April 06, 2015
Can economic systems by compassionate? Experts in neuroscience, Buddhism, and ethics tackle this complex question.
Profit with a Purpose
Money is a vital resource, a cycle like water or knowledge. It has to flow. Cycles are the basis of sustainability, so it's very important that people who have money think and reflect before they invest. What kind of management, people, products, services, and production processes do we want to invest in, financially, socially, and ethically?
We are responsible for the current financial system we have. We are responsible for the economic system we have. These systems produce a lot of financial bubbles, and will continue to do so. Who is really profiting from those bubbles? It's a small group of very greedy people. Meanwhile, most other people are losing not only money, but also jobs and quality of life.
We are all participants in that system. We have to ask ourselves: are we allowed to stay ignorant? In order for us to participate responsibly, we have to share knowledge. If we analyze today's economic system, we see that its values are material growth, profit maximization, efficiency, short termism, individualism, and linear thinking. Are these really our values as consumers and investors? Less and less, I think. I see clients who really care where they invest. We are seeing a shift from profit to profit with a purpose, from quantity to quality of life; immaterial values are becoming more and more important. Let's look at the pyramid of the financial needs of human beings.
First, you need to be able to cover your basic needs: food, drink, shelter, education. Then you need to have some reserves, some financial security, for days when you are ill, for example. When you earn a bit more money, you might like to spend it on recreational activities, on sports and the arts. Finally, you also want to make a profit.
If you have been able to achieve those three levels, and you are aware of the impact of your investments, then you have the opportunity to take responsibility for your investments and use your money so that it can contribute to a better quality of life.
At our company, we analyze organizations according to 180 sustainability factors. Looking at the management, who leads the companies? What values do they stand for? If they communicate something, do they really do it? What are the incentive schemes? Are they long-term oriented? There are companies that set sustainability goals, for example, to issue less carbon dioxide every year, and combine that goal with an incentive scheme. At the investment bank where I worked before founding Forma Futura, I introduced an incentive scheme where bonuses were dependent upon our traders' embracing our values. For example, one of our key values was being fair to the client. So I measured the margin—that is, what the bank earned from selling the clients financial products and securities—and if our traders took too much, they got smaller bonuses. As you can imagine, within three to six months of implementing this policy, we saw a change in behavior in people. When we are fair with our clients, we can build up long-term relationships with them and convince them more and more to invest responsibly.
At Forma Futura, we also measure how companies foster innovation. I imagine that my seventeen-year-old son will someday live in a world where cars are no longer powered by fossil fuels, but that depends on what happens in the transportation sector in the next few years regarding innovation. Innovation needs a certain climate; it needs platforms. It requires combining the expertise of people from different fields and backgrounds.
We also measure how much greenhouse gas companies emit, how they handle scarce resources, if they have products for underserved markets, and how seriously they take human rights in their labor, production, and sourcing practices. After having done this sustainability analysis, we also do a conventional financial analysis. Investors can only invest in companies that have passed all these tests.
What we have been able to show over the last three and a half years is that you can earn at least as much money in these markets as if you invest in conventional models. Now we're also seeing that sustainable companies can get capital on the capital market cheaper than other companies, probably because those companies care more about risks and communicate that to the outside world.
Today in Europe, 3 percent of all money invested is invested in a sustainable way; in the United States it's about 10 percent. My personal goal is that I'm still alive when it's 25 percent, and that I can contribute to this development, together with my partners and employees and clients, so that the heads of companies can no longer ignore social and ecological factors.
Changing the way we invest will be a major step in the right direction, but that alone won't create the comprehensive ethical and sustainable solution we need. What else can we be doing? I think we need four parallel global evolutions, or revolutions, or both. I'm personally more the type for evolution, but given what we've seen so far from the financial crisis, I doubt that it will be possible to do what needs to be done in an evolutionary way.
First, we need an ecological (r)evolution and a market economy that cares about the environment. If somebody is emitting greenhouse gases, he has to pay for it. We need to include environmental damage in our pricing models.
Second, we need a sustainable financial system, and this starts with setting reasonable goals. What kind of targets do we set in our economic system? We measure the GDP, but does the GDP increase quality of life? Only to a point, as we've seen. We measure the days of illness, and see that more days of illness increase the GDP. But in Bhutan, they are measuring the days people are healthy. They have invented what they call the gross national happiness index. We have to move more and more in that direction, setting reasonable goals for ourselves, our communities, our companies, and our economic system.
A sustainable financial system allows and requires responsibility. In large corporations, one of the tasks of board members is to find out about risks. They have to really ask about where these risks can arise and how they are going to be tackled. If you don't understand something, then you shouldn't do it.
Personally, I don't expect that kind of change to be instigated by our current corporate representatives. The real change will come, I believe, from social evolution or revolution, where we, civil society, will act in a responsible way. It's up to us to reflect and to decide what goods we will consume and how much of them. The new luxury goods aren't physical things; they are security, an intact ecosystem, friendships, happiness, and a meaningful life.