The recent election brought about a startling transformation in the nation’s conversation about the economy, circling around the deep economic anxiety of millions of voters. Trump won the rust belt, and thus, the election, partly due to a long simmering rejection of Clintonomics by working families in the industrial Midwest, which suffered sharp economic declines tied to trade-related losses in manufacturing and union jobs since the 1970s.
But Trump wasn't the only “populist” in the 2016 campaign. Democratic candidate Bernie Sanders also appealed to angry workers, whether white, black or Hispanic, and the urban poor. Sanders echoed the belief that free trade agreements led to a loss of American jobs and have depressed American wages. He said America needs to rebuild its own manufacturing base by using American factories and supporting well-paying jobs for American labor rather than outsourcing to China and other countries.
It’s unclear if Trump will ever accomplish anything to actually help struggling industries, much less project a future where innovation and manufacturing actually advance (especially since he’s burning down the federal agencies that assist companies and workers). But if the Democrats want to win back the Heartland, they will not only need to reverse the damage that their trade and financial policies have caused, but work toward long term investment and capital solutions in the industrial sector. So, how can America retain, restore and modernize the industrial commons? How can we rebuild our country? In the Responsible Investor Handbook, published by Greenleaf Publishing, we provide some clues.
President Trump--and the Democrats--need to turn to unions if they are serious about rebuilding the economy. Let’s talk a little economic history. Faced with a severe recession and restructurings in steel mill production and ownership in North America in the 1980s, Lynn Williams, President of the United Steelworkers of America (USW), began engaging with labor-friendly investment bankers, such as Felix Rohatyn at Lazard Frères. In the 1970s, Rohatyn had led the Municipal Assistance Corporation’s (MAC) effort to turn around New York City’s bankruptcy. The USW deployed an investment bank set up by Gene Keilin and Ron Bloom, formerly at Lazard, to intervene in the steel industry through defensive buyouts and other strategies, such as employee stock ownership plans (ESOPs), saving jobs and parts of the industry. Other unions, such as the machinists and pilots, followed suit in addressing the economic crises in their own industries.
By the late 1990s, USW’s then Secretary-Treasurer, Leo Gerard, the AFL-CIO and the Steel Valley Authority (SVA) assembled the Heartland Labor/Capital Network and commissioned the book Working Capital: The Power of Labor’s Capital (Fung et al. 2001), which asked how the labor movement might harness the power of pension funds to rebuild America. Workers’ pension plans, following on the half-century success of housing trusts, began to invest in responsible capital funds (including the Keilin-Bloom legacy firm, KPS Capital Partners), that respected workers’ rights and sought to provide a voice for workers as stakeholders in the company. This initiative gained ground slowly through the decade of the 2000's and was similar to efforts around worker-capitalized vehicles in Quebec (The Solidarity Fund) and Australia, where the Superannuated Funds established specific investment managers to invest in industries, infrastructure, renewable energy, and other responsible alternatives. (Bloom, by the way, went on to help save the auto industry as a leader of Obama’s Auto Czar program).
So, in addition to winning the 8-hour workday, the weekend, and pension plans, labor unions were the original “crowd-funders” who fought for the establishment of collective retirement and welfare benefits for its members. Through these pooled assets, workers helped construct the building blocks of advanced economies around the world. For over a century and 1/2, trade unions and civil society worked together to build housing, finance banks, credit unions and insurance companies, and capitalize cooperatively owned firms (unions in Amsterdam began investing in social housing as far back as 1850). They were the pioneers of long-term investment in the real economy and in ensuring greater responsible corporate governance. Advancing untold financial design innovations, labor’s financial institutions successfully deployed “workers’ capital” to revitalize cities and industries and, acting as responsible shareholders, pushed "the boss" to be more accountable.
What is workers’ capital and responsible investing?
Workers’ capital means, simply, our money -- the pension funds and other savings and assets of working people, including 401ks, insurance funds, bank deposits, etc. Real pension funds—defined benefit plans—grew from $153 billion in 1978 to $9 trillion in U.S. in recent years, including $4 trillion in public and T/H plans where workers have a voice. Overall, workers own $22 trillion in institutional investments in the U.S. and over $36 trillion globally. Today, these assets represent an enormous share of economic and capital market wealth (127% of GDP in 2014, according to Towers Watson). As a result, these large institutional investors came to be referred to as "universal owners," owning large swaths of the economy. In recent decades, pension funds also began to make greater allocations to alternative investments, particularly in private equity and venture capital, and real estate.
The retirement assets of working people have been instrumental in the development of America’s (and the world’s) economy and its capital markets, fueling the desire for growth and prosperity. Today, the stewards of workers’ capital are joining coalitions to pool capital to rebuild cities, make companies more humane and efficient, and address climate change. They are amalgamating resources and investment capacity across borders, as evident from the rapid spread of the U.N. launched Principles for Responsible Investment (PRI), with over 1,600 signatories and over $60 trillion in assets. These investors are applying a more holistic and integrated investment approach to the challenges facing cities, industries and our environment while reaping the financial benefits.
Responsible investment (RI) incorporates environmental, social and governance (ESG) matters into investment decisions, and it aims to better manage risk and generate sustainable, long-term results. The oncoming boom of the millennial generation rejects the idea of profits at any cost: they want to preserve the environment and ensure they have a voice in the workplace.
Do responsible investment considerations enhance or detract from the financial value of investments? Is there a strong financial and competitive case for corporations to include sustainable practices in the management of their business? Can a corporation positively serve all stakeholders while simultaneously pursuing its business mission?
As we demonstrate in the book, the answer for RI skeptics is a resounding “YES” in terms of both responsible investment considerations and good corporate governance. This conclusion is based not only on anecdotal references, but on a battery of financial performance meta-studies led by prestigious global institutions such as the University of Oxford, Harvard Business School, Mercer and Towers Consultants, and Deutsche Bank. Their reports demonstrated, in the aggregate, that responsible investment strategies and good corporate governance have a positive financial impact.
The 2008 financial crisis brought on by the subprime housing market crash bore testament to the explosive negative impacts of short-term, irresponsible, speculative investments "whose risk profiles they [pension funds] did not fully understand." These misguided investments impacted not only the financial value of pension assets, but also broader civil society. Nearly $11 trillion in household wealth vanished, including $4 trillion in retirement accounts and life savings. In addition, millions of jobs were lost and homes were foreclosed. This is why this economic crisis has been so horrible and long-lasting for everyday Americans.
How can we responsibly rebuild the Heartland?
Trump or no Trump, sweeping new movements are pushing America into a more sustainable future. “Making it in America” is not only a popular new slogan, from the White House to the local coffee house, it’s a pop culture staple. While supporting fair trade, consumers want to buy safe, high quality American-made products. Many economy watchers believe there are signs of a new manufacturing renaissance emerging, part of the so-called “reshoring” phenomenon. Americans are also concerned about climate and the environment and are adopting and investing in sustainable solutions.
In addition, important demographic shifts are tipping the scale in favor of responsible investment strategies. Millennials and boomers alike have been moving back to the city, even rust belt cities, and into transit-friendly multi-family housing. People are rethinking highways to nowhere, they are reviving downtown and urban neighborhoods, and supporting high speed trains and bike lanes. New urban dwellers want to harness renewable energy and other smart-house advances. They are supporting local, community-minded companies and worker cooperatives. They want the national chains to utilize ethical supply chains and also source more products locally. And, there is a ferocious “Fight for $15” –across cities and states–to pay workers a living wage. These trends are inexorable and will not disappear in a sink-hole because a new president is in the White House.
An emerging new generation of responsible investors is mobilizing capital for complex smart buildings and affordable housing, community infrastructure projects, wind and solar projects, electric and hybrid vehicles--and advanced manufacturing--which underlies many of these growing sectors. Given its sizable influence, workers’ capital stewards have already mobilized hundreds of billions of dollars in capital investments, building hundreds of thousands of homes and shiny, efficient buildings across the skyline, and saving or creating a similar number of good union and community jobs. Responsible capital stewards will likely accelerate their profitable investment of workers’ capital in cities and industries around America.
1. Reviving our Industrial Commons
In 2009, the fate of the American auto industry was in doubt, jeopardizing up to 1 million jobs in the supply chain. Since the U.S. government’s turnaround efforts, which began phasing out gas-guzzlers, the domestic auto sector is re-growing and becoming much more energy efficient. The ripple effect across the supply chain has been immediate, setting off a revived auto “Industrial Commons” in support of a more productive and sustainable industry. The “Industrial Commons” refers to a foundation of knowledge and capabilities (technical, design and operational) that is shared within an industry sector, such as “R&D know-how, advanced process development and engineering skills, and manufacturing competencies related to a specific technology." (Pisano & Shih, 2009)
Responsible private capital investment houses like KPS Capital Partners are turning around and recombining newly viable transit manufacturing industries, like New Flyer Industries and Motor Coach Industries, deploying at-scale workers’ capital that is bringing back part of our auto manufacturing sector. This recent large impact transaction created a new, earth-friendly transit bus company in North America and secured over 3,500 mainly union jobs. KPS itself, just since the early 2000's, has saved 40,000 jobs across several continents. Large labor-sponsored funds, like the Solidarity Fund in Quebec with $10 billion in workers’ capital, have partnered with 2,467 firms and created or maintained 530,000 primarily industrial jobs, since 1990.
2. Rebuilding the Built Environment
There is also a boom in green construction and sustainably-built environments, along with single-family, townhouse, live-work, condo, and apartment types of housing. According to the U.S. Green Building Alliance, by 2015 nearly half of new non-residential construction, by value, would be green, equating to a $120-145 billion opportunity. The rapidly dropping costs of renewable energy and smart building technologies are leading to the proliferation of net zero energy buildings globally. These new developments also fuel the advanced manufacturing supply chains that build them.
The AFL-CIO Housing Investment Trust (HIT), a labor-friendly, fixed-income investment company, recently launched the Midwest@Work, a major city rebuilding project in nine cities in the Midwest, including Minneapolis, St. Paul, Milwaukee, St. Louis, Detroit, Columbus, Cleveland, Pittsburgh, and Buffalo. The project seeks to invest more than $1 billion in 90 projects, leveraging $900 million in capital, bringing the total investment to over $2 billion. The total economic impact of these projects is estimated at $3.8 billion, potentially resulting in more than 25,000 total new jobs, of which 9,700 would be union construction jobs.
Globally, in projects such as Kings Cross in London, spurred by the BTPS; Collingwood Village in Vancouver B.C., capitalized by Concert Properties, a Labour-Sponsored Investment Fund; and the Cardiff Bay Project in Wales, purchased by the British Steel Fund, responsible capital stewards are not only making smart, sustainable property investments, they are regenerating entire parts of cities. They are building new mixed-use urban villages, connected to transit hubs, centered around recreational amenities and parks, creating new master-planned communities that revive brownfields and bring people back to the city.
3. Growing the Clean Economy and Sustainable Infrastructure
The most serious environmental challenge of our lifetime – global warming and climate change – is facing capital stewards. As Richard Trumka, President of the AFL-CIO, said in his 2014 speech at the Investors Summit on Climate Risk: “We have the technology to reduce building emissions by 50%. In fact, growing market preferences for lower-cost and dependable renewable energy, and other sustainable products and processes, are providing an integrative solution for residential and commercial construction, industrial production and infrastructure development. This integration is seeping into all asset allocation classes."
ULLICO’s Infrastructure Fund, in its first three years, accomplished over a half-dozen infrastructure investment deals, primarily focused on renewable energy projects. Those include a water and wastewater project in Rialto, California; a wind project in Hawaii; a solar project with Panasonic on their properties; and most recently, a $50 million add-on financing of the Eagle Creek Renewable Energy Hydroelectric power project, which is driving 46 hydroelectric facilities in Illinois, Michigan, Minnesota, New York, New Jersey, New Hampshire, Wisconsin, Maine, Massachusetts and Vermont. These projects have yielded thousands of good union jobs.
Increasingly, unions are working with their members, signatory companies, and community partners to create new training and business development opportunities in the clean economy. One of the most advanced initiatives is that taken by the IBEW (International Brotherhood of Electrical Workers), which has collaborated with its signatories through NECA (the National Electrical Contractors Association) in managing successful solar and wind energy training and installation programs in the US for its apprentices and innovative new financing platforms for its contractors.
Globally, activist pension funds such as ABP and PGGM have invested hundreds of millions of Euros in dozens of sustainable energy projects through sustainable investment vehicles like the Ampère Equity Fund, managed by Triodos Bank. Along with the IFM projects in Australia, responsible capital stewards have been building the largest wind-power sites in Europe and Australia. Many of these investors have worked hard to empower the communities in the designs and operations of these large projects.
Paying it Forward: Navigating Toward a Sustainable World
While the campaigns were just getting organized during the spring of 2015, a preposterous-looking solar-powered plane called Solar Impulse 2, with a wing-span longer than that of a Boeing 747, took off from the Mideast in a historic record-breaking attempt to fly around the world. Its wings were covered with 17,000 solar cells, running four electric motors. Despite snags and delays, they crossed the second of two oceans and ended their epic journey in the Middle East in July 2016, as the Republican and Democratic conventions were getting underway.
"The Swiss duo [said] they want to raise the profile of a suite of technologies on their Solar Impulse 2 aircraft — many commercially available today," showing that alternative energy sources and new technologies can achieve what is considered impossible.
American know-how pioneered the early development of solar energy. In fact, Americans--workers, engineers and entrepreneurs--designed world leading advanced technology, space travel, and renewable energy. Our ancestors, furthermore, built our cities, railroads, highways, schools, homes. They created a mighty industrial commons. Workers and societies around the world accomplished many of the same momentous breakthroughs.
American pension funds provided, directly and through VC funds, the fuel to launch hundreds of solar entrepreneurs. People’s capital invested in many of the advances in the last half of the 20th Century. Our money—saved by teachers, electricians, steelworkers, firefighters, hotel workers and other employees—seeded earth-changing innovative industries.
Unfortunately, American industry ceded semi-conductors and flat-panels to China in the 1990's, which led to Chinese dominance in solar technology. Our country gave up leadership in countless advanced technologies to Asia and Europe two decades ago, but today, we’re fighting to regain it.
Capital stewards are poised to invest in more durable technological advancements and more hopeful progress and shared prosperity. They can invest in new paths, as suggested in our RI Handbook, that rebuild our urban cities, revive job-producing industries and bolster the clean economy, and they can mount aggressive actions to mitigate or prevent climate change. As part of a “paying it forward” approach, responsible investors are collaborating with new labor/community apprenticeship programs that provide career ladders for young people and people of color, and they are supporting new community benefit agreements that share the dividends from investment and economic development.
So, yes, we need the federal government to wake the hell up and do its job. But, if you kill Dodd-Frank, you will invite another debilitating economic depression, caused by yet another set of ponzi schemes. If you destroy the programs that help workers, businesses and communities (and their environment), you guarantee more anger and failure, and you can bet America falls further behind in its progress (vis-a-vis countries that are committed to making things, like Germany). In many ways, we need you to simply follow the path that working people have already chosen. Reinvest in our Commonwealth, reinvest in America.
 As noted by the Century Foundation in an upcoming report on the need to rebuild the middle class, manufacturing and infrastructure, and good paying jobs.
 Remember the Clinton-Rubin-Summers-led elimination of the Glass-Steagall Act in 2000? Unfortunately, for the D’s, some voters still do.