The following is a brief summary of the 2019 RIA Conference Session “Conscious Capitalism”.
“Capitalism is broken” is not the easiest thing to say to a plenary room full of over 500 investment professionals. As a veteran executive on Wall Street, Erika Karp has earned the right – and the scars – to be so bold. In her keynote address at the sold-out 2019 RIA Conference, the Founder and CEO of Cornerstone Capital, an impact investment advisor, explained how capitalism can still be fixed.
First, it starts with digging deeper into the nuances and the complexities of our current system and bringing humanity back into it. Karp referred to the classic works of Adam Smith, such as The Wealth of Nations and the famous ‘Invisible Hand’, according to which we have forgotten all about the negative externalities that impact our lives and our world. However, going back even further, Adam Smith also described his Theory of Moral Sentiments, which presents the idea that people have an intense interest in the circumstances of others. “That interest means looking around [and asking] ‘what’s going on?’”.
Removing the blinders that protect us from the world’s woes can be unsettling, but being uncomfortable is part of the process. “There are a lot of things that we are very uncomfortable with”, said Karp, referring to the many environmental and social challenges we face today. “The key is to grab onto those things and do something about it”.
Fortunately, many people and institutions are already taking action. Karp made sure to highlight some of the encouraging phenomena that are facilitating the shift towards a more sustainable form of capitalism. For example, a prolific range of industry players are finally starting to implement standards for corporate disclosure of material ESG factors, thanks to organization like SASB and the TCFD; social media has created extraordinary high-speed networks, allowing consumers to gather their voices and pressure corporations for transparency like never before; processing big data has only just begun and is enabling much more thoughtful analyses and predictive insights; the millennial intergenerational transfer of wealth will move $52 trillion into the hands of investors that demand authenticity. Change is happening!
No one of these events solve all of our problems. Nevertheless, when taken all together, the compounding effects can deliver a powerful message. “As a heritage stock broker, when I see a lot of things going in the same direction at the same time, you either buy it or short it… and I am taking the decision to buy it!” asserted Karp.
Re-examining the nuances, being uncomfortable, and taking action can be a meaningful and productive exercise, yet there still remains one essential piece of the puzzle. Impact measurement is often overlooked, partly due to a lack of reliable data. Even more concerning is the possibility of ‘false precision’, i.e. when poor quality data is built into an impact framework, leading to systemic errors. For this reason, Cornerstone Capital recently released a creative and an open-source impact measurement framework based on the UN Sustainable Development Goals (SDGs) that incorporates company, industry, and manager analyses to reduce the dependence on one type of data point.
In closing, Karp reminded the audience that connectedness is the underlying motivation for a new form of capitalism. It’s also the key to achieving regenerative growth. “We need to make everyone feel if we want to move people. If you can’t move people, you can’t move money. And we need to move money now.”