Zone 8

Financial Assets, Sustainable Global Economy

This zone of the RIM is where we turn our attention to what most people consider “investing”: putting money into a diversified selection of stocks, bonds, mutual funds, and other financial instruments being traded in the global economy. While resilient investing offers us many more baskets to choose from, this zone remains a key place to focus on growing your financial assets.

At the same time, we’re passionate about engaging the global economy in ways that raise the bar on corporate citizenship and enable your financial investments to be consistent with all the choices you’re making with your time, attention, and money across the entire RIM. Sustainable and responsible investing (SRI), which has mushroomed in recent years thanks to being embraced by much of the financial industry and many large institutional investors, offers a wealth of opportunities for those who are committed to making a positive impact on the world while remaining focused on earning solid financial returns.

Key areas of Zone 8 focus

  • SRI mutual funds, stocks, and bonds
  • Shareholder advocacy

ESG investing is expanding—and adds to returns

Two new reports highlight the expanding adoption of Environmental, Social, and Governance (ESG) criteria among money managers, as well as the benefits to the bottom line that accrue to ESG-savvy investors.

The biennial Report on US Sustainable, Responsible and Impact Investing Trends from US SIF, the trade organization for the SRI industry, shows a continuation of the rapid adoption of ESG criteria among mainstream money managers that was noted in the previous Trends Report. In the last two years, the value of portfolios that include consideration of ESG factors has mushroomed by 69%, to over 8 trillion dollars, under the management of 777 money managers and institutional investors, and over 1000 community investing financial institutions. While the number of more active money managers who filed shareholder resolutions

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Equity crowdfunding off to promising start

In May, the SEC finalized its long-anticipated new rule that opens the door for more investors to take part in the most exciting—and risky—realm in the investing universe: innovative startups.  Previously, only “accredited” investors ($200K/yr income or $1 million in assets) were allowed to take these risks, and thus to reap the outsized rewards that can accrue to early investors in companies that are not yet available in the public stock markets.

Indiegogo announced this week that it will begin allowing small companies to offer equity investments on its platform, rather than just the rewards-based pre-sales that have been the core of crowdfunding up til now.  Many small companies have used crowdfunding platforms to get rolling and prove that there’s a ready market for their new products, only to turn to the super-rich when the time came to scale up for mass marketing their innovations.  Oculus, for example, raised millions from early adopters, but it was equity funders who reaped the windfall when the company was sold to Facebook for $2 billion.

In these early months, the potential is just beginning to be realized.  According to WeFunder, the largest equity crowdfunding portal so far, about 55 companies have successfully raised a combined total of $12 million from small investors.  WeFunder is currently hosting several dozen offerings, which range from

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Big corporations at forefront of LGBT rights fight

Did you know that despite the lack of any federal laws protecting LGBT people from discrimination, three-quarters of Fortune 500 companies have policies in place to do just that?  The “S” part of corporate ESG (Environmental, Social, and Governance) standards and SRI (Socially Responsible Investing) has been coming alive in increasingly dynamic ways in recent years.

This year, as three southern states passed laws that actively codified anti-LGBT discrimination, some of the loudest—and most effective—voices raised against these initiatives came from large companies.  As summarized by The New Yorker:

Last month, executives at more than eighty companies—including Apple, Pfizer, Microsoft, and Marriott—signed a public letter to the governor of North Carolina urging him to repeal the state’s new law. Lionsgate Studio is moving production of a new sitcom out of the state, Deutsche Bank cancelled plans to create new jobs there, and PayPal has cancelled plans for a global operations center. In Mississippi, G.E., Pepsi, Dow, and others attacked the law there as “bad for our employees and bad for business.” Disney said that it would stop making movies in Georgia, which has become a major venue for film production, if the governor signed the bill. Something similar happened last year in Indiana, after the state passed a religious-freedom law allowing businesses to discriminate against L.G.B.T. customers and employees. At least a dozen business conventions relocated.

The article goes on to look at the ways this leadership by corporate interests upends both progressive and conservative orthodoxy.  Progressives often decry the influence of business on government decision-making, but this time it’s a welcome addition to grassroots voices against regressive new state laws.  Meanwhile, as the New Yorker’s James Surowiecki notes, “to many conservative business leaders, today’s social-conservative agenda looks anachronistic and is harmful to the bottom line; it makes it hard to hire and keep talented employees who won’t tolerate discrimination.”

Though we’ve long been champions of the idea that business can play a key role in reshaping society in positive ways, this vocal leadership on perhaps the leading social justice issue of the day is a welcome surprise.

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Feds tweak rules to encourage social investing by foundations

A new set of regulations issued by the US Department of Treasury opens the door for private foundations to direct more of their investments to socially and environmentally beneficial projects.  Foundations are careful to separate their investment portfolio, used to grow their asset base, from the funds used to further their charitable mission, distributed in the form of grants or loans.  In recent years, many foundations that wanted to support social entrepreneurship or make loans to organizations within the areas of their missions had to treat these as part of their grant-making budget, rather than as part of their investment portfolio.

The new rules clarify that foundations “can factor in how the anticipated charitable outcomes from the investment might further the foundation’s mission in addition to the financial returns that are typically considered.  Thus, a foundation may prudently choose to make investments that provide both a charitable and a financial return without fear of facing a tax penalty.”

For more on this welcome new Zone 8 and 9 development, see this press release, issued by the Director of what sounds like a fantastic place to work: the White House Office of Social Innovation and Civic Participation.

Also, see this recent article from the Natural Investment News, in which our own Michael Kramer discussed the implications of the new rules and related changes at the IRS.

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US is a nation of regions, not states

Readers of The Resilient Investor will remember that our picture of more vibrant local economies is rooted in a shift from national and international trade networks toward increasingly vibrant regional economic systems.  A recent article in the NYTimes speaks to the emerging regional character of the US economy and society, suggesting that national policy should be redirected from state-specific funding, and instead nourish the already-emerging regional networks, which can then breathe new life into their surrounding rural areas and depressed smaller cities:

America is increasingly divided not between red states and blue states, but between connected hubs and disconnected backwaters. Bruce Katz of the Brookings Institution has pointed out that of America’s 350 major metro areas, the cities with more than three million people have rebounded far better from the financial crisis. Meanwhile, smaller cities like Dayton, Ohio, already floundering, have been falling further behind, as have countless disconnected small towns across the country.

Here’s the map of the US that the authors suggest we begin to plan around (click for larger version):

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World Bank ups climate change funding

The World Bank plans to continue its aggressive funding of climate-related projects over the next four years, gradually increasing its combined total funding and leveraged co-financing from private investors to $29 billion per year, 28% of its total outlays (up from today’s 21%)  and enough to meet nearly a third of the global target of $100 billion per year that was set at the Paris climate talks.  In addition to these funding plans, all World Bank programs will consider climate impacts in future investments.

Projects in the pipeline include quadrupling funding for climate-resilient transport, a project in Mexico to reduce deforestation and forest degredation in an areas the size of Connecticut, and seven solar PV projects in Jordan, and development of an early-warning system for extreme weather events in areas that would help protect one hundred million people.

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Dropping fossil fuels INCREASES investment returns

The fossil fuel divestment movement has faced some fairly stiff headwinds from institutional money managers who insist that universities, foundations, or individual investors will suffer financially if they choose to forgo investment in energy companies that have, historically, been among the best-performing stocks to hold.  But a recent analysis by Fossil Free Indexes paints a very different picture: if you take the S&P 500, and remove companies that are among the Carbon Underground 200 (companies that have the largest as-yet-untapped reserves of coal, oil, and gas), replacing some of them to maintain a balanced portfolio, your investment returns can be higher than they’d have been if you stayed on the business-as-usual path.  Applying this criteria to the past ten years, you’d have earned about an extra 1% per year.  This includes several years early on when the fossil fuel free approach slightly underperformed; it appears that in recent years, you’d have done much better than that (e.g., more than 2% a year over the past 3 years):

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Why some finance pros are walking away from Wall Street

wall400We’ve long urged readers to expand their view of investing to include focus on growing local economies and their own personal and tangible assets; we often use the phrase “weaning off Wall Street” to evoke these broader horizons.  Still, we and most of our clients remain substantially invested in the stock market, even as we seek ever more ways to diversify into all nine zones of the resilient investing map.  In the spirit of looking beyond such readily visible horizons, though, let’s hear from a couple of financial pros who have taken a more radical leap, revamping their entire approach to financial assets in ways that led them to walk away from Wall Street and never look back.

RSF Social Finance has gone all the way, divesting of all publicly traded stocks and bonds, rejecting the institutional standard for setting interest rates, and—interestingly, the hardest of all to complete—severing their ties to too-big-to-fail banks.  President and CEO Don Shaffer explains:

(As) Einstein famously said, “We cannot solve our problems by using the same kind of thinking we used when we created them.” Wall Street is tethered to only one kind of growth, the most relentlessly efficient kind. . . . Are there other ways to structure investment portfolios that are valid for the 21st century?

Shaffer challenges the idea that we need to accept our embeddedness in the system as it is:

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9 sustainable firms join the billion-dollar club

Here’s a piece of good news that’s flown under the radar: sustainability-oriented companies are rapidly becoming mainstream leaders of the corporate world.  Nine companies have crossed the billion-dollars-a-year threshold in annual revenues, and several more are not far behind.  E. Freya Williams, whose recently-released book Green Giants looks at the traits and qualities that these companies share, proclaims that sustainability-driven firms are no longer “going up against with the big boys. They are the big boys.”  And not surprisingly, they’ve been performing like gangbusters:

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Corporations buying forests to create sustainable supply chains

Ikea and Apple have both recently bought up large tracts of working forest land, in order to assure that their wood and paper products are coming from sustainably managed forests.  Ikea, which supposedly uses 1% of the world’s commercial wood supply, is aiming to scale back its use of wood by half, and to become net forest-positive (growing more trees than it uses) within five years. For its part, Apple is partnering with The Conservation Fund to manage its forests for both sustainable harvesting and habitat health; it hopes to see other companies doing the same in years to come.  On the one hand, this could be seen as a corporate land-grab, but at the same time it represents an attempt to take more corporate responsibility for their supply chains; Ikea, for example, has been criticized for the un-sustainable practices of a Russian supplier.  At the very least, in owning the tangible asset of the forest themselves companies will have clear incentives to assure that they remain healthy and productive for decades to come.

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Is globalization starting to bite the hands that fed it?

“The postwar geopolitical system is breaking down, and what comes next could be volatile—not least for the corporations that have built, cheered, and profited from the globalized economy.”

This teaser on a recent Atlantic article titled Globalization Bites Back only hints at the surprising perspectives it fleshed out, backed up by quotes from a wide array of mainstream economic analysts.  The piece reinforces one of the primary drivers behind the resilient investing approach: today’s world is rife with “systemic risks,” factors that could shuffle the economic deck in ways that traditional asset diversification cannot prepare us for.  A few key take-aways:

Ian Bremmer, the founder of the Eurasia Group, which advises companies on geopolitical issues, puts the situation in stark terms, noting that we’re in “a period of geopolitical creative destruction—the glue that is holding the world together no longer sticks. . . The last time this happened was the end of World War II. The level of geopolitical risk as a consequence of this transition—which is just starting—is absolutely going to be a big deal.”

“The last three years have definitely been a wake-up call for business on geopolitics,” agrees Dominic Barton, the managing director of McKinsey. “I’ve not seen anything like it. Since the Second World War, I don’t think you’ve seen such volatility.” Most businesses haven’t pulled back meaningfully from globalized operation, Barton said. “But they are thinking, Gosh, what’s next?”

“Was ExxonMobil worried about a skirmish in Georgia? I doubt it,” says Michael A. McFaul, the former U.S. ambassador to Russia. “But now companies like that one care a lot about the details of the conflict in eastern Ukraine. The conflict in Donetsk is being closely watched day by day by multinational corporations and is influencing their decisions.”

Bremmer notes that convincing companies of the value of his firm’s services was, until recently, a challenge. “There used to be a level of skepticism among top executives: ‘This is interesting, this is fun to talk about, but does it matter for my business?’ ” But they don’t say that anymore. “We no longer have to make a business case as to why what we do is relevant.”

Barton looks at the stagnation of the middle class in Europe and the US, alongside increasing focus on inequality and posits, “I think, in a 300-year time frame, this 20 or 30 years will be looked on as a pretty amazing period (referring to the past five years and the coming decades). “People are asking, ‘How does the capitalist system work? Is it right? Is democracy right?’ There are a lot of people asking fundamental questions.”

Indeed, even as we continue to be investing in the global economy, all this points to the need to stay on our toes, ready to respond nimbly to changing conditions, and considering how to be prepared for potentially profound shifts in the years to come.

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