Systemic reform is the only course for ‘decimated’ investors

Debating relative performance in this crisis is like re-arranging the deck chairs on the Titanic.

At a recent conference in New York, I was asked to speak about the Needmor Fund’s 20 years of experience as a mission investor. I wrote a paper comparing Needmor’s returns to the returns of a traditional foundation, which was founded by the same family, uses the same investment consultant and has a very similar investment strategy. In the end, I decided not to read my prepared paper. The reason had nothing to do with my conclusions: Needmor in fact outperformed the traditional fund by 4.5% last year, but by only 0.4% over the last five years. My careful analysis revealed the majority of this short-term out-performance was caused by the quality bent of Needmor’s screened equity managers, which basically supports the conclusion that ESG screens are a proxy for good management. This quality bent functions like a hedge, so that one consistent result of Needmor’s mission investing has been to reduce portfolio volatility. No, the reason I decided not to read my paper was that I was embarrassed by its irrelevance. At the conference, I listened to my peers make the case that social (or sustainable or ESG) investing is competitive with the dominant markets and it made me wonder.Why are we trying to prove that we are as good as the dominant markets? The dominant markets have failed dismally. Needmor did 4.5% better. So what? We still lost 25% of our endowment. We failed in our fiduciary duty and disappointed our grantees and our staff because we had faith in the dominant markets. A generation lost their retirement security, millions lost their jobs and their homes, and the next generation is foregoing or deferring higher education. And we did 4.5% better. Yippee. The word decimated is a Latin military term used to describe an army that has lost 10% of its soldiers. We were all decimated. Why are we talking about a fraction of a point of performance difference within a failed paradigm? That’s rearranging the deck chairs on the Titanic. We need to be talking about systemic reform. Let’s look at the paradigm that failed. It can be summarised as: “Unregulated markets are the most efficient allocators of capital and pricers of risk and they will result in the greatest and most sustainable global economic growth.” This was not just a financial paradigm. It underpinned the dominant theories of global development and political progress.
Unregulated markets were supposed to lift the world’s population out of poverty, and this, in turn, was supposed to lead to education, empowerment, and engagement in the political process, which would lead to, “ta da!”, democracy. This entire set of paradigms has failed. Unregulated markets have not only destroyed $12 trillion worth of savings, but they have destabilised emerging economies, erased 10 years of development and created uncertainty, chaos and corruption. They failed utterly, and in the nick of time. The only thing worse than the collapse of the markets would have been their continued success.
We all know that maximizing global economic growth is disastrously unsustainable. We were on the brink of resource scarcity in oil, water, rice, wheat, corn and copper when the wheels fell off the car. If they had not fallen off, we would have driven over the cliff. Now at least we are crawling, not speeding, toward environmental disaster. And the dominant paradigm has been discredited. We should celebrate. Pick ourselves up, dust ourselves off and get to work. The problem is, we don’t have a nice, shiny, broadly accepted, politically feasible, researched and tested, safe new paradigm to pop in like a fluorescent light bulb. I wonder where we will find one? Who will stay up all night for six weeks straight to save us? If we leave the re-regulation of the financial and economic systems to the same people who became tremendously wealthy and powerful by dismantling the old regulations, they will design a system that preserves their tremendous wealth and power. They will spend trillions of dollars of our money putting the wheels back on the car and then they will drive it over the cliff.We can’t allow this to happen. We have to develop a financial system that is safe, secure and rewards equitable and sustainable economic behavior. We can draw on the ideas of the New Deal and Keynes, but there are new wrinkles of difficulty and complexity that have to be addressed: globalisation, extreme inequality, resource scarcity and global warming. I cannot tell you what the solutions are; but I do know that if we succeed we will build a financial system that rewards long-term thinking, internalizes externalities, reduces speculation, rewards sustainability and increases social equity. In other words, we will build a financial system that rewards investors like us.

“The only thing worse than the collapse of the markets would have been their continued success.”

We need new analysis and new ideas. And we also need to subject these ideas to rigorous critical review. We already know that the unintended consequences of well meaning reform can be disastrous. It was, after all, activist institutional investors who advocated for stock options tied to quarterly returns in order to align management interests with shareholder interests. The lesson is to be careful what you ask for: you just might get it.
But ideas alone are not enough. To succeed we will need to build the political power to move a reform agenda that supports equitable and sustainable markets. We will need to hash out our differences, prioritise our agenda, and organise and educate an informed engaged constituency.
We will need to amass more power than the Wall Street lobby. To succeed we’ll need good ideas and good organising.
We are all worried about our clients’ portfolios. No one is paying us to research financial market regulation, engage in public advocacy, or organise a coalition. But no one is going to do this for us. There are many ways to contribute to this collective effort. One is the Network for Sustainable Financial Markets at Another, that I am involved in, is a coalition of organisations including TheSocial Investment Forum and the Community Development Finance Institution Coalition called The New Economy Roundtable. Our purpose is: “To shift the dynamics of public discourse and public policy in the wake of the global economic crisis to highlight structures and solutions that support equitable and sustainable economies.” I hope you will join one of these efforts. Our experience at Needmor is that ordinary people become transformative leaders when they assume personal responsibility for the systemic problems that affect their communities.
Sarah Stranahan is chair of the Needmor Fund, a Toledo, Ohio-based fund that supports community investing.