Time and time again ‘value-based’ vs. ‘values-based’ thinking hijacks the urgency needed for radical change

As headlines turn to responsible investment, we face an opportunity to truly argue the case for win-win systems, says Nithya Iyer

This article is Free, but to access more of our content, you can sign up for a no strings attached 28-day free trial here.

The market collapse brought upon by COVID-19 has already distinguished itself from previous Black Swan events. This pandemic redefines uncertainty with its persistent duration, the constant threat of further outbreaks and economy-halting restriction measures. Compounded with imminent climate disaster, mass migration, civil unrest and political corruption, investors are in uncharted territory.

We are now facing the collapse of an entire economic model through a slow dismantling of coherence and depreciating relevance to real value. The ability to reconcile the situation into any semblance of Business-As-Usual using traditional economic models is a task of epic imagination. For investment professionals, many of whom have endured several Black Swan events in their careers, it would appear COVID-19 is the harbinger of the time they suspected would come, though perhaps not in their lifetime, and perhaps not to such dystopic proportions.

Known as ‘catastrophic bifurcation’, both game theorists and chaos theorists contextualise this as the period during which the collapsing system engenders a parallel emergence of a transitional system. This transitional system is tasked with salvaging and transporting viable assets to the new economic system that will ultimately be forged post-collapse. The examples of this are visible on a societal level, where local services incapacitated by COVID-19 have resulted in the spontaneous emergence of civilian networks and digital communities working to deliver essential goods, communicate medical information, and connect families with domestic assistance. While some of these emergent systems will fade with the disappearance of the virus, many show signs of enduring and developing into legitimate social and commercial infrastructures, particularly in a post-COVID world where pandemic risk and global disaster are not to be unexpected.

For investment markets, a similar task awaits. Responsible investors are reflexively acting to identify and support assets that show resilience amidst the carnage of the markets. But this cannot be our only goal; we must also commence an unbiased analysis of the economic model that has facilitated this collapse and boldly articulate the pillars of an alternative. We must not allow history to repeat itself, whereby Black Swan events are so often succeeded by a series of short-sighted economic measures which reinforce the ongoing systemic deficiencies.

The absurd corruption and loss of purpose represented by the mutated form of free-market economics that is practiced today must be addressed. This is the model in which medical professionals can be sued for 3D printing patented life-saving valves; in which ventilators are sold for the highest bidding price; in which patients without health insurance must pay for COVID-19 treatment; in which factory-workers risk their lives to ensure company sales of non-essential consumer goods. These are not issues that have sprung up overnight, but are the inexorable symptoms of an economic model in which win-lose game theory has reached its shelf life and is beginning to decay. As universal owners, it is responsible investors that must return to the root of this system and radically alter its cause.

We have spent several decades constructing complex metrics in an attempt to capture ‘ESG value’ as value which is conducive to promoting long-term financial value. But are we aware of what other value – social, ecological, adaptive – is represented in an asset?

Complex win-win systems, or systems that produce positive Non-Zero-Sum outcomes, are not new ideas in economic theory, but they have previously been difficult to centre as superior strategies within the ideologically biased investment industry. As headlines turn towards responsible investment as the market underdog, we face an opportunity to truly argue the case for win-win systems. Consistent with Kate Raworth’s model of Donut Economics and concepts of closed loop and circular economies, Omni-Win-Win systems preference dynamic, inclusive relationships that serve to benefit all parties – ecological, social, labour – to the system. They also aim to eliminate competition for scarce resources and the offloading of externalities onto other parts of the system (including ecological systems) by redefining how value is measured, i.e. by measuring value as a composite of financial and non-financial benefit. In an economic model that centres Omni-Win-Win dynamics, the financial markets cannot compete with the needs of civil society; industry cannot compete with the needs of ecological systems; the corporation cannot compete with the needs of the individual; the mouth cannot eat the fist. Many responsible investors already know of assets that represent such systems, whether in regenerative agriculture, renewable energy technologies, or Public Private Partnership projects, for example. While these assets represent varied approaches, such prototypes must be collated and analysed, augmented and engaged with, to compile a rich biodiversity of self-sustaining and decentralised alternate economic systems that can rise to the challenge of a transitional – and ultimately a new – economic system. This is the first task of radical responsible investment.

The second task is to interrogate the relevance of ESG models and metrics. We have spent several decades constructing complex metrics in an attempt to capture ‘ESG value’ as value which is conducive to promoting long-term financial value. But are we aware of what other value – social, ecological, adaptive – is represented in an asset?  When it comes to ESG benchmarks, can we trust current ‘best practice’ to galvanise a company from real-world risks? In comparing the hypothetical scenarios of the pre-pandemic world against the demands of the current disaster, the benchmarks for performance are certain to change, shifting companies, or entire sectors, into different risk-profiles.

The third radical task for responsible investors is to critically reflect on the effectiveness of active ownership practices in a post-COVID-19 world. Faced with the knowledge of a corrupted economic model that incentivises disinformation, and the enhanced urgency of addressing risks such as climate change to avert greater ecological disaster – and potentially a human extinction event – current shareholder engagement and voting priorities need to be re-evaluated (or shelved). The urgency of ensuring sustainable food supply chains, access to affordable medical and healthcare facilities, supporting innovative technological and digital infrastructures, and protecting against market manipulation and the vast abuses of labour and human rights occurring across global manufacturing supply chains, has come into grotesque focus. COVID-19 taught us to prioritise essential services on a societal level; we must be unafraid to identify essential assets and to prioritise their success over and above the cash-cows of the pre-COVID world. This includes engaging with all actors – from government, industry bodies and special interest groups through to companies – with an unprecedented vehemence.

It is such actions, paired with the persisting creativity and fearlessness of responsible investors, that will move us towards a new economy as this one slowly and painfully deconstructs around us. We must empower a biodiversity of alternate assets aligned to the ultimate goals of circular economies and omni-win-win systems. Time and time again, we have failed to act as the inertia of legacy responsible rhetoric – of ‘value-based’ versus ‘values-based’ thinking – hijacks the urgency that is needed for rapid and radical change. At a time in which collapse is inevitable and occurring all around us, we must be willing to risk our reputations and back radically new ways of thinking. We must invest in the wild-card saplings that show promise of an alternate future and cultivate them as prototypes of a new economic system.  And we must be willing to wholly actualise our own evolution from responsible investors to true universal stewards if we are to avoid total systemic collapse.

Nithya Iyer is a freelance responsible investment consultant and interdisciplinary researcher. Among others, she has worked with ISS ESG Australia and the Responsible Investment Association Australasia, as well as Altiorem, where she is a Mentor.