True Market Capitalism

by

[Updated: 6/24/2017]

This is part three of a  series of three blog posts [part I, part II] chronicling my economic journey as a leader in the movement for Socially Responsible Investment (now called Sustainable and Responsible Investment) and Triple Bottom Line Business (People, Planet, and Profit) in the 1990s and 2000s.

This post sums up what I have learned by presenting a philosophy for a new kind of capitalism that values natural and social capital equally with economic capital and then goes on to describe some examples of how this new kind of capitalism is taking off.

Aspects of this description of a True Market Capitalism were first written collaboratively with Elliot Hoffman and Dan Beam as a concept paper for New Voice of Business, however, you should take up any problems you may have with what appears here now with me, since I bear sole responsibility for this version. — James Nixon

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A couple of years ago, Bill Gates challenged business leaders throughout the world to utilize their best innovative thinkers to address the big issues facing our planet.  He called this Creative Capitalism.  He joins others pursuing new forms of Capitalism like Paul Hawken’s Natural Capitalism, John Mackey’s Conscious Capitalism, and Professor Michael Porter’s Shared Value Capitalism.

Each of these leaders has realized that the time for business as usual is over.  The time for Capitalism as usual is also over.  The way we have practiced “Free Market” Capitalism over the past 200 years has created great wealth and a high standard of living for many in the U.S. and western world, yet it has left out a large portion of humanity and threatens the planetary eco-system.

The old Free Market Capitalism has produced an extreme and widening gap between the very rich and the rest of the population; dependence on dangerous foreign and domestic oil and gas; very serious air, land, and water pollution; and climate disruption.   Business and society have come to a fork in the road early in the 21st century.  The path we take will play an essential role in determining the future of businesses as well as the future of the U.S. and the world for many generations to come.

It’s time for a new Capitalism.  Whether it’s called Natural, Creative, Conscious, Shared Value, or New is not the issue.  The issue is to determine the particulars—the principles, the values, the strategies, the policies, and the practices that become deeply embedded in the culture of what let’s call True Market Capitalism, guided by the triple bottom line values of planet, people, and profits.

At its core, True Market Capitalism has to recognize that business cannot prosper in an unhealthy world.  Healthy business, a healthy society, and a healthy environment require each other for long term prosperity.

THE THREE FORMS OF CAPITAL

I heard Paul Hawken, author of The Ecology of Commerce and Natural Capitalism, once say that Capitalism could be a great system, but it’s never really been tried.  Free Market Capitalism as it has largely been practiced to date has sought to accumulate economic capital at the expense of social and environmental capital.

Now it is true that the discovery of how to accumulate economic capital by offering a product or a service at a price that is greater than the cost of production—thereby generating wealth—is a great and important discovery.  Classical Free Market Capitalism has wielded that great discovery to generate great wealth, but at a great cost to society and the environment.

However, True Market Capitalism recognizes that there are at least three forms of capital essential to the creation of genuine prosperity.  In addition to economic capital (financial and manufactured), there are two other forms—natural and social.  Any business-person knows that, over the long run, a successful business needs to invest wisely to generate more income than expenses and to grow its capital.  If a business lives off its capital, it will eventually go bankrupt.

True Market Capitalism understands that it is essential to build all three forms of capital in a True Market Economy.  In fact, a True Market Economy can be defined as an economy that uses market forces to build all three forms of capital.

Natural Capital

The economy operates within design limits inherent in the natural environment.  If the economy disrupts the natural environment it disrupts itself, at great financial cost to society and to individual businesses.  Witness the devastation of Super Storm Sandy and the other massive weather disruptions likely caused by Climate Change we are seeing.  Under the deceptively named “Free Market” Economy, which bears little resemblance to the type of market envisioned by Adam Smith, enormous resources, such as clean water and pure air,  have been lost that were once, in fact, provided for free by intact ecosystems.

Conversely, a True Market Economy recognizes its dependence on the natural environment for fresh air, clean water, climate stability, renewable energy, and a thriving eco-system.  In a True Market Economy, businesses derive value from the eco-system without disrupting it.  As the True Market Economy emerges it will utilize true cost pricing and true cost accounting to value major interactions with the natural world.

Social Capital

A prosperous economy depends on a stable society with a skilled and creative workforce.  The economy threatens its own foundations if it disrupts society by allowing an extreme gap to emerge between the very wealthy few and the rest of the population or by inadequately supporting society’s ability to ensure public safety, an effective educational system, a well trained workforce, and quality affordable health care.

On the other hand, a prosperous economy contributes to a stable society by creating the jobs, the opportunity for productive work, and the income that people need to live satisfying lives.  A True Market Economy recognizes the profound contribution of social capital to a prosperous economy and builds social capital by reducing the wealth gap, paying its fair share of taxes, and making many other investments in social health and welfare.

Economic Capital

Sustained economic prosperity requires that both the private sector and the public sector operate according to sound financial principles, using current income to contribute to the accumulation of long term economic capital.

Economic capital is most effectively built and the economy works best when economic transactions are transparent and guided by appropriate policies.  Sound regulations provide the guard-rails that keep the economy on track.  If those who criticized sub-prime lending and exotic real estate derivatives resulting from excessive de-regulation had been listened to, the economy would have saved trillions of dollars and the Great Recession would not have happened.  Massive subsidies to major corporations and industries, hidden inside the tax codes, contribute to the deep distrust of the government, policy makers, and business leaders.  The allocation of our economic capital should be fully transparent to have an economy and a society that function well.

In a True Market Economy, the government (the public corporation) lives within its means, except during significant economic downturns, and partners with private businesses so that both private and public sectors operate in an economically responsible fashion, while maintaining a sound financial system and reliable physical infrastructure.  Investments of public funds for the benefit of current and future generations should be made regularly and wisely.

A True Market Economy needs True Market Metrics— transparent, accurate, timely economic information reporting systems that not only provide a national profit and loss statement but also a national balance sheet to measure the health of our economy, society, and environment and the degree to which the economy is building all three forms of capital.

TOWARD A NEW WAY OF DOING BUSINESS

The good news is that the movement to transform Capitalism and create a True Market Economy has been growing and evolving for decades.  This movement has taken a variety of forms over the last 30 years.  Some of the many examples include:

  • Church pension funds screening out the “sin” stocks of alcohol, gambling, and tobacco throughout much of the 20th Century.
  • The Anti-Apartheid Movement arguing that investors should divest ownership of the stocks of companies doing business in South Africa.
  • The Socially Responsible Investment Movement screening investment portfolios based on social and environmental criteria.
  • CERES, an association of corporations agreeing to adhere to the CERES Principals for social and environmental responsibility.
  • The Global Reporting Initiative, providing a set of international standards for companies to use in evaluating their social and environmental performance.
Corporate Social Responsibility (CSR)

By now, in the second decade of the 21st Century, Corporate Social Responsibility (CSR), which is also sometimes referred to as Corporate Citizenship or Corporate Sustainability, has become a majority movement among publicly traded corporations.

According to the CSR philosophy, corporations should operate in a manner that minimizes negative impacts and encourages positive impacts on all of the corporations’ stakeholders—customers, employees, management, shareholders, supply chain, communities where the corporations are located, society at large, and the environment.  CSR also typically involves regular reporting on the corporation’s impacts on all of its stakeholders.  Most CSR and Sustainability Reports are listed by CSRWire.

According to KPMG’s 2011 International Corporate Responsibility Reporting Survey, “Where CSR reporting was once seen as fulfilling a moral obligation to society, many companies are now recognizing it as a business imperative. Today, companies are increasingly demonstrating that CSR reporting provides financial value and drives innovation, reflecting the old adage of ‘what gets measured gets managed.’

The 2011 KPMG Survey found the percentage of companies reporting on CSR initiatives to be:

  • United States—83%
  • Canada—79%
  • United Kingdom—100%
  • Europe—70%
  • The Americas—69%
  • Middle East and Africa—61%
  • Asia Pacific—49%
Creating Shared Value (CSV)

More recently, large corporations like General Electric, Google, IBM, Du Pont, Interface, and Walmart have formulated specific business models to make market rate profits by solving important social and environmental problems.

At the same time tens of thousands of social entrepreneurs have launched companies specifically designed to operate in a socially and environmentally responsible manner and to address significant social and environmental problems.  The whole Clean Technology field, including companies focused on generation of solar and wind energy, energy efficiency in retrofits and new construction, and design of mixed-use, walkable, transit oriented, livable neighborhoods is one leading example of this trend.

Harvard Professor Michael Porter has popularized this approach by calling it “Creating Shared Value” (CSV), which he defines as ‘policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates.  Shared value creation focuses on identifying and expanding the connections between societal and economic progress.’

According to Professor Porter, there are three key ways that companies can create shared value opportunities by:

  • Reconceiving their products and markets.
  • Redefining productivity in their value chain.
  • Enabling new cluster development in their business clusters.

GE’s Ecomagination program, which has shifted the company’s focus toward Clean Tech products and produced some of the highest levels of profitability in the corporation, is an example of the first way.

Walmart’s establishment of sustainability standards for all of its suppliers, which has forced thousands of businesses across the globe to rethink the design and manufacturing of their products in a more environmentally responsible fashion, is an example of the second way.

IBM’s Smarter Cities Challenge exemplifies the third way.  IBM has funded putting IBM teams into cities to recommend how cities can utilize the intersection of the full range of information technologies and clean technologies to produce positive transformations.

CSR can be seen as a way to ‘do no harm,’ thereby not depleting environmental, social, and economic capital, while CSV can be viewed as a way to ‘create positive good’ by directly building environmental, social, and economic capital.

Benefit Corporations

Benefit Corporations (B Corps) have taken a step beyond CSR and CSV.  According to B Lab, as of the middle of 2014, 27 states have passed legislation and 14 states are working on such legislation to allow companies to incorporate as B Corps and, thereby, include what amounts to a commitment to CSR and CSV in their corporate charters to guide them in value creation for all of their stakeholders, not just their shareholders.

The California version of B Corp legislation includes provisions obligating companies incorporating as B Corps to publish annual reports assessing their social impact according to established economic, social, and environmental standards.  Essentially B Corps commit to operating in a way that builds economic, social and environmental capital as well as producing financial profits.

By summer of 2012 close to 80 companies in California have incorporated as B Corps, including some relatively well known ones such as Patagonia, Sun Light & Power, and Singularity Education Group.

A much larger group of companies have gone through an independent certification process to become certified as B Corps without taking the step of incorporating as a B Corp.  Globally, there are 1,165 certified B Corps in 37 countries and 121 industries, according to B Lab, a B Corp advocate and certification agent.  It’s been said that B Corp certification is to corporate governance what LEED certification is to green buildings and green developments, what Fair Trade certification is to coffee and other imported products, and what US Department of Agriculture certification is to organic milk.

Sustainable and Responsible Investment

Investors are responding to the movement to transform Capitalism by investing in companies that meet social and environmental criteria. US SIF: The Forum for Sustainable and Responsible Investment is the US membership association for professionals, firms, institutions, and organizations engaged in Sustainable and Responsible Investing.  (This is what used to be called Socially Responsible Investing.  The movement has kept the SRI initials, but changed what they stand for to bring the environmental perspective into higher relief.)

Biannually US SIF issues a report on Trends in Sustainable and Responsible Investing in the United States.  According to the a (the most recent one):  “More than one out of every nine dollars under professional management in the United States is invested according to strategies of Sustainable and Responsible Investing (SRI). US SIF Foundation identified:

  • $3.31 trillion in US-domiciled assets that apply various environmental, social, and governance (ESG) criteria in their investment analysis and portfolio selection.
  • $1.54 trillion in US-domiciled assets that filed or co-filed shareholder resolutions on ESG issues at publicly traded companies from 2010 through 2012.

After eliminating double-counting for assets involved in both strategies, the overall total of SRI assets is $3.74 trillion, a 22-percent increase since year-end 2009. The assets engaged in sustainable and responsible investing practice currently represent 11.3 percent of the $33.3 trillion in total assets in the U.S. under management. From 1995 to 2012, the SRI universe has increased 486 percent, while the broader universe of assets under professional management has grown 376 percent.

The Trends Report identified 301 different ESG alternative investment vehicles—private equity funds, venture capital funds, responsible property funds, and hedge funds—with a combined total of $132 billion in assets under management. (The funds in the Bay Area Family of Funds fall into this category.) This segment of the SRI investment market has experienced a 250 percent growth in assets since 2010.

Impact Investment

Impact Investing is the most recent incarnation of SRI.  According to the definition used by the Global Impact Investing Network (GIIN): “Impact investments are investments made into companies, organizations, and funds with the intention to generate a measurable, beneficial social and environmental impact alongside a financial return.  Impact investments can be made in both emerging and developed markets, and target a range of returns from below-market to above-market rates, depending upon the circumstances.”

GIIN has developed the Impact Reporting and Investment Standards (IRIS) as a catalog of “generally-accepted performance metrics that leading impact investors use to measure social, environmental, and financial success, evaluate deals, and grow the credibility of the impact investing industry.” GIIN has also established ImpactBase as a searchable, online database of impact investment funds and products designed for institutional and accredited individual investors.

Crowd Funding

Crowd Funding is the newest form of fund raising for projects and businesses that often have some sort of social or environmental benefit.  Crowd Funding uses the Internet to bring together three types participants: 1) the project or business initiator(s); 2) the people who contribute or invest funds; and 3) the on-line platform that connects the initiators with the investors and handles the transaction.

There are three main forms of crowd funding:

  • Pure donations.
  • Pre-sale of a product or service or premium of some other sort.
  • Purchase of equity shares in what is usually an early stage company

In the Jobs Act, passed and signed in 2012, Congress legalized certain types of Crowdfunding investments in companies by non-accredited investors, but the Securities and Exchange Commission is still in the process of writing the regulations to govern the process.

According to The Crowd Funding Centre websites helped companies and individuals worldwide raise US$2.66 billion in 2012, with US$5.1 billion projected for 2013.

The CDFI Fund

The CDFI Fund is a federal initiative created to promote economic revitalization and community development in low and moderate income communities through:

  • The CDFI Program that directly invests up to $2 million in and/or provides technical assistance to certified CDFIs that provide loans, investments, financial services, and technical assistance to underserved populations and communities.
  • The New Markets Tax Credit Program that provides an allocation of tax credits to certified Community Development Entities which enable these entities to attract investment from the private-sector and reinvest this capital in low-income communities—the tax credit totals 39 percent of the original investment amount and is claimed over a period of seven years.
  • The Bank Enterprise Award Program that offers an incentive to banks to invest in their communities and in other CDFIs.
  • The Native Initiatives, that gives financial assistance, technical assistance, and training to Native CDFIs and other Native entities proposing to become or create Native CDFIs.
  • The CDFI Bond Guarantee Program that issues bonds to support CDFIs that make investments for eligible community or economic development purposes.

Since its creation in 1994, the CDFI Fund has awarded over $1.7 billion in equity investments, loans, deposits, or grants to certified CDFIs (assistance grants can also go to organizations seeking to become certified).

The CDFI Fund requires reporting through its Community Investment Impact System, which has reported that, from 2004 through 2011, 350 CDFIs (7 banks, 42 credit unions, 296 loan funds, and 5 venture funds) made more than 300,000 individual investments and loans totaling more than $19 Billion.

The CDFI Fund also has made 836 tax credit awards to certified Community Development Entities totaling more than $40 billion in tax credit authority, which has generated close to $100 billion in investment.

Genuine Progress Indicator (GPI)

The Genuine Progress Indicator (GPI) is an alternative to Gross Domestic Product (GDP) designed to measure impact on natural, social, and economic capital.  Genuine Progress, the website promoting the GPI, asks:

“What if we defined success not by the money we spent and the goods we consumed but by the quality of life we create not only for ourselves but for everyone with whom we share the planet? What if we added up the positives of economic growth and subtracted from them the clear negatives, so we had a better picture of whether we were headed in the right direction?

GPI does exactly that.  With 26 indicators, the GPI consolidates critical economic, environmental and social factors into a single framework in order to give a more accurate picture of the progress–and the setbacks–we have made.”

According to an essay in the New Republic:

“When the architect of GDP, Simon Kuznets (who later won the Nobel Prize for this work), presented his first report to Congress, he warned against expecting GDP to answer the most important questions for a country: “The welfare of a nation can scarcely be inferred from a measurement of national income as defined by the GDP…
Two states, Maryland and Vermont, have officially adopted GPI…

Oregon and Washington are also moving toward adoption of the GPI in some form. At a recent national summit for “GPI in the States,” organized by the policy think tank Demos, delegations from 20 states, including researchers, advocates, and public officials, met in Baltimore to discuss implementing GPI in their states.”

Localism

According to the Business Alliance for Local Living Economies (BALLE), “Localism is about building communities that are more healthy and sustainable—backed by local economies that are stronger and more resilient.  It means we use regional resources to meet our needs—reconnecting eaters with farmers, investors with entrepreneurs, and business owners with the communities and natural places on which they depend.”

BALLE, the organization promoting this perspective, is growing rapidly among values aligned entrepreneurs, business networks, and local economy funders in North America, with about 60 local affiliates and tens of thousands of members.

According to BALLE, changing a local economic system starts by changing its most basic industries: agriculture, energy, manufacturing, retail, building and transportation and capital. When these sectors are transformed into localized, sustainable, green- and community-focused industries, the entire economy is transformed.  BALLE groups work to expand and diversify local ownership, import substitution, and business cooperation in particular places in ways that result in more wealth and jobs per capita, and in greater personal accountability for the health of the local natural and human communities with the goal of real prosperity for all.

American Sustainable Business Council

BALLE and more than 75 other socially responsible, sustainable, green business organizations have come together to form the American Sustainable Business Council (ASBC), which undertakes programs that educate and inform the public and policy makers about the benefits of a more sustainable economy and about policies and practices that can help the economy become more sustainable. ASBC has become a network that represents over 200,000 businesses and 325,000 business executives, owners, investors, and others.

ASBC works on a wide range of issues related to sustainability in business and in the economy, including addressing:

  • Election Integrity.
  • Energy and Environment.
  • Financial Markets.
  • Food and Agriculture.
  • Good Workplace.
  • Healthcare.
  • Regulations.
  • Safer Chemicals.
  • Sustainable Economics.
  • Taxes.
  • Trade.
  • Worker Ownership.

According to ASBC, “A truly sustainable economy requires stewardship of all types of resources—social capital, financial capital, intellectual capital, and natural capital. All these must be nurtured to make the economy productive, resilient, competitive, and equitable. The idea of stewardship and wise investment to secure future prosperity is neither conservative nor liberal, neither Democrat nor Republican. It is a fundamental tenet of successful business. And it is a core component of the American Dream.”

TOWARD TRUE MARKET CAPITALISM

Taken together, CSR, CSV, B Corps, Sustainable and Responsible Investment, Community Development Finance Institutions, the GPI, and Localism amount to a new way of doing business that leads in the direction of True Market Capitalism and a True Market Economy and this movement is definitely growing rapidly.

Swiss Re, the giant reinsurance company, has put major businesses around the world on notice that it will no longer cover companies who risk liabilities due to irresponsible environmental practices.  This means triple bottom line accounting (people-planet-profit) will not just be optional.  It is becoming essential—reducing externalization of costs and forcing a re-thinking of the balance sheet accounting.  In fact, top line value creation for all stakeholders is becoming as important to business success as bottom line value yield (profit) is to shareholders.

We all can help to build True Market Capitalism and a True Market Economy through the purchases we make, the companies we work for, the companies we invest in, and the economic policies we support politically.  We need to get to the tipping point where True Market Capitalism, which builds all three forms of capital, clearly demonstrates its profound economic superiority over the false Capitalism that continues only to create economic capital at the expense of natural and social capital.

We can all contribute to this transformation and we can all profit from it.  Our future depends on it.