Responsible Investors are Calling for Systemic Reform

January 14, 2009 - New York City

Institutional investors were speaking passionately about the need for deep reform of financial systems this week at the 3rd Annual Forum on Responsible Investing. The event took place January 12-13, 2009 at the Union League Club in New York City, and was strongly attended by all facets of the financial community, including foundation representatives, pension fund managers, research firms, consultants and student activists.

Conversations centered around the global credit crunch, and the recognition that ‘business as usual’ is no longer an option for institutional investors. Foundations, such as Tides Foundation and The Edward W. Hazen Foundation, have seen their holdings decimated in recent months, and are moving away from the common practice of hiring traditional managers to generate high growth at any cost for philanthropy purposes. Instead, they are shifting their assets into investment options that are complementary to their mission and social values in an attempt to ‘do well by doing good’. Socially responsible mutual funds, asset managers and insurance groups, like Calvert, Trillium and Aviva, are also examining their portfolios in a new light, using positive corporate ESG performance as a proxy for good management in an attempt to make wise long-term investments. Several speakers, including Michael Musuraca, Designated Trustee of New York City Employees Retirement System, were so appalled with the greed and short-term thinking prevalent in traditional portfolio management that they lashed out against mainstream managers and economists. Sarah Stranahan, Trustee of The Needmor Fund, said, “the only thing worse than the collapse of the market would have been its continued success“. They prescribed an emboldened US financial regulatory system that would implement incentives for greater cooperation, transparency and ethical decision-making. A call for action was sounded by stakeholders such as the Responsible Endowments Coalition, who are tired of listening to mission-related investors and hearing lots of theoretical talk, without seeing any practical walk.

Although a sense of frustration and urgency permeated the forum, the conference hall was also full of hope that the incoming Obama administration was presenting a once-in-a-generation investment opportunity to profit from the emergent Green Economy. Participants discussed sustainable solutions from non-profits, corporations and governments that encouraged eco-efficiency, while providing a strong economic and social return on investment. Moreover, they exchanged investment strategies that had the dual goals of generating a reasonable financial return, and of creating a better future.


The 3rd Annual Forum on Responsible Investing was organized by Institutional Investor Events, and was sponsored primarily by Calvert Investments and KLD Research & Analytics.

Timothy Jack Nash is a member of the Ethical Markets Sustainability Research Group.

Back to the Basics of Sustainability

People who make New Year’s Resolutions know instinctively that with each new year comes a chance for reflection, for renewal, and for rebirth. Since my hope is for a New Millennium’s Evolution (particularly in the economic and financial systems), it’s important for me to remember WHY I am working on such issues.

I’ve been fortunate in my life to have experienced some pretty powerful connections with living species and systems. But my biggest “AHA!” moment came from an encounter with a smart Swedish scientist named Karl-Henrik Robèrt. He described how economic growth relies on increased demand for energy and inputs. As companies and industries have been growing globally, so too has the need for fossil fuels, metals, water and land. Since traditional business theory is to keep growing in terms of quantity, we can only assume that demand for resources and ecosystem services will continue to rise, increasing the economy’s eco-footprint.


At the same time, we are witnessing an unprecedented decline of the productive capacity of Nature. There are too many examples of ecosystem decline to name them all, but some of the most stunning losses are of the world’s forests and sharks. Non-renewable resources like metals and fossil fuels are just that: non-renewable. Therefore, Earth’s supply is being diminished everyday as mines and drilling rigs continue to operate.


When you consider these two trends together, you get a situation that looks a lot like a funnel!


As we continue with business as usual, the planet is entering further into the funnel, increasing the likelihood of a major catastrophe that could cripple the global economy, tear apart social fabric, and do permanent damage to life-producing ecosystems. We can debate the timing of such a crash, but it will happen sooner or later if we do not change course. Moreover, it will cost much less to prevent the problems now, rather than trying to fix them later.

Achieving Sustainability is about leveling out these two major trends, so that our social and economic systems can continue to operate indefinitely. It is about minimizing personal eco-footprints and consumption rates to levels within the productive means of the planet. And at the same time, it is about investing in new business models and processes that generate economic growth without depleting Nature’s capacity. It is about creating the conditions for endless economic growth, by pursuing quality of life and not quantity of material belongings.

I don’t imagine that an economic shift of this scope will come quickly or easily, but momentum is growing and a tipping point is near!

The Sustainable Solution

If you're in the wrong industry right now, 'business as usual' is no longer a viable option. Change is necessary; adaption is required for survival. Governments, business owners, and layed-off workers alike are scratching their heads over what to do next. We are witnessing a once-in-a-lifetime opportunity to drastically alter the economic paradigm... out of necessity.

We need to change course, but to what direction? How can we cut costs, improve the chances for profit, and ensure that we won't be caught in this mess again? The one word answer is Sustainability.

Lots of people are telling me that we need to solve the current financial situation before even thinking about social and environmental issues like poverty and climate change. They argue that we need cheap credit and more spending in the short-term to buy our way out of this recession. Once consumption levels are back up, then we can turn our attention to more 'luxurious' items like income inequality and ecosystem protection. I couldn't agree less. If we keep borrowing and spending on consumption (i.e. buying things that lose value or depreciate with time), then we will only be making the problem worse for the future. Instead, if people, companies, and governments strategically invest (i.e. buy things that become more valuable as time passes), our future will look brighter and we will become wealthier.

The typical argument against investments in sustainability is that short-term costs take too long to pay back. I've heard business people groan about a 5-year payback time on new windows or the installation of a solar energy system. For some reason, they are scoffing at a very safe 20% return on investment. Even more, it will reduce someone's carbon footprint and help create lots of new green jobs! With interest rates as low as they are, businesses should be encouraged to make investments in waste reduction and energy efficiency. Banks should be encouraged to prioritize this type of loan from governments that would provide incentives and aid packages targeted at employing low-skilled workers and cutting CO2 emissions. For a more detailed description of what this might look like, read this article.

Just as FDR created a New Deal for the American people in 1933, Obama has a unique opportunity to enact Change and create Hope. He's been speaking with some great organizations, like the Center for American Progress, and has announced a great energy team.

A change is gonna come, oh yes it is!

Fed up!

Just when I thought that Distrust had reached his zenith and was starting to leave, today comes in and hands him a folded metal chair.

I'm so angry about this $50-Billion investment scam run by Bernard Madoff. I can understand someone bending the rules of the game for self-gain, but it hurts everyone when they get outright broken. I hope the judge makes an example of him. Talking about building investor trust and confidence, the TSX has halted trading today for technical reasons. No better way to provide assurance than with a technical glitch! Forgive my sarcasm, but this is just silly. Is the TSX's plan B really to just re-route trades through a competing trading system?? Finally, the US Federal Reserve has cut interest rates to zero. The Globe & Mail calls it "the monetary policy equivalent of a Hail Mary pass", but I like the analogy of a soldier throwing his last grenade into a crowd of credit zombies. I'm starting to get really worried.

To take my mind off of this mess, I'm watching Gorrila in the Greenhouse. Let me know when the TSX is back up.....

Trust and Volatility

Watching the financial markets with a more attentive eye for these past months has given me some insights into what I like to call ‘market psychology’. I’ve realized that lately, stock price changes have had less to do with facts, figures, and metrics, but have been influenced more by perceptions, expectations, and other less tangible aspects created by the minds of institutional investors.

Markets have been experiencing unprecedented volatility over the past weeks. It’s become common for good, solid companies to take a 5-10% loss in a day for no apparent reason, then bounce back up the following day almost as much. Retail investors are losing trust in stocks and the way they are traded. This mistrust is understandable when you see these big swings that are based on nothing logical. Jim Cramer describes it as “a broken casino where stocks move in 3, 4, or 5 point increments over [...] whiffs, rumors”. There are several other reasons why the markets are so out-of-whack, including a transitional US government; rising unemployment causing income insecurities; and uncertainty on just about everything from input costs to waste disposal. But perhaps there is a sinister role being played behind the scenes in all of this.

Hedge funds have to be making money, regardless of whether the market is going up or down. Long or short, they need to generate cash. That’s why they exist. They also have the power to borrow money to make investments on margin (where they put up 1/2 or 1/3 or the cash and borrow the rest). When markets were up, they were profiting and pushing stocks even higher. Now that markets are down, one fund will be forced to sell at bad prices, while another will vulture the stock by shorting, and buying it back when the first company is done dumping it. This theory assumes two things: 1) that hedge funds are in cahoots; and 2) that they are greedy enough to sacrifice long-term retail investor trust in order to make a quick buck. You make your own call, but I’d recommend watch Jim Cramer’s 13-minute rant on the subject.

If I’m right, then major structural changes will need to be made before these markets can earn back the trust of mainstreet investors. Until a reasonable degree of consistency is restored, it is hard to recommend any stock based solely on good fundamentals. Anyone got the number to a Wall Street hedge fund manager for me??

ABCP What?

Amidst the chaos of Canada's political posturing, some people were afraid that government was getting distracted from more important matters, i.e. the economy, stupid. Unfortunately, it seems although they were right.

Canada has escaped the brunt of the global financial meltdown, but we are not unaffected. Case in point, the Caisse de Dépôt is struggling to backstop Québec's banking system from sliding down into oblivian. Unfortunately, multiple Montréal financial institutions bought Asset-Backed Comercial Papers, or ABCPs, back in 2007 when they were considered 'safe'. These debt instruments were sold as short-term low-risk investments, which became toxic as people stopped paying their mortgages in the US. Since no one would buy them anymore, the market for this type of security froze. Institutions that happened to own that at the time were stuck with them, and took a big hit on their balance sheet.

Most other countries have moved to limit the damage caused by these radioactive papers (like $150 billion for AIG), but so far Canada has done nothing. Lots of Canadians will be affected if this downward spiral continues, and it will cost more to fix as time goes on. Having banks collapse is the worst-case scenario in the current crisis, as it could precipitate a full-blown depression.

This matter should have been resolved 6 months ago, when the credit securities were first discovered to be toxic and plans were put in place to restructure. Again, it should have been resolved last month, when Stephen Harper assured Canadians that "we will engage in sufficient stimulus to do our part in carrying global economic demand". Unfortunately, it is still not resolved, leaving beleaguered banks left begging for funds. They are not asking for the full value of the toxic papers to be covered by the government, just enough so that they won’t get killed.

Many Canadians are weary of public bailouts, but the stakes are simply too high. A domino effect is in place, and unless it is stopped, all Canadians will feel the financial pinch. This is not a time for politicians to sit by and play internal games, The Canadian economy needs action NOW. National Bank Financial's stock is down almost 10% today, and will continue to slide unless assurances are given that Ottawa and Québec City will do something about it.

Obama to Pop a Green Collar??

There is great speculation about how Obama could possibly meet the insane expectations that the United States, much less the world, have piled upon his shoulders. Last I heard, he's poised to clean-up the biggest financial mess on record; find employment for millions of people; reform the health care system; champion climate change mitigation; improve school conditions; and end the war in Iraq. And I thought I had it tough.....

Fortunately for Obama, there is an idea out there that can help solve many of these problems at once. It's called the 'Green Collar Economy'. Popularized by a recent book by Van Jones, it embodies the goal of creating an environmentally sustainable economy powered by ordinary workers. According to Jones, "the main piece of technology in the green economy is a caulk gun". Focus areas include: energy efficiency upgrades and retrofits for millions of homes and buildings; the construction of renewable energy infrastructure (generation and transmission); and new green developments on remediated land.

By engineering a Green Economy Stimulus Package, Obama can spur development that will curb energy usage, decrease dependency on foreign oil, carve CO2 emissions, give a boost to important market sectors, and inspire a generation. I'm not the only one saying this. The idea of a green economy is embraced by grassroots organizations, and has been picking up traction in the mainstream media. It might not be on CNN (yet), but it's gaining momentum. If Obama really wants to change America, then he is going to put some green into the old red, white and blue. With stock prices in the trenches, the investment opportunity of a generation is presenting itself.

In the coming weeks, I will be researching and analyzing companies that are slated to benefit from the massive Green Economy Stimulus Package that is in the works. I'll help you weed out the losers from the leaders in various Cleantech and Socially Responsible indexes. Your portfolio will be poised to grow massively in the short-term as the Green Economy concept builds steam, and you'll have the pleasure of helping finance the sustainable change that America needs.

Y'all come back now, ya hear!?