Tuesday, May 22, 2012

Building an Ecosystem of EGS Investing

Yesterday's Inbox included a news update from the Network for Sustainable Financial Markets, promoting an article by Raj Thomotheram and Maxime Le Floc'h on "preventable surprises".  It is published in the May issue of the Rotman International Journal of Pension Management.

In the article, the authors lay out a 6 point plan for Institutions to follow in building EGS into their investment practices.  It is hard to think of a point they missed, except for this: there is an architectural flaw in the solutions they propose.

Sometimes in life it is good to live in the moment, figuring things out as we go along, moment-to-moment. Other times, it's better to do a little forward planning.

Our Capital Markets are architected to operate in the moment.  EGS plans ahead.

Do you see the disconnect?

The answer we need to resolve this conundrum can be found in the work of Hazel Henderson at Ethical Markets.  Hazel is on a mission to get Institutions to invest some portion of their portfolios directly into Enterprise, rather than investing indirectly, through the Capital Markets.

Direct investing will give EGS the running room it needs to plan ahead, but direct investing will not work without one other innovation.

The Capital Markets provide Investment with only one strategy for realizing returns: selling out.  It's a buy-low, sell-high ecosystem.

Selling out is inconsistent with EGS.  EGS investors have to stay in, and make their money by sharing in the profits of the Enterprises they are invested in, as and when those Enterprises earn their profits, by delivering value to their commercial counter parties.

Direct investing and revenue sharing.  These are the twin pillars of a sustainable ecosystem of EGS investing.

Hazel cautions that making the shift to direct investing will require re-training the entire profession of institutional investment managers.  But maybe we don't have to re-train everybody.  Maybe it will be enough if we just support the emergence of a new breed of investment professionals, professionals trained in a new EGS ecosystem built on direct investing and revenue sharing.

These professionals will have to compete with the Capital Markets for dollars to invest.  And they will have to compete for Enterprises to invest in.

This may be a good thing.  Competition may be better than regulation for achieving the goals of EGS.

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