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?

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