By Thomas Goldfuss
What it is about
MONEY IS A cultural asset and surely one of the most brilliant inventions of mankind. About 5,000 years ago – apparently introduced by the Sumerians – it enabled the evolution of civilization, specialization and distribution of labor, trade, and the formation of states. It achieved all of this in combination with other inventions but above all, in combination with writing. Money was and is made for humanity; it is a precondition for societal evolution, technological advancement and, thus, serves a great purpose for us humans.
As we all know, money is not only a blessing. And at least since the global financial crisis of 2008 we all have become aware of the devastating effects that the improper handling of money has. I do not wish to talk about the triggers of that crisis, as this topic has been covered at length already. Rather, I want to shift the attention towards the current and upcoming challenges that the world faces, and the role money plays in them. At the beginning of the 21st century it is about time, even imperative, that money serves mankind and the environment (again).
This becomes very clear by taking a look at the Earth Overshoot Day also known as Ecological Debt Day. It is the day in the year on which the global population has used up a year’s worth of biocapacity (the amount of resources that can be regenerated within a year), and begins to consume the substance of the Earth, depleting the Earth’s finite resources. Following the logic of the Earth Overshoot Day, the world population should have left their car in their garage, unplugged their washing machine, freezer and telephone from 8 August 2016 until the end of that year. Consequently, even firefighters, the police and hospitals should have stopped their energy usage. Each year, this day moves closer to the beginning of the year. In 1987 for instance, it fell on 19 December. Even as the ecological situation appears to have been relatively relaxed back then as compared to today, there were still institutions and involved individuals who warned of the limits of growth.
When taking a look at my homeland Germany, the situation becomes even more dire. It is a highly developed, industrialized and consumption-oriented country, which is reflected in its own Earth Overshoot Day, falling on 24 April in 2017. At this day in the year, the German population (from a mathematical point of view) has used up its yearly share of global resources. This shows that we urgently need to adapt our habits with regard to production, trade and consumption and that a shift in the political course is due. Germany puts too great a strain on the Earth, mostly through its high amount of carbon dioxide emissions. This is mainly caused by energy generation, transportation and industrial agriculture, but also because of the high demand it puts on land use, especially in meat production. Thereby, Germany contributes substantially to worldwide over-consumption.
If you want to change the way money is used and put it to a use that is beneficial to society, it is necessary to look at the main forces which led us to were we are today, namely the dogma of economic growth and profit optimization. It is impossible to grow endlessly in a world with limited resources. The global middle class is predicted to increase to 4.9 billion people by 2030 (it stands at about 1.8 billion today), which will make up 50% of total global population. At the same time, as we know from the works of the Swedish sustainability scientist Johan Rockström, three of nine measurable biophysical limits of our planets have already been breached: biodiversity, climate change, and both the nitrogen and the nitrate cycle.
Taking into account that the Intergovernmental Panel for Climate Chance (IPCC, 2014) calls for a reduction in carbon dioxide output of 50% of the levels measured in 2000 by 2050 (and recommends similar reductions for other greenhouse gasses), the suspicion arises that such systemic change can only be achieved if there is a fundamental paradigm shift in economics, in consumption and especially in our handling of money, starting now.
Next to the issues surrounding population growth and economic growth we find the quest for profit maximization as the second root of our fatal dealing with money. When I was invited to a lecture and discussion at a German university in the Fall of 2016, an economics student emphasized that “the first commandment of business is profit maximization”. Clearly, this concept, although in a more different and nuanced way, but identical as dogma, is being taught at German schools and universities. But this principle is not only the touchstone for business, also the consumer acts in accordance with the Geiz ist geil! principle (translating to ‘stinginess is awesome!’, a slogan used by German media outlet MediaMarkt).
In an era of globalization and free trade, the population of Western industrialized nations can buy at increasingly low prices, because the products are manufactured in emerging countries such as China, Vietnam or others. Who cares about the fact that the workers have bad employment contracts, few rights and little social protection?
On a global scale, there is a large supply of people looking for work, but there is a lack of properly paid jobs in the social and education sectors. There are a billion obese and a billion undernourished people. The productivity of agriculture has grown enormously, we produce a record amount of food. Yet, in the end, the most products end up in the hands of people who already have enough. On the way from the field to our tables, 50% of the food is being thrown away.
Similar things can be seen in textile manufacturing, where clothing has become very cheap and dispensable. T-shirts are only worn twice and then thrown away. The negative interest is also a product of oversupply. Economically, there is too high a money supply (a situation that is only marginally induced by the central banks’ policies, but in no way originally caused by them) and the markets are unable to direct it to the places where it is actually needed.
Finally, profit maximization guides our own investment choices. Imagine the following case: you are looking to invest €30,000. From two offers which are generally alike in terms of risk, condition, etc., one has interest of 1.5%, while the other has 3.0% interest. Which one do you pick? You may think this a foolish question. But is it even a question? Acting within the current norms that determine our actions, this does not seem to be a real decision, since the higher interest is always seen to be favorable and a naturally better option. The social, cultural and ecological impacts of the investment are not taken into account and it is not questioned what happens with our invested money.
Money is a means to transform society
The significant meaning and originating qualities of money can become plain when engaging in the following thought experiment: What would happen if the monetary system ceased to function from one day to the next? If payments and cash became unavailable or worthless? What would you engage yourself in? What do you believe others would do? What would you really miss in a situation where money has lost its value and therefore its function?
One thing that can become clear is the real function of money. The mental image is no longer distorted by the false assumption that money has an intrinsic value beyond being a means of transfer. This also creates a favorable situation, where one can reflect about how our monetary system should actually be designed and exactly which responsibilities lie with financial institutions, so that money can take on its intended role. In my opinion, three functions lie at the core of this role, and each of these fundamentally can affect a much needed, positive transformation of society.
1. Lending and giving
This was probably not your first thought. But a form of giving (admittedly not often considered to be some kind of donation) is commonplace in all states around the world. As taxpayers, we ‘donate’ on a daily basis. One example: I am sitting in a train right now and just bought a bottle of water. The VAT related to that purchase later goes to the tax authorities. Without a functioning tax system, a state cannot uphold or build public services for its citizens.
The lending and giving of money has a real impact on society. Out of long-term self-interest alone, the financial markets and the wealthy are required to concern themselves with the financing aspect of the great challenges we face as humanity. Safe investments will not be possible when dealing with these challenges, as substantial risks may ultimately require giving and donating in the process of solving them. Giving and donating are completely underdeveloped in Europe, when compared to the US. The wealthy have to take part in financing public and merit goods on a completely new scale. If they don’t, they endanger their own prosperity.
The ‘gifted money’ serves the creation and education of new abilities, needed in a different future, so that the businessmen of the future are able to change the world with new ideas. Secondly, it supports charitable projects for an open and active civic society. It facilitates social, ecological and cultural areas of learning and development, and uses the knowledge gained in these processes to develop new ways of participation and ownership in both the economy and society. Through this, a culture of giving, which connects individual freedom with sensible actions, may be created. Giving (which always includes eschewal) requires of the giver the highest amount of trust, much higher than when compared with buying or lending, and it can create a social fundament on which and from which new transformations can be made possible.
The motivation to give is not compassion, but the will to transform. The economic cycle is mainly driven by value creation processes, whose social returns will only have socio-economic impact in the middle to long term. This affects certain public sectors of society that cannot finance themselves, and whose share of the tax money doesn’t satisfy their expenses. But financing them privately is not a good option, as they are public responsibilities and on a basic level necessary for a prosperous economy and a functional society: kindergartens, schools, science institutions, and other social and public institutions, are public spaces where civil society takes responsibilities.
Gifted money is freed from the expectation of a financial return and therefore it is able to flow to places where there is no expected financial gain and where it can have a large socio-ecologic impact. It aims more at enabling instead of aiding.
We also need a paradigm shift with regard to the valuation and use of giving towards a society that sees itself as part of the economy and an economy that is geared towards sustainability and social and ecologic goals. To achieve this, society will need active citizens and initiatives, stimulated by gifted money. Normally, when compared to the public administration, civil society is more sensitive to problems and is able to deal with them without being held back by processes and models as governments often are.
2. Investing and financing
The purpose of investing is to use money to finance the creation of new things. These can be businesses, factories or projects. In investing, the deciding factor is meant to be where and what the invested money can achieve or create, for example in small businesses, ventures, projects of all sorts. When financial investments – debt or equity – are combined with the actual financing of something, different impulses are created, new ideas and investments enabled. This kind of money may be called ‘loaned money’ and is similar to a credit. It emerges, for example, when people have business ideas that are promising, but need credits (and the trust) of other people or intermediaries (such as banks) in order to set their ideas in motion. When financial investments and actual financing are combined on a principal and structural level, money is no longer a good of speculation that is only used to accumulate even more money.
This is generally true for business finance. German minister of finance Wolfang Schäuble recently emphasized at a conference that the financial center Germany must be judged by its utility for the real economy. The banks all agreed on that, but it is totally unclear how this can be achieved. Yet the only real purpose of the financial markets is to bring money to the places and humans in the real economy where it is needed. That can only be achieved when the financial sector is concerning itself with the challenges of our societies. But that is currently not the case, and the only talk is about the need for the real economy to grow, which intimates that the real economy serves the financial markets – a premise that is not challenged.
Particularly the highly developed societies have to answer the question of what we need more and of what we do not. Right now, badly needed transformations can often not be brought forward because of a lack of funding. If we assume the financial markets have a purpose to serve the real economy and this is, as Schäuble says, the only yardstick it is measured against, the following questions arise:
· How do we finance the halt of climate change and solve the energy question?
· How do we finance a global restructuring of diet, without damaging soil fertility even further?
· How do we finance necessary investments in infrastructure?
· How do we finance new concepts of mobility?
· How do we finance an upgrade of our education and cultural system?
· How do we finance the integration and inclusion of migrants and refugees?
These great, conflicting questions don’t seem to have reached most of the managing boards in the banking sector yet. The only drivers of change are insight and hardship. So it remains desirable that a discussion about these issues will finally take place. Only then can the required upheaval be influenced and managed. Either way, it is bound to happen in the long run.
Bank customers of yesterday mainly expected a safe, fruitful investment, cheap financing and cheap, functioning transactions. However, as citizens of today and tomorrow, they demand solutions to great challenges – and their financing. If the banks do not react to this, the acceptance of their business model will sharply decrease.
3. Buying and selling
Presumably, when I asked you to imagine a world without money, you thought that money in its function as a payment method demonstrates its most important feature. This indeed stands to reason, as the old function of money as a means of exchange is still found in modern monetary transactions.
Of course, the use of money as a payment method has an essential influence on societal development. It encourages the producer of a good to keep producing when his product is being sold. Innovation is not a direct result of buying, but conscious purchase decisions can ensure the production of sustainable products and stop the production of bad products (that damage environment or health). But the trend towards a more conscious style of purchasing has not yet been generally established in Germany. An example of this is the standards for automobiles in 2015: cars with combustion engines have an average of 144 break horse power under their hoods. I almost couldn’t believe that. The will to transform is not expressed in Germany when looking at mobility.
Important premises for unfolding the impacts of investments
As an investor, I have to be conscious of my own high responsibility. If I want to stay within my comfort zone (high safety, high return and constant availability), my invested money will only have a very limited, if any, positive impact. Next to your personal values or your personal philosophy, your own caution is needed, which ultimately cannot be transferred to some kind of consultant. The following premises may be helpful with that.
Satisfying the needs of society as a benchmark
We have to redefine the understanding of prosperity as a society. We need to accept that the concept of the invisible hand of Adam Smith obviously doesn’t lead to prosperity, even under the circumstances of a social market economy. The constant accumulation of goods, clothing and cars, combined with the need for energy generation, causes devastating ecological and social damages. These damages endanger and hurt the existing prosperity in highly developed countries instead of increasing it. The need for a reversal of ecological damages, for the eradication of poverty, for better education for everyone and for social services will be the future decision making criteria for societies.
A system that fails to cater to these needs will become more and more prone to crisis and collapse. In order to avoid this and to create a prosperity fit for the future, a broad alteration of the economic system must be undertaken. The basic assumptions of economics shall be moved towards these. In the past, natural resources and the environment were conceived of as sufficiently available. Work and capital were seen as scarce. Today, this is inverted; natural resources have become very scarce around the world, while labor supply and capital are abundant. These considerations must be an integral part of consideration for the transformation.
But such considerations aren’t really the task of a single investor. What should he do then if he does want to achieve positive results for his fellow humans with his investments? Is there an orientation that can guide him and show where investments are needed in the future?
The Sustainable Development Goals (SDGs) of the United Nations, which became applicable at the beginning of 2016, have superseded the Millennium Development Goals (which were created in 2000). They combine the previously not connected poverty and development agenda with the sustainability agenda. For the first time, they pertain to developing as well as developed countries. The SDGs are 17 goals, distributed around the topics of environmental, social and economic issues, that have to be realized before 2030. Under the motto “leave no one behind”, the weakest and most vulnerable are explicitly given priority. Apart from that, each of the 17 SDGs and the 169 sub-goals can be matched with specific human rights topics.
These SDGs are binding for the world community and can, if put fully into action, really contribute to the necessary transformation. Impact-oriented investors can pick from various branches and criteria where they want to put an emphasis. Government bonds can be evaluated using SDGs too, as states are the primary executors of those goals. The first rankings oriented around the SDGs have already been created, such as that by the Bertelsmann Foundation.
But attention is still required. Not all values, principles and criteria are covered by the SDGs, some of which you might find central and some of which play a key role in the GLS Bank as well. For instance, the abolition of nuclear energy is not clearly defined as a goal and neither the death sentence nor the use of green GMOs (genetically modified organisms) are considered. Again, each investor has to decide where he wants to put his investment himself.
Form follows functions: the virtues of an impact investor
Across the world, financial instruments are constructed mostly according to the interest of the investor. In the center are his main needs, interest, safety and ease of use. These needs are what guide the common investor, as I already laid out. But which developments do I stimulate when I am primarily looking for high returns from investments that I can liquidate at any time and therefore generally look to avoid all risk? Is it realistic to expect a high return when investing in an innovative, important project with a high risk? Is there any reason for me to invest in organic agriculture when profits are low to non-existent in that sector? Given that I want to use my wealth or a part of it to shape society, I do not only need an investment adviser but, more importantly, a list of personal qualities.
These are as follows.
Patience
The further away the maturity date of an investment, the lower the interest payments. Maybe you’ve heard of that in the context of a private real estate financing. There certainly are borrowers that can and are willing to pay the borrowed money back in a short time. An impact-oriented investor however has to give the borrower the time he needs to realize his project. Possibly, there can be a deferred start to the interest payments so that the borrower has time to breathe at the beginning. The basic question is what makes sense and what is realistic for the person who has to make the interest payments. Exits should be discussed as well. They are often connected with exceptionally high profit expectations, which can bring difficulties to the relevant business, often at times when a continuous cooperation with investors is much needed.
Restraint
Imagine the case of a young, medium-sized, European business that has developed a very efficient and effective technology to de-centrally produce drinkable water in developing countries. Now the business needs capital to construct a production line and infrastructure. An investment in that business would support SDG number 6 (unpolluted drinkable water) as well as number 3 (health). I know of a ‘green’ private equity fund that would only commit to such an investment if a return of at least 10% could be achieved. Following the current practices of valuing investments, this might be a common thing and seen as legitimate by the fund. However, what would be the consequences for the business, if it were to accept the condition of these investors? Multiple scenarios are possible: it could lower the production cost or raise the price of its product. In any case, the high expected rate of return has an effect, perhaps the buyers and users of the products, living in developing countries, have to dig deeper into their pockets – if it’s possible at all to purchase these products. It is important that the investor has an appropriate yield expectation, and pays heed to the social consequences resulting from that.
Courage
Innovations always carry the risk of failure. I believe that everybody who is involved in Social Impact Investing is aware that he is putting a part of his assets at a risk, maybe even at very high risk, if he is looking to make an impact with it. Especially in the social realm, obtaining debt financing is not hard to do in Germany. Most of the time, what is needed is both equity and junior debt. When financing, one should look at the outlook of different investments. Does it make sense to invest my capital in a high-risk, albeit sustainable equity fund, and when making this investment exhaust my available risk capital? Or are direct subordinated bonds or perhaps the participation in crowd investing-platforms for certain initiatives options with a higher impact? Understandably, every investor has a limited risk budget. The focus should be on where the risks generate the highest amount of impact, meaning that investments should be made where they carry the highest impact in the shortest amount of time, and be directed directly towards the relevant business or project. This could be defined as a sort of mezzanine capital between financing and giving, meaning that I plan to absorb possible losses.
Expediency
Usually, only familiar financial instruments are designed, structured and issued by the financial industry. This has something to do with the fact that the designer of a financial instrument knows how the sales and distribution work, what rules the financial supervisory authorities have put up and where profit can be generated when dealing with familiar instruments. But these financial instruments aren’t always useful for financing social and ecological development and, at times, they even have adverse effects. When choosing an instrument, the needs of the recipient must be taken into account (without, of course, losing sight of the interests of the investor). At GLS Bank, we have made positive experiences with cooperatives. Cooperatives are democratically organised associations and earn a basic capital supply via the membership fee. They also have the ability to obtain loans from private or public investors. Most of the time, members of cooperatives have a long-term, unlimited membership, which leads to a strong identification with the goals of the cooperatives and results in a different perception: if I make capital available through my membership, I no longer feel like an investor but rather a supporter who has a connection to the cooperative. The investment becomes a part of my public engagement and a resemblance of my will to drive changes. The possible yield expectation does not play an important role, which is why the GLS Bank calls this type of capital ‘community capital’.
Foresight
It is standard to analyze the prospect of growth and profit when investing in a business. This practice makes sense in and of itself but, as I said before, shouldn’t be the determining factor. Instead of growth, the impact and the possible development caused by the investment should be analyzed. The first two questions are: what contribution is made to our society, to humanity? Are human desires being fullfilled and if so, how? The third question: how does the project (i.e. its manufacturing process, its use, etc.) affect the environment? Or possibly: how does the product or service impact the SDGs?
Tenacity
A broad market in impact investing does not yet exist, and options are very limited in comparison to the normal financial market. Investments are often not readily available, and financial advisors often play down the possibilities too. Go into it with a ‘Not possible? Impossible!’ attitude, an approach that can already be observed from foundations and private investors. Chase investments down and don’t be satisfied too easily. Luckily, there are sufficient suitable alternatives to most investments by now. Perseverance requires personal engagement. It is possible to start small, by making alternative, impact-oriented investments and then building on that. Not everything will work out, there will be some disappointments. Errors and mistakes happen. But that does not mean that this way is not worth pursuing: without risk – always including a risk of loss – there will be no development.
Money is a means to transform society! It exists in abundance. Let’s make sure that it – in an expedient manner – reaches the places where it is needed and where it contributes to desired developments. A thoughtful handling of money also means that I as an investor and bankroller grow aware of virtues and consider them in each decision, where they give important orientation.
Money and the honeybee
Ideally, money serves humanity and the environment as honeybees and all the other pollinators do. The honeybees have a high demand for pollen and nectar in the early spring, converting the latter to honey. However, they are not perceived as predators or vermin. Rather the opposite: they are eagerly awaited by the blossoms in spring and do a great service to most plants. And not only the plants benefit from their pollination, but all animals and humans as well. This is how I understand the job of sustainable financial service providers and impact-oriented investors. The use of capital serves mutual interests. Utilizing money serves the commonwealth.
One great condition exists, in my opinion: we need to break the vicious circle where we just divert the current excess of money in the world’s financial systems towards pure financial investments, focusing on our assets which leads to indebtedness on the other side of the spectrum. We have to give! A sustainable development of our society and our economy will not come about without giving.
About Thomas Goldfuss
Thomas Goldfuss has been with GLS Bank in Germany for 12 years and has set up and managed the asset management, securities and treasury business within the bank. At the moment, he is responsible for various projects and working groups at the overall bank level as a senior expert on sustainability.
Before his time at GLS Bank, he held various management functions at another major bank, was an independent consultant and coach, and worked as a sales manager in the field of renewable energies. In his free time, he is an active beekeeper and has a passion for literature and gardening, and also actively supports the protection of honeybees as a curator of the aurelia foundation.