By Thomas Croft
from: Green Money Journal
The Gulf Oil spill disaster riveted the attention of the world over the Spring and Summer. Unfortunately, this accident was just one in April alone that caused 49 worker deaths in drilling rigs, mines and refineries. And we watched for days the real environmental destruction and profound harm to the people and the coastal economies in the American gulf south. The death and destruction were just the tip of the iceberg.Pension fund beneficiaries from Britain and elsewhere also learned that their funds had suffered severe losses due to BP's subsequent stock swoon. The British Parliament demanded that investors pay more attention to the environmental, social and governance (ESG) risks in their investment decisions, a charge that could have been a blanket warning to investors in hundreds of bad banks and poorly managed companies this last half-decade. These firms were behind the market melt-down and Great Recession, costing financial losses to millions of people, in the trillions of dollars in household and savings assets. When you consider all the bad economic news—on top of the fraud and malfeasance charges leveled against Wall Street (and in London) these last two years—it's clear that we're not out of trouble yet. We need a new deal. I'll come back to that. But first, more about the money managers.
An Inside Bank Job (by the Bankers?)
Goldman Sachs and other gigantic banks and investment houses have operated with abandon in the last few years. After being charged with fraud by the SEC for bilking investors (including pension funds) out of $1 billion, Goldman—the poster child for investor deception—settled with the SEC for $1/2 billion. Citibank just settled for similar reasons (ill-advised securitizations of sub-prime mortgages). Goldman's and Citi's settlements with the SEC don't lessen the reality that these behemoth corporations have caused grave damage to the world.
Wall Street, in fact, poured our money into sub-prime mortgages and real estate bubbles, short-term hedge funds and mega-leveraged buyout firms, and other risky bets. Wall Street, in essence, used our capital to destroy good companies and obliterate a good chunk of the housing market.
BP, Goldman and many of the blue-chip corporations had long boasted of their commitments to responsible investments and "green," sustainable business practices. Their leaders have stood on world stages and mouthed a litany of sweet-sounding, sustainable business nostrums. What is sustainable about throwing the global economy into a Great Recession, dumping millions of people into poverty and destroying a region of the U.S.?
Some have called the descent into widespread financial speculation (and worse) the "financialization of the economy." Thorstein Veblen, an immigrant Norwegian sociologist who anticipated the first depression, called it "commercial sabotage." Let's hope the new financial reforms can prevent future damage of this scale. It's hard to prevent inside bank jobs when the CEO's are the culprit.
Are these the kinds of companies we want in our communities? Is this how we want investment managers to manage our assets? No. Whether a steelworker or retiree, teacher or student, insurance holder or bank depositor, or everyday office workers, we should all want our savings and assets—our money—to be invested responsibly, sanely and sustainably for the long-term.
Responsible investing is not just a moral choice, but a very practical way to protect our savings and retirement assets and communities. Wall Street snubbed this movement for years, but many of Wall Street's gilded corporate names—run by the smartest men in the room—are now history.
There is a better, alternative path that can restore real prosperity. Our money – the $24 trillion held in retirement accounts and mutual funds, university and foundation endowments and college savings funds, insurance companies and banks – can be responsibly invested in a way that yields good returns but also sustainable benefits to workers and communities.
My book, Up from Wall Street: The Responsible Investment Alternative (Cosimo, 2009) makes the case that there are strategic and socially responsible investment paths that have the capacity to rebuild our economy and infrastructure, reinvigorate our cities, and create the highly anticipated green jobs of the future. Up from Wall Street shows us both how to harness and unleash the power of "our money"—the assets in retirement accounts and mutual funds, insurance companies, university, hospital and foundation endowments and college savings funds—and to move forward towards a future of healthy, sustainable returns on our investment.
Up was written to educate everyday people to demand that policy makers and our capital stewards adopt not just the credo but the practice of responsible investments. To show them how it's done, my colleague Dr. Teresa Ghilarducci (New School for Social Research) and I tracked the performance of a baker's dozen of responsible investment managers. Most of the fund managers (with a modest $30-35 billion in pension funds and other assets), reported that their funds basically met or bested their respective indexes during the period studied.
I traveled to towns and cities all over North America in the last few years. I came to know many of these remarkable fund managers in the U.S. and Canada and visited many of the great firms and projects that they backed. And there I met union workers and company leaders on the job, working in cooperative workplaces, yielding high road jobs and broad social and environmental benefits. Local residents and businesses in these communities welcomed and supported these companies (instead of fearing them). And many of the investments blazed new trails in the innovative green economy.
Who are these responsible investors, and what have they done differently? Among the examples of successful alternative pension investments in the book:
* The MEPT Fund rebuilt a burned and abandoned hospital on the north tip of Roosevelt Island, New York, and converted it into a green housing community with 500 units, plus a daycare center and essential amenities. Called "The Octagon," this remarkable green construction project—built all-union—won New York City's Green Apple Award for solar roof panels and renewable advances (and great livable amenities).
* The KPS Special Situations Fund restructured a bankrupt transportation company with factories in towns like St. Cloud and Crookston, Minnesota, and Winnipeg, Manitoba. The investment at New Flyer Industries saved 1,800 union jobs; these workers design and manufacture energy-efficient and hybrid transit buses and parts for cities and institutions across North America.
* The GrowthWorks Funds in British Columbia invested in a company called Xantrex, which pioneered new inverters and chargers for wind and solar energy systems. This remarkable VC fund is owned by 50,000 workers in BC, where the fund is headquartered. The firm, with 500 employees, has locations in BC but also hard-hit areas of California, Washington State and Indiana.
* The GESD Fund rebuilt a part of the historic Fisherman's Wharf area in San Francisco, and provided dozens of good union jobs and benefits for local residents, by creating a 26,000 square-foot Boudin Sourdough Bakery, Bistro and Café. The project created a demonstration bakery and Baker's Hall, a shopping destination.
In a companion report that I produced for the International Trade Union Confederation (ITUC), I learned that workers' capital is being invested in tremendously innovative (and compassionate) ways across all continents. In Australia, workers' capital funds own the largest wind and water utility company in the nation. In Europe, pension funds are investing in giant multi-national climate change pools. In South Africa, responsible pension fund managers are helping build new infrastructure, rebuild townships and are also leading an effort to share the ownership of foreign-held corporations by "empowerment transactions" that increase black ownership. This is a path toward sustainability.
A Green New Deal
We still need the equivalent of a New Deal to overcome what has become a blue-collar depression in America. How would we create this Next New Deal? There's actually a coalition that's thinking about this question. We want to see more stimulus funds, national investment and infrastructure banks, major jobs programs and regional industry sector innovations. But it should also be a Green New Deal.
Yes, there are huge stimulus grants and incentives for clean tech investments. But, some developers have received grants and are taking the manufacturing for U.S. projects off-shore. There's great promise in the hoped-for green jobs boom, but if we don't make the clean economy products here, America will lose out to other countries. So, how do we build wind, solar, efficient transportation and green building products in American factories—and make sure that workers' jobs are high-road jobs, with good benefits?
When Pennsylvania suffered the recession of 2001-02, the Rendell Administration worked hard to both bring back manufacturing and also launch a new generation of renewable energy industries. In a sense, Pennsylvania began integrating its manufacturing jobs base with the new green economy: * The Gamesa Corporation, the third largest wind company in the world, built two factories in PA due to a manufacturing infrastructure, skilled workers and portfolio standard (creating 800 Steelworker jobs).
* Pittsburgh also became a leading city in the construction of green buildings, and created a green manufacturing products supply network.
But due to the recession and other reasons, there are capital gaps in project financing for wind and solar farms; new wind financing projects dropped precipitously in recent quarters. We need, besides government action, new investment vehicles. Could a small portion of America's pension funds—with prudent guarantees from the federal government—help fill this capital gap?
It is within the context of a green new deal that workers' capital, with the right guarantees and protections, could step up and make a difference. We are currently supporting the efforts of worker-friendly investment funds (highlighted in my book) to structure new energy project finance funds that will provide efficient long-term financing (often using DOE's Energy's Loan Guarantee Program). One such responsible fund considering this tack is the NewTower Renewable Energy Trust (NRET), which will primarily be capitalized by union pension funds.
The next step is to connect responsible investors to responsible wind and alternative energy companies that might be in search of long-term, patient capital. If workers' capital can provide part of the financing for new wind and solar farms, we would be combating climate change while creating thousands of high quality US jobs. With the DOE's loan guarantees (and other incentives), pension funds should have some security in investing in NRET and other new vehicles that can provide alt energy project financing. And if investments can return at least 8% over the long-term (as NRET is projecting), this "green annuity" would essentially match the actuarial needs of the pension funds. With good green jobs, renewable energy and good returns, we would be creating a virtuous cycle.
So, what if America converted our existing industries to become suppliers to the green economy, building windmills, solar systems, efficient vehicles and fast trains, green buildings? And we re-trained dislocated workers and our kids to become the pioneers of this new economy? And we invested workers' capital (prudently) in the new green economy? And what if we, the people, became the capital stewards of our future?
We can re-claim our pension funds and other assets and rebuild and re-shape this economy. To do that, we must remind investment managers and fiduciaries that markets serve society and not the other way around.
If we walked down this path, we would see the beginnings of a real new deal…a green new deal.
Let's call it the Next New Deal.