The Brief | November 8, 2018

Stakeholder capitalism, mitigating income-inequality risk, forest resilience bond, artificial intelligence for good

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Featured: Impact Voices

How investors can drive the shift from shareholder primacy to stakeholder capitalism. Don’t blame the robots. It’s shareholders that are stealing our jobs. Sure, automation and the gig economy can undermine quality jobs with good wages, reliable benefits, advance opportunities and paths to ownership. Likely more culpable: Short-term investment strategies that pressure companies into squeezing workers and disgorging cash. In a new report, “Shareholders are Stealing Our Jobs,” published in full on ImpactAlpha, Transform Finance’s Andrea Armeni and NYU Stern School of Business’ Tensie Whelan call on asset managers and owners to reject shareholder primacy and embrace stakeholder capitalism. To help American workers and shareholders, the authors say, investors should “invest in positive approaches to quality employment, and help workers regain a voice in corporate decision-making.”

The authors cite investment opportunities that create quality jobs, value “human capital” and provide solid returns. Parnassus Endeavor Fund, which picks companies based on their positive workplace attributes, has ranked No. 1 among all large-cap growth-stock funds over every long-term period measured by Morningstar. The HIP Great Places to Work ESG Portfolio beat its benchmark last year. Blue Wolf Capital, a middle-market private equity firm, sees workers, unions, and regulators as stakeholders, not antagonists. The mezzanine debt fund HCAP Partners invests in companies that prioritize quality jobs and supports them to improve wages, benefits, opportunities for advancement, and profit- and ownership-sharing. Coastal Enterprises, Inc. engages employers to improve job quality and livelihoods as a competitive advantage.

Read, “How investors can drive the shift from shareholder primacy to stakeholder capitalism,” by Andrea Armeni and Tensie Whelan on ImpactAlpha.

Dealflow: Follow the Money

Google launches $25 million artificial intelligence impact challenge. The challenge is part of Google’s AI for Good initiative, which the tech giant launched after protests from thousands of its employees over a contract with the U.S. Department of Defense. Google’s new principles for AI exclude support for weapons or warfare. With $25 million in grant funding, the Google AI Impact Challenge will support nonprofits, academics and social enterprises to develop AI applications for social, environmental, and humanitarian outcomes. Dig in.

‘Forest resilience bond’ to mitigate wildfire risk in Tahoe National Forest. California’s increasingly severe wildfires includes August’s Mendocino Complex fire, the largest ever. Blue Forest Conservation and World Resources Institute have launched a $4.6 million “forest resilience bond” to restore 15,000 acres in the North Yuba River watershed of the Tahoe National Forest. If the project succeeds in mitigating wildfire risk, the investors will be repaid by the Yuba Water Agency, which has a stake in water quantity and quality, and California’s state Climate Change Investment program. Rockefeller Foundation, the Gordon & Betty Moore Foundation, Calvert Impact Capital and CSAA Insurance Group are providing upfront capital for restoration work by the National Forest Foundation. Blue Forest, led by Zach Knight, was a 2015 winner of the Kellogg-Morgan Stanley Sustainable Investing Challenge. Read on.

Impact investors back transportation data startup Knock Software. City bike riders use Knock’s Ride Report app to track routes and distance traveled. The Portland, Ore.-based company sells data to cities and partners with municipal planners on transport infrastructure projects. Knock Software raised $2.6 million from San Francisco venture fund Homebrew, impact investor Better Ventures, and Urban Innovation Fund, a tech fund backing companies solving urban growth challenges. Here’s more.

Signals: Ahead of the Curve

Mitigating the investment risks of rising income inequality. Institutional investors have a growing awareness of the systemic risk posed by climate change. Investors have been slower to appreciate the possibly greater risks of increasing income inequality. “So far, not many fund managers regard this as a relevant, imminent risk for their portfolio,” writes Hiro Mizuno, chief investment officer of the $1.4 trillion Government Pension Investment Fund of Japan, the world’s largest pension fund, in “Why and How Investors Can Respond to Income Inequality,” from The Investment Integration Project and Principles for Responsible Investment. “As long-term investors, we need to think about social instabilities that are possibly caused by income inequality and their negative impact on long-term investment return.”

The risks include immediate effects such as a demotivated workforce, as well as “system-level, unhedgeable risks of instability – national or geopolitical – that can arise when inequalities lead to a hollowing out of the middle class, political polarization, and a kind of populism that results in isolationism, trade wars, and other forms of saber-rattling,” adds Bob Eccles, a visiting professor at Oxford’s Said Business School. One reason for the slow response has been uncertainty about what investors can do to mitigate the risks of income inequality. The new report offers three workstreams:

  • Employee relations and labor rights. Long-term investors can set expectations for fair treatment of corporations’ direct and indirect workforces. The report cites Norges Bank Investment Management, Aviva and ABN AMRO for their promotion of human rights by corporations. The California Public Employees Retirement System and AutralianSuper support responsible contracting programs for real estate and infrastructure investments. The Human Capital Management Coalition, representing investors with over $2.8 trillion in assets, is seeking SEC mandates for corporate disclosure of human capital management practices and performance.
  • Corporate taxation. Investors can clarify their expectation that corporations pay their share of taxes and that paying tax is key to the social capital that supports long-term investments. The Local Authority Pension Fund Forum in the U.K. has called for companies to fully report on their tax strategies and payments.
  • CEO compensation. Investors can press for alternative compensation models that balance rewards to stockholders with investments in employees that enhance corporate value. In the U.S., the Dodd-Frank Act requires corporations to disclose the ratio of CEO compensation to that of the median employee. A wide compensation gap between senior executives and lower-level employees can hamper productivity.

“Investors have unintentionally contributed to the rise in income inequality and its potentially destabilizing effects,” says The Investment Integration Project’s William Burckart, a co-author of the report. “Investors can also see the opportunities to shift practices” towards a more equitable society. Share, “Mitigating the investment risks of rising income inequality.”

Agents of Impact: Follow the Talent

Toronto-based Purpose Capital is now Rally Assets… The Global Impact Investing Network and Orrick are hosting a workshop on clean energy access investment products on Nov. 14 in New York… Renewal Funds seeks a director of finance in Vancouver.

November 8, 2018.