By John Fullerton
THE FLOW OF private and public real investment is the bridge to the future economic system our children will inherit. Such real investment includes creating and expanding enterprises of all purposes, from business to education and healthcare, to the building of infrastructure in its many forms from buildings to transportation, communications, and energy systems, and critically to the investment in and management of our landscapes, inclusive of agriculture of all types and scales.
And with this flow of real investment, we will determine the possibilities and limitations for the future of civilization.
Of course our consumption decisions matter as well. But increasingly our consumption choices are highly influenced by corporations themselves, with ever more effective advertising thanks to the likes of Google and Facebook. So with respect to even our consumption alternatives, it is the real investment decisions of corporations that are the initiating act – the investment in a new product or technology that becomes the subject of future advertising campaigns. Investors who financed the creation of Tesla, and Volvo’s recent decision to invest only in electric cars by 2019, are examples of such real investment decisions that will define our future consumption patterns. So too a corporate or state investment decision to build a new coal-fired power plant, or a new highway system instead of a rail system.
It is essential to distinguish what I am calling real investment from financial investment – investment and speculation in financial securities like stocks and bonds on the secondary markets where they trade. The multi-trillion-dollar real investment flows that will define our future economic system are generally the choices of corporations large and small, governments, and to a lesser degree institutional investors and individuals who make real investments as well as financial investments. Anyone who builds a house or remodels their home is making a real investment, so this extends to many of us and collectively it all adds up.
However, much of what commentators generally refer to as ‘investment’ is in reality trading in already existing financial securities – buying and selling existing shares of public companies like Apple or ExxonMobil. This financial investment can have an indirect influence on real investment decisions to varying degrees. But more than we would like to acknowledge, future real investment, and therefore the future of civilization itself, is to a significant degree in the hands of the decision makers inside governments and the corporate sector, with the greatest influence sitting with the biggest actors. This should be cause for great alarm, given the generally weak state of both corporate and political governance in place today, positive exceptions notwithstanding.
And yet, change is afoot.
I would like to share one man’s journey as a window into this change. It is a story of what we now call ‘impact investment’,45 but more importantly, a search for a bigger framework within which all investment decisions must sit.
Investment is perhaps the centerpiece of finance, and yet finance properly understood sits within the real economy, a fact we have lost sight of, with disastrous consequences in 2008 when the financial system all but collapsed and brought the real economy down with it. The ramifications of this confusion of means and ends still dominate policy makers’ options today, like a debt we keep on paying. Our failure to properly prosecute wrongdoing, and make profound structural adjustments in the financial system in response to the crisis, is a legacy we will increasingly regret in the challenging times ahead.
This search for a larger framework has led to an understanding of holism not as a new age idea, but rather, in the words of Jan Smuts who coined the term in his magnum opus Holism and Evolution, “the universal principle that explains matter, life, and spirit.”46 That’s no small idea! It’s the idea that everything is created from – and evolution occurs through – embedded wholes, which leads to the well understood and intuitive truth that ‘the whole is greater than the sum of the parts’. It is perhaps the central organizing idea in the universe.
An appreciation for the central truth of holism has led me directly to a hypothesis about a new theory of Regenerative Economics47 as the natural evolution of economic thought, aligned with the latest advances in both the physical and social sciences, and importantly, aligned with the many wisdom traditions – Eastern, Western, and Indigenous – that have stood the test of time. It is a clean break from the age-old debate between socialism and capitalism; a shift from the reductionist limitations of modern era thinking of the past 400 years to the new integral era thinking of the new millennium. But we are getting ahead of ourselves. Here’s some highlights from my story.
Eight years after I walked away from my nearly 20-year career on Wall Street in 2001, I was fortunate to forge a relationship that would profoundly influence my search to make sense of our crisis-riddled world and find a way to make a positive contribution through my work. Along this search, I learned about the environmental crisis as a systemic crisis rather than a series of disconnected ‘problems’ for the first time. I read about the rise and fall of civilizations, explored Eastern thought, and discovered the writings of E. F. Schumacher. It was the latter discovery, and a subsequent paper I wrote, ‘The Relevance of Schumacher in the 21st Century’,48 that led to my introduction to Allan Savory and biomimicry – the practice of imitating nature’s natural processes to find solutions to humanity’s challenges.
When I first encountered him, Savory, a combative and somewhat controversial Zimbabwe-born ecologist, farmer, and environmentalist, had been working for some 40 years to address the degradation and desertification of the Earth’s grasslands. He also had an earlier run as a political leader trying to unseat Ian Smith, whose policies many including Savory considered racist.
Savory sent me an email after reading my paper on Schumacher. One-third of the Earth’s land surface, he explained, is grasslands. Most of those grasslands have been degraded, contributing to climate change, destabilizing floods and droughts, and global inequality. Unless you are one of the roughly one billion people who live on the world’s vast but largely unpopulated grasslands, most of us generally experience them from 30,000 feet in the air, flying overhead. But grasslands are photosynthesis at their core, and depend on the symbiotic relationship with large herbivores (buffalo, elk, cattle, wild deer, etc.) to recycle organic matter. They are also the economic foundation and source of survival for many of the world’s poorest communities. Holistic management of these lands, Savory continued, would not only restore the health and ecological value of the world’s grasslands, but it can also produce an enhanced and sustainable financial return from the proper management of the land for all the families who depend upon them for their livelihoods.
Holistic management is essentially a decision-making framework applied to land management and the use of large animals (typically cattle, but also sheep, and bison) to reproduce the otherwise naturally occurring regenerative activity of soil, in this case to mimic the way large animals naturally lived on grasslands before industrial agriculture, feedlots, and the environmental degradation that goes hand in hand with this mechanistic (non-holistic) approach.
Soil, as it turns out, is the second largest depository of carbon after the oceans, a vital ‘carbon sink’. So if we don’t have healthy soil, in fact if we’re not continuously building soil, we’re not sequestering carbon in the way our natural system is meant to operate (the carbon cycle). This breakdown has been happening for the last century as we have killed off large animals – remember the buffalo – or herded our domesticated animals into fenced pastures and pens while killing off their natural predators, which has changed their natural herding instincts with a negative consequence for the land. In some cases, we have removed large herbivores altogether from the land, thinking that ‘over-grazing’ was the problem when in fact it was improper grazing (too much, too little, and in the wrong patterns). Grass doesn’t drop leaves like trees do. The symbiotic relationship with large herds of herbivores is vital to the regenerative process. It’s the reason there is over ten feet of rich soil under the tall grass prairies of the great plains, although it is degrading at an alarming rate in most places.
What Savory and his colleagues around the world figured out is that by developing a plan unique to the local context (rainfall, plant species, etc.), herding cattle in large herds and moving them systematically around a large landscape, we can mimic the natural course of large animals that used to herd together to protect themselves against predators. By herding, the animals all eat in one place and they defecate in one place, completing the nutrient cycle back into the soil. Their concentrated hoof action creates ‘disturbance’, then stimulates new growth and helps soil hold water when the intermittent grassland rains do come. Moving the herd together through active management then allows the grass to rest, which is how it regenerates, growing deeper roots and building healthy soil. Through this practice, we can replicate the natural soil-building process. If done on a large scale across the world’s vast grasslands, this practice has the potential to sequester large amounts of carbon and rebuild this essential carbon sink – literally enough to buy decades of time while we transition our energy system away from the fossil fuels.
In our conversations, Savory expressed an interest in shifting from helping ranchers execute holistic management practices on a consultancy basis to getting a sizable amount of land under management in order to demonstrate at scale, and retain control over long periods of time in order to document the affects by collecting surface-level organic matter data, and sub-surface carbon data. The following year, Savory and his team would partner with me and another financial partner – Armonia – to form Grasslands, LLC,49 a for-profit land management company.
To get started, we acquired two modest ranches in western South Dakota, on the mid-grass prairie of the United States. Seven years later, Grasslands, LLC manages approximately 200,000 acres in the South Dakota, eastern Montana, central Florida, and on the South Island of New Zealand. The Savory Institute50 (a non-profit whose board I also sit on) is spreading holistic management throughout the world via its Savory Hub training model, with an aspiration to impact management practices on one billion acres of land down the road.
My investment project with Savory and his colleagues is as much about a new way to think as it is about grasslands management. Another ‘impact investment’ project, New Day Farms, which after extreme challenges now grows nutrient-dense micro greens in rich soil, in a highly productive, energy efficient, controlled environment, opened my eyes to holistic health, and the growing practice of integrated medicine as the only true pathway to genuine human health.51 My regenerative real estate investment projects, inspired by the work of Regenesis Group, further reinforced this pattern of unlocking unseen potential through a more holistic approach.
When coupled with my study of our interconnected environmental, economic, and social crises, my discovery in particular of the work of Donella Meadows and colleagues in Limits to Growth (it turns out the authors pretty much had it right after all),52 and of Jan Smuts, E. F. Schumacher, Jane Jacobs, Stuart Kauffman, Fritjof Capra, Paul Hawken, Herman Daly, Sally Goerner, and many others, it became clear to me that any serious consideration of the challenges facing humanity at the dawn of the 21st century demands first and foremost a new way to think, and a new way to see the world.
We must advance from the reductionist method that brought us great advances in the Modern Age, to a more integral or holistic view, aligned with nature’s laws in this next ‘Integral Age’ that follows. This does not mean rejecting outright all of our previous understandings. Rather, we must now use integrated transdisciplinary thinking to advance our understanding, better identify root causes of interconnected challenges, and be capable of working with the new complexity that already defines the 21st century.
I have good company in these ideas. In his masterful Laudato Si,53 Pope Francis proclaims:
“We urgently need a humanism capable of bringing together the different fields of knowledge, including economics, in the service of a more integral and integrating vision.”
And in his important and courageous book Harmony, Prince Charles too calls for an alignment with the universal principles that govern the cosmos spanning all domains including education, agriculture and economics. “The starting point,” Prince Charles writes, “is to see things differently.”54
Now well over a decade post-Wall Street, of experiential learning through my focused impact investment projects, the storytelling work we do at Capital Institute covering over 40 projects from around the world, combined with extensive study in collaboration with my colleagues, has reinforced my realization of how far we’ve diverted from our natural path; indeed how far we are from collectively understanding and acting in accordance with the way our world – and the universe, for that matter – actually works. Nowhere is this more true, and more dangerous to the future of civilization, than in our economics and finance. And this realization brought into question my entire finance-centric worldview.
When I graduated from the University of Michigan in 1982, I was thrilled to land a job at what was, in my estimation, the most prestigious and principled bank in the world: Morgan Guaranty Trust Company. The firm changed its name into JPMorgan as the business evolved and this is a firm I now refer to as ‘The Old JPMorgan’, which had little in common with the modern colossus by the same name.55 The former firm’s culture valued integrity above all, intellect over financial muscle, and was the perfect place for a young whippersnapper who arrived from college with the idea that economics and finance, more than politics, would determine the future course of international relations, peace and prosperity. As it turns out, I joined the bank at the right time.
Then referred to as the highway of finance, linking capital markets around the globe together for the first time, derivatives (a new technology and not yet a dirty word) were about to transform global finance. As a young professional who could run spreadsheets unlike my older bosses, I was primed for early success. By my mid-thirties I and others of my generation were managing capital markets and derivatives businesses across the globe for Morgan, in my case taking me to Tokyo, London, and back to New York. And while I fit the bill as far as the generally accepted model of ‘success’ is concerned, over time I found myself in a business that had become less fun and more of a fight, and was no longer serving the ideal I had as a naïve college graduate to use finance to help improve the world. It had become much more about making money and ‘success’ as defined by Wall Street, affecting who I was as a person in the process.
After having had enough in capital markets, a shift into direct private investment inside Morgan Capital in 1997 provided a fresh, practical, and intellectually challenging experience, and first allowed me to explore the idea of aligning investment with environmental and social purpose. I made my first ‘impact investment’ in 1997, a $20 million investment into Edison Schools, the pioneer charter school management company run by entrepreneur Chris Whittle and former Yale President Benno Schmidt. It was controversial to say the least inside the house of Morgan. Our investment committee wrestled with all the same questions of trade-offs (or not) – between ‘social purpose’ and return, and was it possible to think holistically about investment or was ‘John just getting soft’ – that now the Ford Foundation has embarked on 20 years later with their decision to begin experimenting with impact investing.56 The reductionist finance ideology is a stubborn one indeed!
Growing ever more restless with a feeling my life had lost a meaningful purpose, and now disillusioned by the direction in which Wall Street was headed and the loss of the culture I so admired after JPMorgan merged with the much larger Chase Manhattan Bank, I decided to walk away in 2001 with my stock options vested, but without the foggiest idea of what my future would hold.
What followed, after experiencing 9/11 up close and personal, the first day I had been downtown after resigning from the bank the previous April, was years of searching – searching for a way to make sense of a world I could no longer explain to my children, and searching for my own purpose in it all.
While my search would eventually lead me to Savory and other significant work, it first opened my eyes to the profound, interlocking crises we are now facing – ecological, economic, and social – including the shocking prospect that we are destroying the planet’s ability to support life as we know it. My most startling discovery, however, was that modern economics and finance – what Wall Street ‘geniuses’ (like me) practiced so well – formed the root cause of these systemic crises. Moreover, the crises were simply symptoms of the fundamental root cause – an economic system design that as presently conceived is startlingly incompatible with a finite planet and what we understand about how sustainable systems actually work. This realization is irrespective of political ideology. And I must add, it occurred before and is totally independent of the 2008 financial crisis; however, that egregious display of irresponsibility, greed, and fraud further confirmed the reality that Wall Street had lost its way.
Despite its many achievements, including a dramatic rise in the material well-being for a significant minority of today’s ever expanding global population, science tells us that our current economic system – a take-make-waste model fueled by a single-minded growth imperative to maximize return on investment – is fundamentally at odds with the finite boundaries of the biosphere and the laws of physics. Similarly, climate change and, more broadly, the degradation of the life-supporting functions of a healthy ecosystem, threaten life as we know it, presenting an existential threat that has no parallel in our relatively short human history on this earth. Simply put, we are destroying the planet because there is a profit in it. In its wake, current economic activity, irresponsible finance, and increasing impacts from climate change such as storms bringing unprecedented destruction, and extended and severe droughts, has left a crescendo of social, political, and economic crises that threaten to undermine the very foundation of the economic system and with it, civilization itself. A cold-minded assessment of the accelerating refugee crisis tells us a dangerous process of collapse is already underway and time is short for us to change course.
Global economic activity is already breaching four of nine critical ‘planetary boundaries’: atmospheric carbon; nitrogen and phosphorous flows from agriculture dumped into our river systems; land use changes; and the rate of biodiversity loss. Severe fresh water stress in specific locations is on the rise. In the process, we are compromising the Earth’s interconnected life support systems.57
Symptoms of this truth abound, most notably the extreme weather events accompanying reports that we have exceeded 400 parts-per-million of atmospheric carbon, when science tells us that we must rapidly reduce that level to below 350 if we are to preserve life as we know it on the planet. We live in a time of reckoning. The associated mounting social, ethical, economic, financial, and environmental crises, connected in an incomprehensibly complex web, are converging into a global emergency that even the most entrenched denialists will soon be unable to ignore.
It is now critical that our modern economic system evolves past today’s immoral ‘rationalism’ of neoliberalism to address both the environmental crisis and the growing list of societal challenges, most notably chronic unemployment, the grotesquely inequitable distribution of wealth, and the oppressive poverty that still afflicts nearly half of the world’s population, despite decades of genuine progress. And now we have the accelerating refugee crisis to cope with, with all of its human and cultural complexities.
The writing on the wall is clear: the dominant economic model of the developed world is unsustainable. A new system, or the evolution of the existing system – one that is just and sustainable over the long term, one that is regenerative, rather than purely extractive – must be ushered in.
My struggle to find a credible alternative framework for economics and finance sharpened my interest in the intellectual and scientific underpinnings of holistic, systemic approaches. I began by studying how we might apply the lessons of non-human living systems, as executed through biomimicry, for example, to human economic systems. Here my re-education became practical as well as intellectual. Through my own conscious investment projects, ranging from my holistic rangeland management work with Savory to values-based banking and investment, I experienced the economic benefits of holistic and more relationship-centered decision making first-hand.
I then discovered that scientists were turning the rules by which living systems sustain and regenerate themselves into tested and proven principles of systemic health and development, which applied as much to non-living systems as to living organisms and ecosystems, like grasslands and forests, but also the human body. Indeed there appeared to be universal principles that apply to all ‘energy flow networks’, as Capital Institute’s science advisor Sally Goerner explained. Everything is energy at its core, from matter even to consciousness. The resulting synthesis produced an unexpected alignment of insights from fields ranging from physics and biology to sociology and even the world’s many diverse wisdom traditions that can be applied universally to healthcare and agriculture, and yes to economics and finance.
When we take a close look at the world around us, modern science reveals that we come to understand that everything in the universe is organized into systems whose interlinked parts work together in some larger process or pattern. These patterns and principles guide behavior in living systems from bacteria to human beings; non-living systems from hurricanes to transportation systems and the internet; and societal systems including monetary systems and economies. When applied to economics and finance, what we learn from universal patterns of system behavior provides the theory and precise measures of systemic health we need to guide our way forward, supporting long-standing observations about the importance of circulation, balance, and even ideals such as justice and fair play. In short, what we learn from studying systems in the real world is to see the world in a new way, a practical, rigorous, and even commonsense new picture of how the world works. The result is the idea that the universal patterns and principles nature uses to build stable, healthy, and sustainable systems throughout the real world can and must be used as a model for economic system design.58
I have attempted to distil this core idea into eight key, interconnected principles that must define our economic system design if it is to operate in alignment with nature’s laws and patterns that govern how systems that sustain themselves for long periods of time actually work. Of course readers can quibble with my definitions and descriptions, or even the idea that something as complex as a living system can be reduced to principles at all. That is not the important point here. What matters is that either we must bring our economic system into alignment with how we best understand the way all other sustainable systems operate (however defined), or someone needs to make the case that the human economy is the one exception to the rule that all systems follow similar patterns and principles! I for one would not want to attempt that argument.
Figure 1 shows a diagram of the interconnected eight principles that must guide regenerative economies, followed by their descriptions, as they appeared in my 2015 paper, ‘Regenerative Capitalism’.
1. In Right Relationships: Humanity is an integral part of an interconnected web of life in which there is no real separation between ‘us’ and ‘it’. The scale of the human economy matters in relation to the biosphere in which it is embedded. What is more, we are all connected to one another and to all locales of our global civilization. Damage to any part of that ripples back to harm every other part, as well.
2. Views Wealth Holistically: True wealth is not merely money in the bank. It must be defined and managed in terms of the well-being of the whole, achieved through the harmonization of multiple kinds of wealth or capital, including social, cultural, living, and experiential. It must also be defined by a broadly shared prosperity across all of these varied forms of capital. The whole is only as strong as the weakest link.
3. Innovative, Adaptive, Responsive: In a world in which change is both ever-present and accelerating, the qualities of innovation and adaptability are critical to health. It is this idea that Charles Darwin intended to convey in this often-misconstrued statement attributed to him: “In the struggle for survival, the fittest win out at the expense of their rivals.” What Darwin actually meant is that the most ‘fit’ is the one that fits best (i.e., the one that is most adaptable to a changing environment).
4. Empowered Participation: In an interdependent system, ‘fit-ness’ comes from contributing in some way to the health of the whole. The quality of empowered participation means that all parts must be ‘in relationship’ with the larger whole in ways that not only empower them to negotiate for their own needs but also enable them to add their unique contribution towards the health and well-being of the larger wholes in which they are embedded.
5. Honors Community and Place: Each human community consists of a mosaic of peoples, traditions, beliefs, and institutions uniquely shaped by long-term pressures of geography, human history, culture, local environment, and changing human needs. Honoring this fact, a regenerative economy nurtures healthy and resilient communities and regions, each one uniquely informed by the essence of its individual history and place.
6. Edge Effect Abundance: Creativity and abundance flourish synergistically at the ‘edges’ of systems, where bonds holding the dominant pattern in place are weakest. For example, there is an abundance of interdependent life in salt marshes where a river meets the ocean. At those edges the opportunities for innovation and cross-fertilization are the greatest. Working collaboratively across edges – with ongoing learning and development sourced from the diversity that exists there – is transformative for both the communities where the exchanges are happening, and for the individuals involved.
7. Robust Circulatory Flow: Just as human health depends on the robust circulation of oxygen, nutrients, etc., so too does economic health depend on robust circulatory flows of money, information, resources, and goods and services to support exchange, flush toxins, and nourish every cell at every level of our human networks. The circulation of money and information and the efficient use and reuse of materials are particularly critical to individuals, businesses, and economies reaching their regenerative potential.
8. Seeks Balance: Being in balance is essential to systemic health. Like a unicycle rider, regenerative systems are always engaged in this delicate dance in search of balance. Achieving it requires that they harmonize multiple variables instead of optimizing single ones. A regenerative economy seeks to balance: efficiency and resilience (rather than the endless pursuit of greater efficiency alone as standard economics teaches); collaboration and competition; feminine and masculine qualities, diversity and coherence; and small, medium, and large organizations and needs.
The resulting theory shows us how to build vibrant, long-lived, regenerative economies and societies using the same holistic principles of health found consistently across widely different types of systems throughout the cosmos. This theory, built on healthy flow networks, in our case trusting, healthy human networks, grounds our understanding of why integrity, ethics, caring, and sharing lead to socially vibrant communities and healthy economies – while at the same time making perfect practical and scientific sense.
Noteworthy is how different this economic approach is from conventional economic thinking, which presumes economic vigor is a function of the rate of GNP growth. Instead, a regenerative economy:
1. acts in ways that support the long-term health of the whole society;
2. sees economic and financial health as inseparable from human, societal, and environmental health;
3. values richness and diversity, integrity, and fairness (seeking excellence through constructive competition, particularly among groups rather than within groups, while discouraging destructive winner-take-all competition through the fractal structure of the system rather than any heavy regulatory hand); and,
4. responds to the full gamut of human needs, continuously adapting to changing circumstances, and evolving to higher and more effective levels of organization.
This necessary transition to a more effective form of economics that is regenerative and therefore sustainable over the long term is something akin to humanity’s economic Copernican moment. But instead of challenging the belief that the sun revolved around the Earth, we must challenge and accept the fact that exponential and undifferentiated economic growth is not sustainable, and that the financial system and our real investment choices in particular – instead of driving the Earth past its biospheric limits and social fractures to the point of revolution – must be used to drive the restoration of our Earth, mitigating our interconnected global threats and crystallizing the evolution of our economic thought and practice, to produce prosperity for humanity and the only Earth that is our home for the indefinite future.
This approach differs most from current approaches to sustainability in that, instead of focusing on social and environmental health using traditional reductionist logic to ‘solve problems’, it aims directly at building healthy human networks as the objective, drawing on universal principles and patterns, with sustainability becoming an outcome, a natural by-product of systemic health. The distinction is similar to (holistic) healthcare in contrast to (reductionist) disease care. See figure 2.
Similarly, our body regenerates all of its cells every seven years on average. Sustainability is the outcome, not the design principle. If the human economy and its institutions, and human civilization itself, are to thrive in the long run, they too must operate regeneratively.
While healthy debates about solutions to our global crises are expected to continue, a regenerative framing provides an integrated approach with the potential for polarized perspectives to find common cause in the best of both sides’ original ideas:
· Instead of assuming economic efficiency and undifferentiated GDP growth automatically lead to prosperity, regenerative actors understand that long-term economic vitality depends on creating conditions that will unlock the vast potential for true wealth creation that lies dormant in every individual, community, business network, and bioregion. Consequently, instead of viewing moral issues as irrelevant to ‘rational’ economic decision-making, in regenerative economics, human and moral concerns become central to decision-making, and policymakers view those concerns as critical to the maintenance of a healthy whole. In this sense, regenerative economics is also a humanist economics.
· Instead of believing a laissez-faire market system can somehow magically solve long-term systemic challenges if only we can improve market efficiency and transparency, regenerative actors understand that markets, while central, are but one of a number of institutions involved in systemic health – others include governments, community institutions, educational institutions, commons trusts, non-profits, foundations, etc. Markets address certain problems well but not others. For example, since climate change and other threats occur over multiple scales and across the very long run, they demand governance and tools like incentives and feedback loops that act as guard rails and, where necessary, limits – i.e. quotas, a tool often considered off limits in conventional economics, that coordinate across scales and focus on the long term.
· Instead of pursuing greater government regulation as the only realistic solution to markets running amok, policy makers in a regenerative economy understand the importance of designing incentive-driven, self-regulating systems that embody the critical balance between the freedom upon which innovation thrives and the constraints necessary for effective collaborative communities to work.
· Instead of assuming that maximum societal health comes from maximizing shareholder profits alone, or that it can be achieved through the imposition of a top down one-size-fits-all welfare state, regenerative actors realize that systemic health can only be maintained when all stakeholders who contribute to the profit of an enterprise are empowered to negotiate just compensation on their behalf. Instead of accepting the inevitability of extreme concentrations of financial wealth, or advocating for wealth to be redistributed equally, they know some inequality is natural but also that balance is essential to systemic health and that robust circulation of wealth throughout all levels of the economy is critical. Instead of believing increasing efficiency and cutting costs are always good, they understand that resilience is equally necessary, and vitality requires balancing numerous equally critical but competing factors.
· Instead of seeing industrialism as either the ultimate form of economy or a product of misguided arrogance and greed that is destroying the planet, the regenerative actors see it as a crossroads along the evolutionary path that our self-organizing human creativity is traveling. Instead of suffocating in a flawed economic ideology, we must now trust in our creative human qualities to learn, improve, and acquire a new, more exact understanding of the regenerative nature of healthy economies. No, Mr Fukuyama, we have not yet achieved “the end of history”!59 Rather, we must confront our collective misunderstandings and ignorance with humility, objectivity and integrity. And continue on our upward evolutionary journey.
Achieving the successful transition toward a regenerative economic model, however, first requires a difficult departure from our 400-year-old reductionist approach to problem-solving that dates back to the scientific revolution. Modern economic theory and the practice of finance especially, now the dominant global frameworks around which modern civilization is organized, remain dangerously grounded in an outdated mechanistic world view that fails to reflect the reality of the more accurate living-systems world view, increasingly being embraced by physical and social scientists across multiple disciplines.60
Neoliberal economics assumes the primacy of the individual as a ‘utility maximizing’ machine – homo-economicus – and that broad-based prosperity can be achieved through the operations of unfettered, free markets that efficiently allocate resources, presumably maximizing what economists call the ‘utility’ of the participants in the system. Its mental model contains a number of assumptions, which are, in fact, all fatally flawed. These unquestioned beliefs include that the economy is separate from the biosphere and the environment in violation of the principle of holism, and that maximizing profits for shareholders, growing GDP, and optimizing consumer material utility (more stuff) all lead to prosperity. Multiple studies have demonstrated that this is simply wrong,61 and that we need a much more refined understanding of what leads to a flourishing civilization.
Despite a growing awareness of the inadequacies of conventional economics, especially after the financial crisis of 2008 which is understood as an abject failure for economic theory and accepted practices of financial management, most leading business schools still teach the idea that optimizing near-term ‘shareholder value’ should be a firm’s primary goal. This idea which refuses to die poses a clear and present danger to the health of human communities and all life on Earth because it assumes the firm is separate from the greater whole of society, as well as from the biosphere upon whose life-supporting functions the firm, its employees, and its customers depend.
Similarly, most business schools still teach that Modern Portfolio Theory (MPT) remains the only useful framework to understand investment management, and in fact this framework remains the dominant theory still used by wealth management professionals. Yet we know that MPT is in reality a theory of speculation rather than investment, based on backward-looking data with unknown relevance to a profoundly different future we should expect, and it’s based on flawed statistics that assume a normal distribution of outcomes (i.e. no likelihood of 100 year storms that we experience happening every few years).
It is not hyperbole to suggest we are in search of a whole new theory of economics and finance, built on the solid foundation of how systems actually work, rather than flawed and unrealistic assumptions. The solution lies in transcending the problem through cognitive processes that go beyond the reductionist logic that has informed the way we have seen the world for nearly half a century in the Modern Age. This new way of reasoning requires us to step back and think in systems62 in order to understand what determines system health. It requires an inquiry into complexity science and holistic decision-making in order to grapple effectively with the wicked problems of our age.
To bring to scale the regenerative economy that is already emerging all around us if we only have eyes to see it,63 Sally Goerner suggests that those pursuing a transition to a regenerative world must integrate elements of head, heart, and hands – three factors that move human beings. These translate into:
· a rigorous understanding of what makes human networks healthy;
· a unifying, noble purpose that inspires people to serve a cause greater than themselves; and,
· the ability to turn noble ideas and purpose into effective practical action.
Those able to take up these responsibilities will need to help mobilize a significant effort to restore and regenerate our planet and our civilization, including a mobilization to regenerate the world’s carbon sinks – not just the world’s five billion hectares of grasslands, but also our oceans, forests, and peat bogs; we will need to reimagine products and services, business models, and supply chains to become more circular or ‘closed loop’, mimicking nature’s way. We will need entire local and regional economies, and the global economic system (itself a series of fractal wholes), to be redesigned using nature’s holistic design principles that we know lead to resiliency. At their core, such economies will be built up from healthy human networks in which we can all discover and express our unique essence, just as the health of a human body is built up from healthy cells and cellular networks.
Finance, in particular, is in for a period of fundamental re-examination following the financial system collapse of 2008, and this will reveal its confusion of means and ends. To begin with – and this is terribly challenging – the goal of compounding financial returns on a now massive and ever expanding stock of financial capital is a design principle that is fundamentally flawed when viewed over the long run.64
So where does all this leave investors?
I believe conscious investors, those of us committed to using our head, heart, and hands to move capital into alignment with not only our values, but the imperatives facing civilization at this moment in history, are uniquely positioned to catalyze and lead the transition of our economy from the current extractive and degenerative model to a regenerative and thus truly sustainable model that is the necessary foundation of a prosperous future.
Indeed, this is more than a choice. I believe those with the privilege of capital to invest, including individuals directing retirement portfolios and making home renovation decisions, and critically those who can influence large pools of capital that today are not in ‘right relationship’ with a harmonious and holistic understanding of true wealth and societal well-being, have an awesome responsibility to fulfil that will define our legacy for generations to come. The possibility for a regenerative civilization, or not, and the consequent very real prospect of collapse into a degenerative new dark age, hangs in the balance.
The good news is that this shift is already underway. So called ‘impact investment’ is now a well-established meme, even if practitioners don’t agree on what it means. Wall Street now references it as a new ‘asset class’ – reductionist and confused thinking I will not critique in detail in this short introduction. The point is, consciousness is shifting, particularly with the younger generations, and investment practice is following the shift. It’s far from perfect, more talk than action, confusion of purpose and definitions, inadequate metrics, and in my view, the practice is still trapped in our flawed modern portfolio (MPT) framework. But we are making huge progress from the days of my JPMorgan investment committee some 20 years ago when we were first debating whether it was possible to make responsible investments while placing the purpose ahead of financial returns, while expecting financial returns to be fine. In that case they were, but that certainly does not settle the debate.
Even institutional capital has awakened to the risks, if not the imperative, of a more holistic approach to investing, although to a large degree still constrained by the lens of ESG factors affecting public securities investing. This is a long way still from a more profound and essential rethinking of institutional ‘investment’ in contrast with securities speculation over various timeframes ranging from seconds to a few years. Private impact investors making direct investments in companies and projects must – and I believe will – inspire an institutional response that, first and foremost, acknowledges the primacy of reconnecting – ‘in right relationship’ – asset owners with the enterprises they then will exercise responsibility for, in keeping with the meaning of genuine ownership.
This will look something like Evergreen Direct Investing,65 more akin to an intentional Warren Buffett approach, than passive or active mutual funds utilizing an ESG lens alone. It will do away with excessive diversification, and an index orientation in favour of a real economy view, and a willing acceptance of the responsibility for influence over strategy that only an engaged owner can exercise. It is for sure the extreme opposite of intra-second algorithmic trading, which should not be considered investing at all. Speculation in all its variety, at the right scale – way less than we have today – has a constructive place in any modern financial system. But we must stop confusing it with investment.
Back at Grasslands, LLC where we are managing large landscapes of grasslands holistically, utilizing cattle, cowboys, portable electric fences, and no other inputs or capital equipment which are common in more industrial models of agriculture, we sought to buck conventional wisdom, which says overgrazing creates desertification. Our experience tells a different story. The symbiotic relationship we reproduced and the natural benefits to the land enabled us to pasture an even greater number of cattle per acre than conventional wisdom suggests, while at the same time actually enhancing the ecological health of the land, building resiliency. And because of the higher stocking rates, we increase the financial returns the land affords by a considerable amount in the process. That is the regenerative potential in action!
It was a pleasant outcome, of course, but it was just one more reinforcement of the benefits of a regenerative approach to investment. Something magical happens (there’s really no other word for it) when we tap into the unique creative and not yet seen regenerative potential that exists when systems operate according to nature’s laws. Through invoking the power of holistic thinking that encompasses complexity, we suddenly achieve a new understanding of what is possible.
Consider the internet, for example. Looked at through our regenerative lens, it is first and foremost about exponentially accelerating the ‘robust circulation’ of information, one of our regenerative principles. That innovation held potential and possibilities of search and social media, which manifested years after the internet was first invented, unlocking unprecedented regenerative potential for accelerated learning and community building. Understanding the conditions that enable us to unlock this creative regenerative potential, thereby mimicking the abundance found in the natural world, is the key challenge to transforming our economics.
Conscious investors, with the activating energy that real investment decisions represent, have the opportunity, and awesome responsibility, to invest wisely, and in doing so, literally change the world. In the 21st century, such wisdom means investing with regenerative intention, in all our endeavours not just with some modest “asset allocation in our portfolios” as the old thinking might suggest. The eight principles of regenerative economies described above can serve as a guide. The ‘truth’ of course lies deep within each and every one of us if we allow ourselves to listen.
About John Fullerton
John Fullerton is the founder and president of Capital Institute, a non-partisan organization working to create a more just and sustainable way of living on earth through the implementation of a Regenerative Economy. After spending years immersed in the sustainability challenge of our age following his Wall Street career, John is now a globally-recognized thought leader in the New Economy space. The architect of the concept of Regenerative Capitalism, John is the author of Regenerative Capitalism: How Universal Principles and Patterns Will Shape the New Economy and the widely-syndicated Future of Finance blog. A Fellow of Toniic, the global impact investment network, he is also a recognized impact investment leader and practitioner as the principal of Level 3 Capital Advisors, LLC.
Prior to Capital Institute, John was a managing director at JPMorgan, where he worked for 18 years before walking away from Wall Street in 2001. At Morgan, he managed various capital markets businesses around the globe and then ran the investment arm of Lab Morgan. He was JPMorgan’s representative on the Long Term Capital Management Oversight Committee that managed the multi-billion dollar bailout of the failed hedge fund that threatened the financial system in 1997.
John is a co-founder and director of Grasslands, LLC, a director of New Day Farms and the Savory Institute, and a member of the Club of Rome.
45 All investment has impact, both positive and negative. I have therefore always had an issue with the concept of ‘impact investment’ and it is most certainly not an ‘asset class’ despite this latest fashion on Wall Street.
46 J. Smuts, Holism and Evolution (1926).
47 J. Fullerton, ‘Regenerative Capitalism: How Universal Principles and Patterns Will Shape the New Economy’ (2015).
48 J. Fullerton, ‘The Relevance of Schumacher in the 21st Century’ (2008).
49 www.grasslands-llc.com.
50 www.savory.global.
51 Nutrient dense ‘superfood’ is way beyond ‘organic’, which simply means ‘not poisonous’. Holistic thinking reveals an understanding of the essential relationship between rich soil and nutritious food, something totally missed by the recent growth in ‘soil free’ hydroponics. Just like the well-intentioned ‘green revolution’, unintended consequences, in this case the continued deterioration of human health, await if we don’t learn to think holistically.
52 G. Turner, ‘Is Global Collapse Imminent?’, MSSI Research Paper No. 4, Melbourne Sustainable Society Institute, The University of Melbourne (2014).
53 Pope Francis, Laudato Si: On Care for Our Common Home (2015).
54 The Prince of Wales, Harmony: A New Way of Looking at Our World (2010).
55 JPMorgan’s balance sheet just prior to the merger with Chase Manhattan in 2001 was approximately $300 million, a scale senior management felt was sufficient to serve the clients’ needs. Today the balance sheet of JPMorgan exceeds a hard to comprehend $2 trillion. I left the firm in 2001 soon after the merger with Chase when it became clear that the ‘old Morgan’ I grew up in was gone forever.
56 ‘Ford Foundation Is An Unlikely Convert to Impact Investing’, New York Times (April 13, 2017). “When we first started talking about this nine months ago, I was very wary,” Peter Nadosy (Ford Foundation Investment Committee Chair) told me. “I’m on ten different boards and investment committees. It’s deeply ingrained that your goal is to maximize returns, because that’s how performance is measured.”
57 Rockstrom, et al, ‘Planetary Boundaries’, Stockholm Resilience Center.
58 S. Goerner, ‘Regenerative Development: The Art and Science of Creating Durably Vibrant Human Networks’, Capital Institute (2014).
59 In his 1992 bestseller, The End of History and the Last Man, scholar Francis Fukuyama argued that the arrival of the post-cold war period and the advent of Western liberal democracy, with its embrace of neoliberal economics, signaled the endpoint of humanity’s sociocultural evolution and final form of political economy. Indeed, Fukuyama argued, it signaled the end of history itself. In my Capital Institute 2016 Annual Letter, I argue nothing could be farther from the truth, thank goodness, than this hubristic and ignorant (of how the entire universe is in fact an evolutionary process itself at its core) perspective.
60 S. Goerner, After the Clockwork Universe (Floris Books, 2001); and S. Kauffman, Reinventing the Sacred: A New View of Science, Reason, and Religion (Basic Books, 2010).
61 S. Wallis, ‘Five measures of growth that are better than GDP’, www.weforum.org (April 19, 2016).
62 D. Meadows, Thinking in Systems: A Primer (2008).
63 ‘Field Guide to Investing in A Regenerative Economy’, Capital Institute.
64 J. Fullerton, ‘Limits to Investment: Finance in the Anthropocene’.
65 www.capitalinstitute.org/our-projects/evergreen-direct-investing.