Transformative funds:
a new form of ethical investment 
(If I managed Australian Ethical’s $120m - Investments that transform the economy and society)
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If I had the job of investing Australian Ethical’s $120m¹ under management I would try to deploy it so that Australian Ethical became a key financial player, perhaps the key player, in making investments that catalyse the emergence of a progressive and sustainable triple bottom line economy. Before deciding exactly how to invest that $120m I would need to think some more about what Australian Ethical hopes to achieve in the world.

Australian Ethical has had a leading role in building up ethical investment in Australia - from just a warm, fuzzy fringe idea to the point where it is operating on a commercially meaningful scale. Having proven that ethical investment is a viable business proposition, mainstream financial institutions, in follower mode, are now entering the market.

So what should Australian Ethical do? It could resign itself to being squeezed to the point where it became a small niche player within the ethical investment market or it could aim to continue to hold a large slice of the market. I think there are good reasons to try to hold a significant share.

The notion of ethical investment has already undergone one paradigm shift. Early on, most ethical funds simply screened out investments that people objected to (eg. armaments, tobacco, exploiters of child labour.). Then some ethical finance organisations like Australian Ethical realised that they could actively seek out investments that would make a positive contribution to society (eg. alternative energy generators, pollution control and recycling companies, firms with family friendly pro-workforce strategies). This switch in strategy, from a negative to a positive orientation, can go further - and be the basis for a second big paradigm shift - the development of new transformative areas of investment.

Australian Ethical could pioneer the creation of investment funds that were not just positive in a general sense but that were actively catalytic. These funds would be structured to maximise the transformation of the economy and society - so that it becomes environmentally and socially sustainable and delivers a decent standard of living for all - and so that these goals are achieved as soon as possible.

Investments would be transformative if they:

• helped identify what is needed for a rapid transition to a sustainable high performance triple bottom line economy
• pioneered dramatically new techniques, products, technologies, knowledge bases, markets etc.
• enabled the widespread use of substantially superior techniques, products and technologies
• acted as a catalyst to stir others into significant action.

In the area of environmental sustainability, transformative investments could include:

• the production of hypercars in Australia and/or production of hypercar components for global sale,
• large scale installation of wind and wave-power farms,
• research and advocacy for the adoption of an ecotax regime including a significant carbon tax,
• urban village development (car free),
• industrial ecology-based industry parks,
• business education programs to support closed-cycle production,
• radical dematerialisation (factor 10 and beyond),
• sustainability-promotion as a corporate strategic orientation,
• developments and technologies that would enable the current supply of pine in Australia to substitute for virtually all uses of timbers from native forests in Australia and, in the case of imports, from overseas;
• (as a secondary priority to the previous item,) ecologically sound timber plantations and agroforestry operations - to supply a range of wood needs;
• internet shopping,
• user friendly paperless office technology eg. electronic paper, etc.
• selling products as services even where they involve the use of materials or equipment,
• bio-mimicry technologies (using low energy, low temperature, low toxicity chemistry),
• technologies for the local sourcing of energy and water,
• publishing/ conferencing/ networking / broadcasting about the transformation of the economy,
• R&D on the transformation of the economy,
• brokering and advocacy to promote the transformation of the economy,
• policy work to underpin leading-edge government programs for the creation of a triple bottom line economy,
• development of the project generation process (as opposed to the project assessment process).

These sorts of ideas can be generated in many different ways but a useful technique is to take a challenging stretch goal and try to figure how it could be met in practice eg. zero waste or zero fossil fuel use. See Green Innovations’ web site for a list of such goals and high order strategies:

http://www.green-innovations.asn.au/ecolsust.htm#direction

Should Australian Ethical put all of its money into transformative investments?

Transformative investments represent the highest quality (highest leverage) ethical investments possible from society’s perspective. So if Australian Ethical could find enough lucrative transformative placements that could absorb all of its funds then that would be fine. But the chances are that this will not be the case for several reasons. Early in the piece, Australian Ethical may have difficulty finding a sufficient number of transformative projects in which to invest because the networks/knowledge/skills to find them may take a while to build up and because there may not, as yet, be a large number of suitable transformative investments out there. And it’s possible that the inflow of funds to Australian Ethical will grow faster than its ability to place money with transformative projects. Furthermore some critically important transformative investment opportunities may not yield high financial returns. I think that Australian Ethical has to maintain a competitive level of financial performance overall and especially in its high-financial-performance funds - otherwise competitors will overtake it. So if there are not enough high financial returns to be gained from transformative investments then Australian Ethical will have to supplement the transformative placements with ones that do have high financial returns even if they are not transformationally spectacular.

Provided Australian Ethical can grow the transformative funds rapidly enough to match the emerging opportunities for the transformation of the economy/society, then the mixed-fund strategy ("transformative" plus "positive-but-not-transformative" funds) delivers win-win results for society. Furthermore, until the transformative market grows to a significant size and until the organisation has developed overwhelming strength in that market segment, Australian Ethical could lose scale in the overall ethical market, and hence market recognition and influence, if it totally vacates the "positive-but-not-transformative" sphere. In the longer run however, transformational investments should actually start to displace positive-but-not-transformative investments on the ground.

For Australian Ethical to become a key player in catalysing the emergence of a progressive and sustainable economy in the three key triple bottom line areas (environmental, social and economic) it would need to have a portfolio of investments that spanned across:

• zero to low direct financial return from investments in market development
• high risk, small scale investments in concept development
• high risk, small to moderate investments in R&D
• high risk, small to moderate investments in venture establishment
• moderate risk, large scale investment in venture scale up & me-too investments
• low risk, medium to large scale investment in maturing transformative markets

This suggests that Australian Ethical will need to explore a range of new investment vehicles and partnerships, especially to make potentially higher risk investments manageable and to enable investments to go ahead in the low return exploratory/market shaping and breakthrough areas (market development). Partnerships with philanthropic trusts is one avenue to explore in relation to projects with high transformative impact but low or zero private return.

To embark on a journey to become a major transformative investor Australian Ethical will need to develop new and deep knowledge capabilities.

The wider significance of transformative funds:
the economic planning agencies of the new industrial revolution?

Governments and private firms that depend on the approval of the electorate or finance markets cannot easily take on transformative leadership until the need is glaringly obvious - such as during a war or after a natural disaster. So we need vehicles for change that can be highly strategic, can avoid watering down their objectives and yet can mobilise very significant resources to catalyse change through both ideas and concrete action.

Imagine if we had our best 'new industrial revolution minds' running the strategy for transformative ethical investment funds - some global and many operating at regional and local levels - with billions of dollars at their disposal.

Endnotes:

1. As of 26 October 2003, Australian Ethical Investment Limited has about $250 million under management.

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