Capitalism ain’t broke but it might need fixing

Bernie Sanders is angry about capitalism. He has told us in the title of his latest book that “It’s OK to Be Angry About Capitalism”. But is socialism the answer? Probably not – but…

What can capitalists with an interest in a social impact do short of transitioning to socialism?

Firstly, philanthropy remains a compelling option. There are increasingly impactful ways to donate money to worthy causes – donor-advised funds, outcomes-based contracts, establishing foundations and bequests.

Secondly, ESG approaches. There is an increasing understanding that pursuit of pure short-term profit at any cost is not sustainable for anyone. Investors, institutions and family offices can apply ESG (environmental/social/governance) approaches to their operations and investments. In essence, these are risk mitigation tools to examine the ESG implications of a company’s investments and activities. Does it harm the earth? Does it harm our suppliers? Does it harm people? All questions with long-term impacts on the company and society.

The reputation of ESG has taken a small battering in certain markets lately (partially due to inconsistent application of standards, and partially due to culture wars). However, it is hard to see how this kind of basic due diligence on matters other than the bottom line is “wokery”, and there is increasing evidence of a correlation between good ESG practices and positive financial and business outcomes (see my earlier post from May!). In the coming years, ESG considerations will not just be a ‘nice to have’ but a key part of any organisation’s standard operating procedure.

Thirdly, socially responsible (or ‘conscious’) investing (SRI). SRI is, in essence, a form of negative screening. It sets out the types of activities or investments the organisation is not willing to give capital to. For some organisations, this might be tobacco, fossil fuels, extractives, or areas with high risk of illicit labour. The actual parameters vary from organisation to organisation but the ‘negative screening’ (i.e. screening out opportunities) is its hallmark.

Lastly, impact investing. A touch further than the others, because it flips the coin. Rather than risk-mitigating or screening out, impact investing actively seeks catalytic change with its capital. The peak body for impact investing, the Global Impact Investing Network, differentiates it by describing the activity as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”. Namely, intentionally seeking a financial return and an impact return. Impact investing involves intentionally seeking impactful opportunities. So there is an opportunity to do well while doing good. No need to give it away when you can catalyse change and recycle the capital for re-investing.

Can we fix the perception of capitalism’s heart being avarice-driven through risk mitigation? Negative screening? Impact investing? Perhaps. Perhaps not. But in the meantime it’s not okay to just be angry. We can do something about it.

Social Impact Bonds – when are they the right choice?

I’m very fortunate that my work takes me into interesting and innovative territory, including working on transactions that mobilise capital for social aims. One such emerging mechanism (albeit one with a 10 year track record) is social impact bonds.

I have this piece out today in The Catalyst called “When is the Right Time to Use a Social Impact Bond?”, exploring when a Social Impact Bond is the right choice for your social transaction (and, by extension, when not!).