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Recently I have come across quite a few articles with analysis providing shocking data on just how pale and male the management of banks, asset managers private equity and venture capital funds continues to be and how they tend to invest in businesses that look just like them. These articles often go on to point out that financial institutions and businesses that have diverse management and boards tend to “outperform” those dominated by white men. And therefore, the argument logically follows, there should be greater representation of women and “people of colour” in senior positions in these businesses.  After all it just makes business sense.

It is this last sentence that worries me – not because it is wrong (frankly it’s a no-brainer) but because of what it implies. And what it implies is that there is no morality but profit and business success. Let me ask this question: If businesses and finance institutions run by highly diverse management teams, returned on average, exactly the same profits as those run exclusively by white men – would that mean it would be fine to maintain the gender and racial imbalance in business? Because that is the implication of “after all it makes business sense”.

Has the worship of profit really brought us to the point that we cannot simply make the moral judgment: men and women are equal, black and white people are equal and therefore, they should be equally represented in all walks of life including finance and business?

i. Because it is the right thing to do

ii. Because it essential if we are to break down the structures of patriarchy and racial domination that re-inforce and exacerbate the inequality of the global economy.

Profit should have nothing to do with it. Can we please say what we think is right. It is not a harmless seduction to make it more palatable to the masters of the financial universe by saying “and it’s good for profits”. Rather it leaves unchallenged the lens that says what is good for profit must therefore be intrinsically good.

This approach has intellectual forebears that are familiar to those who have watched and participated in the emergence of the impact investing movement.

CK Prahalad, in 2002 published an article “The Fortune at the Bottom of the Pyramid”[i]later a book of the same name , in which he sought to lure multi-national corporations into driving economic and therefore (he believed) social development in poorer countries and communities by getting creative about how they produced and distributed products in those areas. Examples he cited included micro finance, distributed energy and enhanced agricultural supply chains. His attempted seduction was premised on the untold billions of dollars that awaited those who got it right.

Nine years later Michael Porter attempted to rescue capitalism from the bad rap it was getting because of the 2009 financial crisis and the growing awareness that it was the cause of growing inequality and looming environmental catastrophe. Trotting out the frankly muddled concept of “shared value”[ii]he argued that ESG reporting and the idea of business’s “social responsibility” are a distraction from capitalism’s true mission – to grow and profit by creatively solving social problems, promoting local prosperity (and therefore markets)  and reducing costs (and environmental damage at the same time) by improved efficiency and the use of new technology.

I have no doubt that both Prahalad and Porter were motivated by a desire to improve the role of the economy in a highly distressed world. But by emphasising that they are focussed on enhancing the growth and profitability of markets they both trip over the question: “what happens if it is just more profitable to keep on doing what we always have done; if serving the “bottom billion”  is not profitable on a risk adjusted basis, and if it really is more profitable to externalise environmental damage than to fix it, or to export my textile business to the lowest cost labour market than to create shared value with the community where my factory is currently located?” If you pay unconditional obeisance to profit, then you are bound to follow it wherever it leads. 

I find this subjugation of a moral perspective to the god of profit to be one important source of confusion around what needs to happen to reform markets and the financial institutions that underwrite them. 

What follows is really an attempt to establish for myself a relatively simple framework for thinking about this. I share it in the hope that it may be helpful to others.[iii]

1. The economy is a social construct not a set of natural laws. The economies of (say) Korea, Sweden and the United States (or Costa Rica and Equatorial Guinea) have been constructed to look different and they achieve very different outcomes;

2. Human health and well-being should be the object of economic activity not subjected, and often sacrificed to it;

3. “Market related returns” and the search for ever larger profits for shareholders and investors are a major cause of inequality and poverty, not part of the solution. No-one interested in systemic change should be offering such returns as an incentive. 

4. There is going to have to be a “new normal” of what investors and managers can reasonably expect to earn from their investments.

5. Living wages, gender equality environmental sustainability, paying taxes, promoting local economic development and avoiding land grabs and child labour, should not be a class of business activity defined as “ESG compliant”. It should be inherent in the license to operate a business and enforced globally. The only question is how to get there.

6. There should be no profit without a purpose, no investing which is not socially responsible or “green”, no blended finance structure that does not also set standards for the commercial partner.  To the extent that we create ghettoes of all these different categories of investment we in fact normalise the abuse of power and wealth that exists in the mainstream economy and the political and economic elites that dominate it.

7. Extensive changes to the global economy must be led by governments and international treaty and global institutions that enforce compliance. If they don’t exist or don’t work, then we have a duty to work for their creation and to keep them honest. That is a political task.

8. And another political task is to mobilise for racial and gender justice in the investment and business world – not because it is profitable, but because it is right.

9. Extract from the above this message; solving the world’s most intractable problems, or achieving the SDGs by 2030 is primarily the responsibility of national governments and institutions of global governance – not something for the finance sector to claim or feel largely responsible for.

Having established this principled view of the economy and the role of investors, it is then possible to talk about deploying catalytic capital for particular purposes with different levels of risk tolerance. Some suggestions:

- Pioneering development finance institutions that commit to the success of their investees rather than having target rate of return themselves?

- Creating enterprises and eco-systems that model, or help to create an economy built around the principles established above: funds that support only women enterprises or those operated by people of colour or to invest only in local entrepreneurs in developing countries;  enterprises that limit the pay gap between boss and lowest paid workers or that demonstrate that worker or community ownership is perfectly feasible; investments that seek to promote local economic development rather than always treating poor countries or marginalised communities as source of primary commodities and cheap labour. 

- Creating imaginative blended finance instruments that attract more risk averse investors, as long as the accept a reduction in profit expectations and comply with all the moral issues described above.

It seems to me like the impact investing world needs to free itself from the trap it has laid for itself: ownership of responsibility to finance the SDG’s and solve the world’s most intractable problems. Those goals must be laid at the door of the politicians and international agencies where they belong. Then investors can stop micro defining the many, many different classes of investments, stop twisting themselves into knots about the move from billions into trillions of dollars of socially responsible/impact/ESG/ etc investing and just get on with the job of defining what they want to achieve with their funds, how they will do it, and how they can best contribute to changing the nature of finance and ending the worship of profit. 

This is a moral and political effort, not one of clever terminology and intricate financial structuring.

This article is the work of Cedric de Beer. I assert my rights over the article. Please cite the source when quoting from it.

[i] C.K Prahalad and SL Hart: “The Fortune at the Bottom of the Pyramid”. Strategy and Business January 2002

[ii]ME Porter and MR Kramer: “Creating Shared Value”. Harvard Business Review January/February 2011

[iii] I claim no originality here. Many others have set out to create a far more detailed moral perspective on the economy and investment. See for example Jed Emerson’s excellent “The Purpose of Capital” 2019, Blended Value Group Press.