By Marco Vangelisti, Founder of Essential Knowledge for Transition
I am a refugee from conventional finance.
It all started in the most innocent and promising way — a graduate student in math and economics at the University of California in Berkeley lands a job in the 80s with a think tank spearheading what would come to be called the quant wave in finance. We were applying mathematical models, statistical techniques and state-of-the-art computers (imagine a computer the size of a large refrigerator with the brain of your iPod Nano) to the field of investing, which at the time was the purview of fundamental analysts and stock pickers. Just for reference, in those days there was no email and no internet in our office.
What a thrill to find real life applications for the many years of theoretical math, which had been the staple of the last six years of my education.
Fast-forward 30 years, and that graduate student was now part of a team managing $20 billion in emerging markets equity in a very well respected investment management firm. It was a glamorous job. I had smart colleagues and influential clients around the world. We were also doing great — we were managing the best performing emerging markets equity fund with a 10 year track record and our clients loved us.
The only glitch was my curiosity about how our quantitatively constructed 300-name portfolio achieved such an amazing performance. You must know that I have always been a passionate and committed environmentalist. I never even applied for a job that required me to commute and I currently do not own a car. I am also passionate about social justice. Suffice it to say, I feel very much at home in Berkeley, CA.
When I looked at some of the best performing stocks in the portfolio that year I found a palm oil company in Malaysia that had destroyed tens of thousands of acres of original rain forest in the Borneo to plant a monocrop of palm oil plants — eliminating massive swaths of orangutan habitat in the process. In fact, part of their stock performance was predicated on obtaining carbon credits for planting trees.
Ironically, most of our clients were foundations and endowments. In fact, some of the best-known environmental foundations had invested in our fund and celebrated our strong performance. Paradoxically, I had donated to one of them for their work protecting the orangutan habitat.
So, let’s recap. An environmentalist who donated to an environmental foundation for its work in preserving orangutan habitat finds himself managing that same foundation’s assets, and funding through one of the portfolio’s companies the very destruction of said habitat. We were all doing our jobs in the most skilled and ethical way. The CIO of the environmental foundation, whose task was to preserve and grow the foundation assets in perpetuity (notice: a luxury not afforded to the thousand year old rainforest) had selected the best performing fund in that sector of the market. Our team, which had the fiduciary responsibility to manage our clients’ assets so as to maximize the risk-adjusted return, delivered exceptional results and grew the foundation’s assets. And yet, money that was set up to do good was funding activities directly contrary to the purpose for which it was granted.
That was when the cognitive dissonance between my personal values and my livelihood became too loud to ignore and I knew I had to leave my glamorous job. This was in early 2009, when the economy was tanking and the stock market was in a nosedive. Needless to say, it was not an easy decision to leave, as jobs in the investment management industry can be very well compensated. Yet, I felt I had no choice.
The intermediation of global finance is, I believe, at the very core of the many environmental and social problems we face. We live in a global economy driven by global financial capital, which is for the most part managed by fiduciaries legally bound to strictly confine themselves to financial risk and return considerations. All the non-financial impacts of an investment, what an economist will call “externalities,” like the destruction of the rainforest, the pollution of rivers, the displacement of communities, etc. cannot be considered by fiduciaries. Through this intermediated arrangement we are rendering these externalities invisible to the owners of capital. We are all collectively unaware of what our investments are really doing out there in the world. All we ask of the people managing our money is to focus exclusively on the financial performance of our investments — their return and their volatility.
The Economics of Ecosystems and Biodiversity, a UN initiative focused on “making nature’s values visible,” published a very important study in April 2013 called “Natural Capital at Risk: the Top 100 Externalities of Business.” It was a result of a massive global study over 15 years which applied environmental economics techniques to measuring in dollar terms the value of the natural capital we use for free — like water, land and natural resources — and the cost of “externalities” like pollution of the air, water and land. The results of the study were staggering. Our global economic activity in 2009 caused a loss of unpriced natural capital of $7.3 trillion. Considering that the global GDP, the total output of goods and services produced worldwide that year, was about $62 trillion, the unpriced natural capital used in the process amounted to more than 10 percent of the global GDP. In other words, we have been treating nature as a business in liquidation in order to subsidize our economic activity worldwide and therefore the financial returns of global investment capital.
An alien looking at this beautiful blue planet might see something quite odd. A species which calls itself homo sapiens and which is utterly dependent on the natural systems that developed on this unique planet over billions of years, has come up with a strange game of numbers played over a complicated network of computers that forces it to take whatever is left of those natural systems, commoditize them, dismantle them and sell them for parts. That is pretty odd. And yet, I have a confession to make. Three years after leaving my finance job, my personal investment portfolio was still playing the odd game the alien observed. That is, until I had an insight as I was sitting on a meditation cushion doing Metta practice. I was imagining sending loving kindness to all living beings around the world. The image of the destroyed rainforest came to my mind, and then it hit me. I was already affecting a lot of living beings around the world with my very investments, and the impact certainly did not feel like loving kindness to them.
I realized then that I had to overcome my concerns about the increased risk of giving up broad diversification in my investment portfolio and the potential loss of investment return. I divested from all international investments, all large capitalization stocks and all mutual funds, and retained mostly local investments. Basically, I sold all investments for which I did not have a complete understanding of their ultimate impact on communities and ecosystems.
What I found perplexing was the fact that it was easier for me to align my livelihood to my values by walking away from my prior finance job, than it was to align my own investments — despite that the personal financial cost of the first decision was much greater than that of the second.
I realized that money in the form of investment capital, especially in our global and highly intermediated financial system has a very unfortunate power — it allows for the separation of our intentions and personal values from our agency in the world as expressed by our investments.
I also realized that through my traditional investments I was involved in a massive intergenerational injustice. The financial returns I relied upon to provide for my comfortable retirement came at the expense of future generations, since a large part of those returns was predicated on extractive activities that diminished the natural capital future generations will need to survive.
In the last six years I have been involved in direct funding of mostly Slow Money enterprises in Northern California where I live. The process has called for an investment of time as well as money, since direct investing requires taking a close look at each business or project and, at times, advising the entrepreneur receiving funding. And yes, local investing can be risky. I experienced investment losses in two areas — pre-revenue start-ups and direct personal loans to entrepreneurs whose character I did not know well enough. But it can also be greatly rewarding. Seeing local businesses thrive and knowing that your investment had a part in their success is wonderfully gratifying.
Local investments are also investments for the long haul, since there is no developed secondary market that could provide liquidity (the ability to sell the investment to someone else for cash). Risk, liquidity, a steep learning curve and time commitment are the primary challenges we face in realigning our values with our investments, yet such realignment is the moral imperative of our time and our responsibility towards future generations.
Article by Marco Vangelisti, Founder, Essential Knowledge for Transition (http://ek4t.com). Marco worked in finance for 25 years and for the last 6 in the investment management industry. He is a founding member of Slow Money and in the leadership team of the Slow Money Northern California network. He is a 100% impact investor and shares his experience doing direct Slow Money investments with communities around the country to help them increase their capacity for local investing through workshop and lectures. Marco developed Essential Knowledge for Transition – a curriculum for engaged citizens to understand the money and banking system, the economic system and the financial system and how we need to transform them. He speaks nationally as guest lecturer and author.