioned values that deify the foundations of mainstream economics and financial markets, real progress in taming their unbridled and destructive ‘growth-at-any-cost’ instincts is unlikely to materialize. With forethought and attention to deeper questions of purpose, this inquiry into systemic risks can provide a much needed platform for exploring both existential and operational aspects of the how finance should serve the goal of building inclusive, just and ecologically resilience societies.

Allen L. White, Ph.D, is Vice President and Senior Fellow, Tellus Institute

Have your say: comment on this response and the original article: ‘It’s time for investors to start reporting on both portfolio and systems-level performance at RI’s Linked-in site