Moving America Forward

How Building Social Good Can Reduce Market Volatility

June 5, 2015
How Building Social Good Can Reduce Market Volatility
Tomicah Tillemann speaks during an event with U.N. Secretary General Ban Ki-Moon and World Bank President Jim Kim at the World Bank's spring meetings.
“These are the individuals doing the most important work on the planet... yet, it’s difficult or impossible for them to get access to the resources they need.”

Twenty-five trillion dollars. That’s the mind-boggling amount, in assets, controlled by pension funds, philanthropic foundations and sovereign wealth funds worldwide. For decades, that money has been invested in guns, oil, cigarettes and soda — big moneymakers that often detracted from the public good.

A new theory being discussed among investors, however, suggests that funds could make a bigger profit over the long haul by redirecting a small portion as investments in nonprofits or social entrepreneurs. Known as the Progress Pledge, the idea isn’t derived from the traditional arguments that, morally, corporations should be socially responsible; instead, the theory claims that the investment will reduce conflict globally and thus, volatility on the financial markets — providing a steadier and more profitable return from the entire market over decades. It’s not only the right thing for wealth managers to do, the argument goes, it’s their fiduciary responsibility to do so.

“When the world does well, asset managers do well. When the world does badly, their assets do badly,” says Tomicah Tillemann, senior fellow at the New America Foundation who’s pioneering the pledge. “It’s a small slice of $25 trillion, but the efforts by social entrepreneurs and civil society leaders will address the root causes of volatility and generate a lot more money over the lifespan of their investments.”

The Progress Pledge is part of the Bretton Woods II initiative (a reference to the 1944 pact that funded reconstruction after World War II and created the International Monetary Fund) by New America and has three main components. The first is the commitment of 1 percent (of assets for funds or of earnings for traditional corporations) to the cause. The money can go to an impact investment (think: Defy Ventures backing entrepreneurs with criminal histories), infrastructure enhancement or a civil organization. Secondly, money can only flow to countries that meet basic standards of “governance, accountability and citizen engagement,” encouraging those who lack civic institutions to catch up. Lastly, those who sign up will lobby for regulatory reform to remove red tape and streamline investments.

You see an example of the pledge’s possibilities in the recent Ebola outbreak in West Africa, Tillemann points out. If a pension fund for airline employees like United or American had invested a sliver of their assets in medical care for underserved regions, a few cases of disease may never have worsened into a crisis. Airline travel would have remained at all-time highs, unaffected by fear of the deadly illness, and stocks would have likely continued on an upward trajectory.

“The Progress Pledge is really about changing the mindset,” Tillemann says. “Long-term investors need to think beyond simply assembling a basket of individual investments and instead try to create an environment in which their investments mature and minimize risk.”

The idea for the Progress Pledge first coalesced at an event in Boston last year. Tillemann, a former senior advisor to secretaries of state Hillary Clinton and John Kerry, was giving a speech about the difficulty of finding capital to fund socially minded organizations. “It’s a little discouraging,” he recalls saying. “These are the individuals doing the most important work on the planet, solving the biggest challenges facing humanity as a whole. And yet, it’s difficult or impossible for them to get access to the resources they need in order to scale.”

After the talk, Dan DiBartolomeo, president of Northfield, a firm that specializes in risk modeling of global markets, approached Tillemann with an idea. “If you really want to get engagement on this issue, you might want to take an angle where you argue that there’s actually a benefit to doing this,” DiBartolomeo remembers saying.

As with many a life-changing idea, the Progress Pledge unfolded over drinks, late into the night. At a hotel bar nearby, DiBartolomeo sketched out a rough calculation on cocktail napkins. Markets generally promise an average return of 8 percent annually, but the actual dollar amount three decades from now depends on how drastic the booms and busts are in between. An investment that sees years with 30 percent gains mixed with 10 percent losses will earn less than an investment with consistent returns year after year. A $1 investment in the former will earn you only $18 over 50 years while the latter will rack up close to $46 in profit over the same period.

Because funds like California’s $304 billion pension system or the $41 billion Bill and Melinda Gates Foundation are so focused on distant, multi-decade time horizons and are so large and diversified, any fluctuation in the market is worth millions. The question of exactly how much, however, is currently being studied by a team of researchers from The Wharton School of the University of Pennsylvania and Yale University. They’re digging up historical examples of global investment, and then they’ll map out a predictive model for the future.

Asset managers who sign the pledge next year will invest a penny for every dollar. From that small amount, if all goes according to plan, their funds will profit, nonprofits will take their mission to scale, and we will all end up as stockholders in a better future.