Shifting the Burden of Economic and Moral Case-Making
By Denise Hearn
Mainstream investors have, for too long, put the burden of proof on social change advocates, community leaders, and impact investors to justify moving money to areas like climate, racial, or gender equity. This has left impact-oriented individuals and firms asking: how do we most strongly make our case? Do we emphasise the economic case for an investment, or the moral case?
Each approach has drawbacks, and often the ‘right’ answer is entirely situational. However, it’s time to reverse the burden of case-making by asking mainstream investors to justify their weddedness to legacy approaches and allocations.
The problems with ‘economic cases’ as investment justification
Many impact investors, while trying to catalyse additional funding to needed areas — gender lens, climate, or racial equity investing — feel the need to make the 'economic' case to generate investor attention and capital allocation. This is especially true when building new approaches, fields, or investment areas. The predominant fallback is to emphasise that the investment area was an overlooked opportunity with tremendous upside waiting to be captured, or that risk was mispriced. While this is often true, there are problems with over-relying on this win-win approach.
1: They are instrumentalist
Making an economic case based on instrumentalist logic can seem appealing as a way of convincing others. Some examples might sound like: “companies with women on boards outperform”, “increased diversity is better for company performance”, and “stakeholder capitalism companies outperform benchmarks.” In these instances, correlation may not necessarily be causation — I’ve written previously on the strange success logic of stakeholder capitalism — but that is not necessarily the predominant issue with this line of reasoning. The problem with instrumentalist logic is that a worldview built on this approach implies that if the economic case breaks down for any reason, the cause it ‘proved’ should be abandoned. Take for example, a company with a number of women on its board that begins to underperform. Should the company revert to an all-male board to solve their underperformance problem? Of course not, but we can see how thin this logic becomes when viewed in reverse.
2: They can lead to blind spots of power asymmetries in investment design
“Is it right to make the economic case for returns for largely white, privileged investors when mostly low-income borrowers of colour will bear higher interest rates to repay investor ‘risk’?”
Making the economic case is entirely appropriate in some sectors or investment strategies. In others, it may be less so. On the one hand, viewing founders or managers of colour as a source of innovation that has too long been sidelined, is an entirely justified thesis for potentially high returns. And if managers and founders are majority owners of their businesses, they stand to build wealth alongside investors — meaning power may be more equitably split.
On the other hand, in other areas of racial justice investing, like access to credit, investors should question why an economic case is needed to justify providing affordable credit to historically marginalised communities which have been extracted from for centuries. Is it right to make the economic case for returns for largely white, privileged investors when mostly low-income borrowers of colour will bear higher interest rates to repay investor ‘risk’? In this case, making a moral justification for lower interest rates, or even zero-percent interest, is preferable to making the economic case to investors. Because, in this instance, the economic case only serves to further entrench existing inequalities that impact investors hope to address with their capital.
3: Has making the economic case actually worked?
Tireless champions of gender and racial equity have churned out report after report on the economic case for a variety of methods that could be used to level the playing field like investing in diverse managers, founders, or increasing diversity at the most senior levels of firm leadership. Has this approach worked to create change at the scale and speed necessary to reach our ultimate objectives?
“It seems as though the economic case is most effective when managers are already predisposed to certain investment theses and existing paradigms. ”
As the Criterion Institute points out in Disrupting Fields: Addressing Power Dynamics in the Fields of Climate Finance and Gender Lens Investing, climate-related investing has had incredible uptake in recent years; much more so than gender lens investing. This has a number of causes, but we must ask why the economic case for climate-related investing has gained significantly more traction (measured in asset flows) than the case for gender or racial equity investing. Despite years of work by the gender lens investing community, we know that 2020 was a year of regression for women founders.
It seems as though the economic case is most effective when managers are already predisposed to certain investment theses and existing paradigms. Some might call this one of the oldest problems in human psychology: confirmation bias. As more and more data is produced in favour of investing in women or founders of colour, funding isn’t following. Only the data that confirms our existing biases is adopted, whereas the data that challenges or widens our worldview is often ignored, has its validity questioned, or outright rejected.
Issues with only emphasising the ‘moral case’
While these persistent issues with the economic case remain, emphasising the ‘moral case’ on its own can also be problematic. Many founders of colour and women do not want to be seen as ‘catalytic’ projects, with concessionary returns, and would rather be evaluated on the merit of their ideas and ability to generate significant returns.
Following the murder of George Floyd and the racial justice protests across the world last year, many investment firms took stock of legacy systems and values that had prevented them from previously allocating to managers or ventures of colour. The moral case seemed to have been made. But despite many lofty announcements, minority managers are still waiting on significant allocations to their funds and strategies. As Rachel Robasciotti said, “If we’re actually looking for new perspectives from diverse managers, what we really need is a shift in [due diligence] standards to accurately assess whether or not an asset manager is a good fit for an asset owner. Not coming from a traditional background doesn’t mean [they] don’t have the brilliance necessary to effectively manage that portfolio.”
It seems even the moral case is failing to materialise into significant shifts in capital flows, though it has arguably moved the industry much faster than previous attempts at economic justification.
Investors should make the case for the status quo
So while both ‘cases’ are imperfect, the larger challenge is that the burden of proof is placed on those trying to catalyse change rather than mainstream investors wedded to failed paradigms. The assumption has been that impact investors or community leaders should go to great lengths to make their cases, instead of asking mainstream managers to justify why, as an example, more than 97% of venture capital still goes to men.
As Tracy Gray of The 22 Fund has said, “No one has done the research proving that investing in white males 98% of the time is meeting their fiduciary duty. And no one is doing historical analysis on failed white male managers as proof that investors should look elsewhere.” But perhaps we should. Internal investment teams, CIOs, and Heads of Research should do backwards analysis on their performance and ask themselves why they have continued to invest with traditional frames, even as returns erode and they are pushed into riskier and riskier asset classes.
It is time to shift the burden of case-making and ask “mainstream” investors to make the economic and moral case for the status quo.
Denise is an advisor, author, and project catalyser who works with organisations, asset managers, and companies to use their resources to support a more equitable future. She is currently a Senior Fellow at the American Economic Liberties Project, a thought partner to SheEO, and a consultant to Criterion Institute. Denise co-authored The Myth of Capitalism: Monopolies and the Death of Competition, named a Best Book of 2018 by the Financial Times. Denise is also Board Chair of The Predistribution Initiative. Find her on Twitter: @denisehearn_