Sunday, January 26, 2014

Different sides of the mountain

I was in Parpan, Switzerland, at an impact investing get together whilst, over the other side of the mountain at Davos, the 'great' and the 'good' were attending the World Economic Forum.

Of this latter, The Economist's editor in chief described the mood as 'short term greed, long term paranoia'. The greed element was the belief (on behalf of CEOs) that the world had turned a corner and was back on the path to growth (unless you live in the Eurozone), the paranoia element related to the fear that technological change was stripping the economy of its ability to create sufficient jobs (for an increasing population).

At what point would this phenomena begin to unravel the social contract between 'capital' and 'labour'? Underlying this theme too was the one of growing inequality. This was beautifully captured in the 'killer fact' of a report launched to coincide with WEF by my former colleagues in Oxfam: that the 85 wealthiest individuals in the world own assets equivalent to 3.5 billion people (namely half of the world's population, the poorest half).

Meanwhile, we humbler folk in Parpan were pondering the challenges of developing 'impact' or 'social' investing whereby as well as a financial return, you aim to deliver businesses (commercial or social) that provide social and/or environmentally beneficial impacts. A classic example would be a business that sells solar powered lighting products in, say, Tanzania through a chain of 'micro-entrepreneurs' (thus creating employment in rural areas) to end clients who now have less dependence on (expensive) kerosene and whose children can now finish their homework after dark.

One of the tensions in our conversation was whether we were developing 'impact investing' as a niche product within mainstream finance or whether we are developing a model of how all financing ought to be constructed? On which there were distinct differences of opinion.

My own is for the latter for it is only the latter (and in a radical version) that can address what the world needs which is to invent a coherent economy that does not require 'growth' (in the conventional sense) to sustain it.

The first place to start would be to acknowledge that the CE0's return to greed is only possible because many of the cost of doing business are not accounted for at the business level. These 'externalities' (for example the real cost of natural resource use in a finite world) are borne either by communities now (pollution) or future generations (no more oil to extract). So why not begin here? By taxing resource use, impact and depletion.

This would make the kinds of business that impact investors get excited about now, infinitely more attractive to 'mainstream finance' because, in fact, they would be the trend setters doing by design what everyone will have to do by the compulsion of taxing resource use (hopefully) or ecological breakdown (sadly). It will also foster radical innovation towards sustainability - 'green taxes' as the necessity that is the mother of invention!

Meanwhile, what about long term paranoia? If you tax the use of resources (and the accumulation of assets), you can afford to reduce taxes on labour. On the one hand labour intensification becomes more attractive and on the other people may be able to afford to work less. They will be able to enjoy the benefits of this technological advance such as we have been promised for over a century by every two dime futurologist. If we are truly lucky, we may find ourselves working at the same pace as our hunter gatherer or medieval peasant ancestors!

All of this might be possible if the Davos folk 'got out more' - out into the real world that offers abundant opportunity but which our economic paradigms have constrained into a narrow vision of 'greed' and, most especially, out from under those paradigms themselves which long since exceeded their sell by date. I often wonder whether future generations will bracket them in a similar way that medieval scholastic theologians are seen but instead of angels dancing on pinheads, we will puzzle over the obsession with 'perfect markets' and 'invisible hands'!

Meanwhile, we, the Parpan folk, need to be bolder in thinking about not only how to make these fascinating enterprises work (within the current system) but how do we re-design the system so that these enterprises simply become the norm rather than the niche.

An impact investing advocacy for global tax reform anyone?

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