Tuesday, January 27, 2015

Repackaged Social Investing Brought to Us by David Brooks

Repackaged Social Investing Brought to Us by David Brooks

This morning David Brooks extols the virtues of impact investing, which involves forming a fund or business venture designed to achieve a social good while pursuing a modest profit.[1]  Mr. Brooks sees impact investing as a way to address social ills in era of gridlocked government and corporate greed.  He acknowledges that impact investing isn’t raising nearly enough capital ($40 billion) to make an appreciable difference.  However, Mr. Brooks predicts that impact investing is going to start drawing much more attention and capital.  I laud investors who are interested in funding socially progressive products and services.  However, it isn’t a panacea, it isn’t new, and it is going to be co-opted by Wall Street. 

Impact investing is simply a new label on a very old practice.  All sorts of community organizations, companies, and investors have been funding products and services through low interest loans and subsidies for decades.  Mr. Brooks misses this point because he makes an incorrect assertion at the outset of his column.  He asserts that socially responsible investing is only a negative process in which investors try to avoid certain kinds of investments, such as tobacco, gambling, alcohol, or petroleum companies.   Socially responsible investors, including religious organizations, unions, public funds, and foundations have been doing impact investing under the label of social investing for decades.

Only one thing has changed.  Wall Street has put a new label on the effort, and Goldman Sachs, Credit Suisse, Merrill Lynch, and other banks are using this repackaged form of social investing to soothe the consciences of young employees and woo new clients.  Again, there’s nothing wrong with an investment bank offering a client an opportunity to earn an investment return while doing a little bit of good.  However, let’s be clear about what is going on.  The big banks already use their charitable efforts to improve their images.  Impact investing is another weapon in their public relations battle plan. 

In my estimation, it won’t take long for Wall Street to co-opt impact investing into activities that serve Wall Street instead of broader interests.  It’s easy to see the social good that can come from funding research into vaccines or therapies for relatively rare diseases.  However in the hands of Wall Street, impact investing will soon venture into areas where the social good is less clear-cut.  It’s not hard to imagine a fund dedicated to charter schools or fracking in which investors accept below market returns in return for “reforming education” or “promoting greener energy.” 

I hate to be so cynical.  However, when culturally corrupt organizations put new labels on old ideas, cynicism is warranted.  Wall Street has helped to undermine the very political and regulatory institutions that should be working in the public interest.  Mr. Brooks expects impact investing, largely promoted by Wall Street, to fill at least some of the void.  It ain’t going to happen.

[1] http://www.nytimes.com/2015/01/27/opinion/david-brooks-how-to-leave-a-mark.html?ref=opinion

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