21st Century Investing: Redirecting Financial Strategies to Drive Systems Change by William Burckart & Steve Lydenberg

Author:William Burckart & Steve Lydenberg
Language: eng
Format: epub
Publisher: Berrett-Koehler Publishers, Inc.

Principles, Assumptions, and a Way Forward

The best place to start in measuring and assessing system-level investments is what evaluation expert Michael Quinn Patton calls a “principles-focused evaluation.”8 Using a framework based on principles “provides guidance for making choices and decisions, is useful in setting priorities, inspires, and supports ongoing development and adaptation.”9 In addition, “Principles-focused evaluation examines (1) whether principles are clear, meaningful, and actionable, and if so, (2) whether they are actually being followed and, if so, (3) whether they are leading to desired results.”10

From these foundations of principles-focused evaluations, investors can make sense of their managers’ performance by keeping four key assumptions in mind. These assumptions are, relatively speaking, simple, straightforward, and hardly original. Together, however, they can provide a base on which to build a method that investors can use to evaluate their managers’ relative performance in achieving positive, system-related, social and environmental impact.

The first assumption is that the overall consistency of managers is essential. Sustainable investors today tend to assume that impact can be measured solely by considering outcomes. In practice, the challenge is more complicated. Managers can undermine their outcomes achieved through unjustified claims and countervailing deeds. Consistency in managers’ character, actions, and outcomes is necessary to ensure impact is sustainable.11

If managers tout their investments in solar or wind power, for example, as a positive outcome for contending with global warming but simultaneously invest heavily in fossil fuels because they believe that a viable economy will depend on oil, coal, and natural gas into the foreseeable future, they may be counteracting the positive outcomes they profess. Similarly, if they publicly assert that a transition to alternative energy is urgently needed but lobby for tax breaks for fossil fuels in order to benefit their portfolios’ holdings, they also undermine those positive outcomes.

The second assumption is that it is valid for investors to use qualitative judgment as well as qualitative metrics in making system-level investment decisions. Today’s managers are well trained in portfolio risk control, using quantitative data to identify pricing anomalies, opportunities to diversify risk, and effective hedging maneuvers. When systemic social and environmental risks and rewards are the challenge they face, unintended consequences are a constant danger. Judgment and the flexibility to readjust are needed to fill the void.12

In evaluating their managers, investors must honor the necessity for the use of judgment and then assess the quality of that judgment—a quality that, for better or worse, cannot be easily captured in quantifiable data. If, for example, investors are contending with the complex systemic challenges of income inequality—covered in chapter 7—given the systemic risks it poses to political instability around the world today, they will need to evaluate managers’ judgment in how best to contend with complex contributing factors such as companies’ labor, tax, and CEO compensation practices. Each involves multiple interconnected factors. To address them requires managers’ judgment on how best to measure the consequences of their decisions.

Judgment with respect to systemic impacts is similarly essential in the financial realm, as Amar Bhidé points out in A Call for Judgment.

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