Meaningful Platitudes Edition III: There's No Such Thing As A Neutral Investment

This is the first of at least two posts about the way we invest - in the broadest sense of that term - reflects a value system and therefore reflects choices, preferences, and biases that are, by definition, not neutral. The existing system is not neutral, though it will usually claim to be when contrasted with a new system or approach. But the root of any and all markets presumes human intervention (to have a market, you need to have property and to have a property, you need to have enforceable ownership, and to have enforceable ownership you need to have rules and bodies to enforce those rules - see where I am going with this?) and thus a market is a product of humans and humans are not neutral. (Now is a good time to admit that I took a single economics class in college and was so frustrated by the presumption of "free markets" that I refused to take another one and chose instead to learn about economics through various other vehicles thereafter.)

This post is about the influence investors have to shape society and three recent examples that brought this front and center for me.

In a January 24th article for Fortune, Vista Equity Partner's Chairman and CEO, Robert Smith, pointed out that of $126 trillion that makes up the global asset management base, "Only 1.4% of that astounding sum is allocated to diverse asset managers. Asset allocators, therefore, have enormous room to build more inclusive societies by increasing investments in diverse managers." He went on to suggest three ways asset managers to drive change that is equitable - by establishing Conscious Inclusion programs; increasing board diversity, and measuring the impact of the work on performance and returns. Why? Because "Increasing a sense of equity and opportunity among all workers decreases the risks to our investments, the economy, and the communities that make up our workforce and consumer base. Inclusionary business practices require intentionality, sustained effort, and collaboration."

Meanwhile, the inimitable Mellody Hobson graces the cover of the February-March edition of Forbes and in the accompanying article, discussed Project Black - a $1.45 billion dollar private equity fund within her firm, Ariel Investments, specifically designed to provide to both capital and customer access to middle-market, minority-owned companies - suppliers that receive only 2% of corporate spending. The model also includes "minoritizing" the company leadership teams and according to the article, "Over the next decade, they forecast, their portfolio companies will generate an additional $8 billion to $10 billion in annual revenue while creating 100,000 jobs for underrepresented people. But that’s just the start. Some big corporations are talking about boosting purchases from minority-run suppliers from the current 2% to 10% or even 15%. That could translate to a trillion-dollar opportunity."

It's not just about diversity. In a recent article for Puck News, Bill Cohan reported on what he calls the "new Wall Street war zone" a.k.a. ESG, whereby a battle is apparently brewing "between the big money managers that are trying to be (and stay) woke, and the managers of big pools of capital at the state level—the state treasurers—who are sworn to be fiduciaries for billions and billions of their citizens’ dollars, and thereby becoming some of the most desirable limited partners for venture capital, private equity, mutual funds, and all manner of institutional investing. Their job is to maximize returns. They don’t want to be told what they can and can’t invest in, and many don’t want third-party investment managers avoiding ExxonMobil for political reasons when its stock is up 45 percent in a tough year." The argument is that money managers have a fiduciary responsibility to generate the highest possible returns even if that is from sources that are, for instance, harming the environment. The most notable pro-ESG stance on this came from Larry Fink at BlackRock (who seems to be doing just fine per Cohan's own reporting) but it's still early to tell the long term returns of the decision.

Wherever you land on these topics, the critical point for me is that they are all informed by the data, experience, and knowledge of the people behind them. There is no such thing as neutral; the absence of an action is still an action even if it's been years or decades since the last action took place. The political and economic environment right now lends itself to binary positions, anchored in claims to the moral high ground, and I would argue that what we're actually seeing is what happens when a viable alternative emerges to cast the norm in a stark, often ugly, relief, and the interrogation that demands of how we've always done things and asks us to confront, "Is that way still the right way? Was it ever?"