Investing in a More Inclusive, Resilient New Reality
By Tom Croft, Heartland Capital Strategies and David Keto, SRI Group
Working families face a unique set of crises today. It has been an exhausting, anxious, and, for some, heartbreaking few months. Shockingly, forty-five million workers lost their jobs and the UI rate shot to the mid-teens—the worst since the Great Depression. The COVID-19 crisis has devastated many economic sectors and entire communities. The protests around the tragic killing of George Floyd and other Black Americans have exposed the deep faults of racial violence, systemic discrimination, and income inequality. And then there’s all the other troubles right here in river city that never went away.
The last time this country faced such an existential crisis was the Great Depression and WWII. While the US didn’t fully recover economically from the recession until the war started, the New Deal birthed a new social contract between labor, management, and the government that, for the first time, provided a voice to working people. It launched major social protection programs for workers; shaped new federal foundations, like the Reconstruction Finance Agency, that intervened in the economy; commandeered critical industries to re-tool for war; and deployed millions of workers to rebuild our communities through public works programs. We did it then; we can do it again.
It is time for a new social contract and economic planning institutions [DK-SG1] that apply across all aspects of our economy. Workers are demanding a workplace that provides safe work, provides livable wages and essential benefits, a good retirement, and yields a voice on the job. Our brothers and sisters are demanding an economy that ensures a fair chance at a good job, a sustainable environment, and long-term prosperity for all. They are nauseated at the secretive sweetheart deals and bailouts once again being bestowed on buddies of the powers-that-be.
We are entering what Winston Churchill might have called the “end of the beginning” of the dual crises. The pandemic is now part of our daily lives and the reality is that the crisis will not be over soon. The protests have brought about a major shift in American attitudes toward racial justice and income inequality. When we emerge, it will be to a changed world. Will it be a better world – one that is more just and sustainable – or will we go back to how things were?
These crises may be accelerating trends that have been underway for years, including growing impatience with the ideology of unfettered markets and small government, and fatigue with the politics of division at a time when unity and collective action are desperately needed. These are some of the changes to come:
Rethinking Global Trade: We witnessed a greater awareness of the fragile, just-in-time international supply chains that US businesses built over the past several decades. This concern started before the COVID-19 crisis, but COVID-19 accelerated the process by exposing the dire consequences of a non-resilient, internationally exposed economy unable to produce even enough cotton swabs to allow essential testing. Many firms are shifting supply chains to domestic producers as insurance against future disruptions, and investors are paying more attention to labor rights in global supply chains.
Making it in America: There is wider receptivity to public policy protections for critical domestic industries, like those that produce essential PPA and health products, military security, and manufacturing more generally. Whether this public policy takes the form of more strategic (and less chaotic) fair trade rules, Buy-America policies, public support for specialized industries through infrastructure development or training, or a more comprehensive industrial policy remains to be seen. An increasing number of responsible investors and their portfolio firms are already leaders in the circular industrial economy, which is being put in place across Europe; can we make it happen here?
Addressing Income Inequality: These upheavals have dramatically exposed the deep inequities in society, for example, in the stark death statistics skewed against people of color and from poor communities (who already face multiple challenges). The fact that a US majority lacks adequate emergency savings and food, and a vast number of citizens can’t pay rent/mortgage, will contribute to a wave of human suffering in coming months. Despite federal emergency relief measures and state re-opening orders, many businesses will not survive, experience with prior recessions show that it takes years for a full recovery. America must face up to chronic income inequality that keeps worsening.
Strengthening the S in ESG: At the same time, the pandemic has brought a greater recognition by those who sheltered in place of their dependence for safety and even survival on not just essential manufacturing workers but also on low-paid grocery store clerks, delivery people, garbage collectors, health aids, agricultural workers, food processing plant workers. And it threw a torchlight on the heroism and dignity of those workers in showing up for their jobs despite inadequate protective equipment and subsistence pay. Black Americans, women, and immigrants are disproportionately working those front lines and have inordinately suffered the consequences. Many face the risk of serious illness without even paid sick leave or health insurance. All investors have to strengthen the S in ESG, and ensure that the firms they invest in ensure strong labor rights.
Decent Housing: The pandemic has also exposed vast differences in housing that have led directly to stark geographical divisions in people’s exposure to the virus and death rates. The problems are particularly acute for homeless populations in America’s largest cities. The solution to homelessness—and to housing inadequacy generally—is building affordable and workforce housing on a large scale. We know how to do this; responsible investors and their partners in labor and the community have all of the tools necessary. What’s needed are public leadership, resources, and repurposed publicly-owned land. This solution should be part of a broader program to create badly needed jobs, including infrastructure jobs, to replace ones permanently lost in the lockdowns and ongoing recession. In the process, we must explore ESG-driven place-making, stop gentrifying communities, and rebuild fairer, more resilient cities.
Sustainability: Renewable energy has so far been the energy source most resilient to Covid‑19 lockdown measures, according to the International Energy Agency (IEA). Renewables also are the cheapest power sources to build, and 76% of all new domestic power capacity will come from wind and solar in 2020 (U.S. Energy Information Administration, EIA). IEA’s last forecast projected that worldwide renewable energy capacity will grow by 50 percent from 2019 to 2024, adding about 1,200 gigawatts, which would account for two-thirds of new electricity generation capacity. Pension advisors need to be aware of this decades-long shift in terms of both profitability, resiliency, and stranded assets. The crisis of global warming, in its many guises, is, sadly, already roaring back,
It does seem that America is at a tipping point: there is a wider acceptance of the essential role of government in civic life; a greater receptivity to progressive policies designed to boost workers’ rights, promote sustainability, and reduce inequality; and a broader recognition that we are all in this together. Emergency stimulus measures already passed into law include programs that are similar to universal basic income and government-provided healthcare (albeit on a circumscribed basis) that would have been unthinkable two months ago.
The Role of Responsible Investors in Rebuilding the Economy
The U.S has a capital gap of several hundred billion dollars annually to move toward sustainable climate targets by 2030. Billions more are needed to modernize transport, the affordable housing stock, and our general infrastructure in general. As stewards of the US $25 trillion in deferred wages that make retirement income security possible, pension fund managers and trustees must make critical decisions allocating assets in a wide variety of investments. One overlooked set of considerations for the capital stewards of vast pools of pension and institutional funds is the impact these investments make in our communities, and whether those align with the interests of workers and beneficiaries.
Today, given the immense economic, equity, health, and environmental challenges faced by our communities (and country), there is a greater imperative than ever before that this workers’ capital be reinvested responsibly and sustainably in the real and clean economy. That requires reorienting alternatives investments toward investing more responsibly, and not in harmful short-term, extractive schemes that in the end often lose money. The U.S. SIF reported an estimated $588 billion in responsible alternatives vehicles in 2018, up from $38 billion in 2010. Let’s put this money to work.
Heartland Capital Strategies (HCS) was launched a quarter century ago to promote the power of the owners of workers’ capital – workers and retirees--to make companies more humane and the economy more resilient and responsive to the needs of ordinary people. The Heartland Network has grown to become a Community of Practice that has invested in a united front to rebuild cities, renew the industrial commons, grow the clean economy, and make the “boss” more accountable.
Over that time, Heartland has built a knowledge base on responsible investment practices and has developed a collaborative network of informed, like-minded people and organizations across the country and internationally.
As demonstrated in our fourth book, the Responsible Investor Handbook (2016, Routledge), Heartland is committed to the idea that workers’ capital must be invested to rebuild an America that values and supports its workers and that is sustainable over the long term. As more people conclude that we cannot just go back to business-as-usual, there will be a search for ideas and practices with which to build the new economy (such as supporting an American co-determination governance model). Heartland has been developing and sharing such ideas and practices for over two decades.
The Heartland Network has always been about building the economy of this country in a way that works for all workers. We know we must do more, and we invite you to work with us to revitalize our economy and bring back the country. As Alice Walker wrote, we are the ones we have been waiting for.