Tuesday, April 30, 2013

Purpose + Method

In an email discussion thread on the subject of climate risk and transitioning out of a carbon economy, the conversation turned to the power of stewardship investors to manage the problem of stranded investment as we de-commissioned unburned fossil fuel reserves.

We were reminded of the famous Freshfield's research paper establishing the rules of fiduciary duty for stewardship investors as extending to considerations of environment, society and governance in investing. It was observed that Freshfield's has received more critical acclaim than practical implementation.

There is a reason for this. If we are going to give our stewardship investors an new purpose, we also have to give them new methods with which to achieve that purpose.

Consider, for example, the letter that was sent by the British Academy to Her Majesty the Queen in June 2009. A most remarkable document. In it, the top-ranked economy thinkers and financial policymakers in England responded to the Queen's demand for an explanation as to why they had not seen the financial crisis of 2008 coming. The answer: they did! In the letter, they explained that they new the global financial asset pricing markets were in a bubble, but they could not calculate exactly when it would burst or identify exactly what would trigger the collapse. So, other than issuing a few tepid warnings, they did nothing, hoping they would be able to clean up the mess, after the fact.

The point is this. These are money and credit guys. Credit does not start bubbles, although it usually is what causes them to pop. So, we can't expect the credit guys to stop the boom-and-bust. They do not have the right tools.

Same with stewardship investing. We can't expect good stewardship, if we do not have the right tools.

Monday, April 29, 2013

Supervising the Winding Down - A Bold Proposal for the Remediation of Carbon Pollution

The polar icecaps are melting.

Levels of fossilized carbon trapped in the atmosphere are rising.

Is this consequence, or happenstance?

The safer answer is to pick consequence, and accept the theory of Global Warming that holds that carbon pollution is driving climate change, with devastating consequences possibly for us, but certainly for our children and our children's children.

If we believe in Global Warming, take corrective action to reverse carbon pollution, and it turns out we were wrong, we will have gyrated through changing choices that we did not have to make. If, on the other hand, it turns out we were right, we will survive, and our children can prosper.

The path to reversing carbon pollution lies through a rebalancing of our global energy mix, to drastically reduce, or even eliminate, our combustion of fossilized carbons for motor fuel and power generation. This means winding down at least two, and maybe all three, of the bedrock industries on which our economy is currently built: coal, oil and natural gas. (Gas may be the wildcard in this, if as some claim, its contributions to carbon pollution are more manageable.)

This is, I believe, unprecedented in the whole of human history. Not the competitive shift from one bedrock technology to a new and better one. That has happened many times before. But the deliberate choice to wind down our use of one bedrock technology while we search for an alternative that is not better as a price-performer, but is better because it will not kill us all.

Fortunately, we also have the benefit of another evolution that is unprecedented, at least in the history of the Euro-American economy.  That is the evolution of stewardship investing as a new technology for  aggregating savings to form capital for investment. This technology for aggregating savings has not yet evolved its own technology for deploying capital (which is causing its own set of "birthing pains"), but as it does, it will provide the tools we need to manage the winding down of our dependence on fossilized carbon to fuel the engines of our comfort and our prosperity.

We can, using a strategy of "going private, staying private" transfer ownership and control of our fossilized carbon resources over to stewardship investors for the express purpose of overseeing the winding down of those industries as we transition over to more climate-friendly energy choices.

Using the innovative architecture of the equity split, stewardship investors can break out of the corporate model of investment ownership that is designed to keep going, until it crashes.

Instead of reinvesting profits to perpetuate the problems of incumbency with fossilized carbon, stewardship investors can pay out profits to themselves, realizing the returns required to support their portfolio needs, and superintending an orderly winding down of our fossilized carbon industries, as we reconfigure our economy around new, non-fossil energy choices.

It's what engineers call a controlled failure. Much to be preferred over the alternative: catastrophic collapse.

Tuesday, April 23, 2013

Awakening the Sleeping Giants of Stewardship Investing

Divestment was the beginning. The campaign to end apartheid in South Africa showed the stewardship community that they are large, that they are powerful, and that the investment choices they make can move the world.

Shareholder activism is the transition to a full realization that stewardship investing affects global prosperity, for good or ill. It is not a question of whether, but only of how. Still, shareholder activism remains enthralled to the lords of investment banking, their minions of exponential growth, and the tyranny of transient trading on price.

Equity splits will set stewardship investing free. They are the key to unlocking the chains of speculation that are keeping stewardship investors from realizing their full power and import as large, perpetual and purposeful investors, to drive the economy away from the boom-and-bust of miscreant market manipulation and towards a more authentically sustainable prosperity, one in which we are truly able to always continue having enough, and to spare, for this generation and the next, on and on into the future indefinitely.

The future. That is our New Frontier. Stewardship. That is the rocket we can ride into this new frontier. Equity splits. They are the infrastructure we must construct to conquer that frontier.

Thursday, April 18, 2013

All Apples are Fruits, but not all Fruits are Apples

The ESG community is passionate about building the values of sustainability and social responsibility into the global economy through investment.

I share their passion. I cannot, however, support their methods.

There is a strong perception in the popular thinking that investment, or stated more generally, capital formation, is about investment banking. This is only partly true. Investment banking is a technology for aggregating capital for investment and deploying it to fund enterprise, but it is not the only way that capital is formed. All investment banking is capital formation, but not all capital formation is investment banking.

One reason this may be so hard for the popular mind to see may be because there are so few competing choices. There is private wealth. There is public wealth. There is commercial banking. There is investment banking. And there is stewardship investing. That pretty much completes the list.

Like all technology choices, each of these has its own unique strengths, and its own corresponding set of limitations. The choice of which to use when is a trade-off of strengths for limitations. You can't choose one without the other. You have to take both. Technology is always a package deal.

The strength of investment banking is flexibility at scale. It's limitations are volatility, instability and opportunism.  Three of the other competing choices can match investment banking for scale. These are public wealth (government spending), commercial banking and stewardship investing. Only one, stewardship investing, can also match investment banking for flexibility. And only stewardship investing can beat investment banking for longevity, stability and purpose, at scale and with flexibility.

Yet, stewardship investing is not being tapped by the ESG community as it should be. Instead, all their energies are being expended in a futile effort to build purpose into the radical, in the Latin sense of "going to the root", opportunism that is investment banking.  You cannot build purpose into opportunism. The two are mutually exclusive.

We can build purpose into capital formation. We just can't build it into investment banking.

We have to make a different choice. We have to choose stewardship investing. That is the only technology for capital formation that will support the purposeful investment of purpose-driven funds into values-driven enterprise, at scale and with the flexibility required to support the economy in adapting to change when circumstances change, as they do more or less continuously.

How do we get the popular mind to see that?