Questions from our Substack posts answered
Keep the questions and challenges coming
While I’m working on future posts, I thought to summarize some of the recent questions and comments brought up by readers about the fiduciary duty initiative at Bank of Nature. As you know, we wade into the nexus of pension funds, fiduciary duty, neoliberal economics and climate finance as a way of defining The Untaken Safer Alternative toward a climate future "worth retiring into." It’s likely unfamiliar territory to many who have taken a chance to engage with our material. So, thank you for reading along. As always, I am happy to field more questions and comments, so send them along. Thanks! ian@bankofnature.eco
Prompted by our Planet: Critical interview, our Senate Bill 1644 and a post about the purchasing scale of fiduciary money, reader
asked:Q: Why would pension fund managers necessarily choose climate-friendly businesses to invest in with the change of [fiduciary] law? Are there not neutral investments that would also qualify?
Pensions are under no obligation to finance anything to do with climate — nor enterprises that might be “future benign”. Our argument is that it's within the fiduciary's purview to consider a financing in climate because it benefits their end users — who we call pension promisees. It's important that people get that we are not telling fiduciaries what to do. Rather, we are alerting fiduciaries that their financing choices — using money that also has non-financial obligations — are due for better scrutiny
We ask: Can fiduciaries defend in law their compliance with fiduciary duty in a confrontation with their youngest beneficiaries owed a dignified retirement 30 years from now?
I think, “No” — but we’re working on a test of that. Fiduciaries have the scale to negotiate better and to do better. We think that means something other than stock-picking on Wall Street, growth, profit motive and other neoliberal economic linchpins. In a fiduciary economy, shaped by money vividly pinned to the future, we expect to see financings of enterprises that generate sufficient cash flows over the long-term to keep the pension promise viable, both financially and environmentally.
We have introduced the idea of "fiduciary-grade" enterprise that ticks all the boxes. What those opportunities are depends on how we package financings to do the job we ask. Also, how those fiduciary financings happen — which I think is unlikely to be Wall Street, but we will find out — is also TBD waiting for a “fiduciary economy” to unfold.
Q: The sort of investments that are needed for meeting climate objectives seem to be higher risk than such funds would normally go for, particularly if they were startups or involved novel concepts such as the buying of multi-billion oil companies to redirect their business.
All investments carry risk. A so-called green business is not automatically more risky than a toxic business. Each enterprise has its specific risks and each has a way of rewarding the risk takers — case by case. In our argrument, the risk doesn’t accrue to the future.
BTW, what are the definitions of risk and loss when it comes to a pension fund? It's more complicated than negative financial returns.
There are many great ideas left on the white board because pensions choose to work within the status quo rather than curate a future for beneficiaries. That choice also carries risk not acknowledged today.
Q: Assuming you succeed in Mass., how do you see this scaling up to reach the level of investment needed to make a real difference globally?
We will succeed in MA. Maybe not this go around, but the door is open. And, we are getting attention from other jurisdictions.
When this bill was accepted in February 2023, the world became safer — not instantly, but the way was paved to scrutinize fiduciary duty and the behemoth, untapped financial might of public pensions.
At a minimum, the "writing is on the wall". Whatever traction we gain from our Bank of Nature efforts, opens the door to more people. My hope is that fiduciaries everywhere self-regulate — that they take on these ideas without the legal challenge. That would mean trillions for climate that already exist but just need to be pointed that way.
Reader
asked a series of questions, prompted by a post: Why is Bank of Nature talking fiduciairy duty?:Q: By shifting the interpretation of fiduciary duty to include these [fiduciary-grade] investments, won't there be an internal incompatibility created with the 'no net loss/preferably growth' requirements of the fund in terms of cash value?
Fiduciary duty in law is just fine. In our thinking, the pension promise, in particular, is a model for a social contract that could be a win for everyone. So, we’re not shifting fiduciary duty anywhere. We are addressing a gross misinterpretation of the law and its fall out.
So, we make the case that an internal incompatibility already exists, but in the mismatch of the law and practice. Fiduciary-grade enterprises would resolve that schism.
We argue that fiduciaries of defined benefits plans are doing only half the job when they focus solely on ROI without reckoning how that ROI accrues damage to the future. At their scale, as one of the largest aggregated players in the global economy, how fiduciaries earn ROI is relevant to everyone’s future. They control tens of trillions in money that has a duty, literally, to do no harm.
Q: Many, perhaps most, repair and restore projects and programs will be net costs on the fund because they are not designed to make an economic return, and in fact they will be operating quite rightly as a sort of debt repayment scheme to Nature.
I don't accept the idea that repairing nature as a business is an automatic "net cost" to a pension fund investor. There are plenty of nature-building enterprises uncapitalized because they don't fit a VC model of fast money and Wall Street bonanzas.
The fiduciary model is slow cash flow. We already have this model in the pension sector when the fiduciaries put money directly in real estate — like shopping malls or commercial buildings. That's steady cash flow returns over decades.
Pensions must make a return in order to fulfill the pension promise of financial security. So, even in our model, not every climate-friendly initiative will fit the fiduciary-grade criteria. Environmental initiatives that are running in the red likely won't qualify — but maybe they can make the business case for fiduciary success with time. The other opportunity for business is that fiduciary financiers work over longer time horizons.
How we repay our debt to nature is only partially addressed through a proper use of fiduciary money. Civil society will still have a role in nonprofit science, art, conservation, etc. that should continue (aided by fiduciary money) but it doesn’t need the unrealistic burden of the label "solution."
Q: Will the balancing out of fiduciary actions within a fund end up putting pressure on these ecological interventions to generate profit, or at least reduce costs to net zero?
Eco initiatives are already under pressure to generate profit. How many green entrepreneurs go to COP events to pitch investors? Our proposal requires a different set of deliverables to fiduciary financiers: a regular cashflow that meets an actuarial return and reckons with its future impacts. We say that's a sufficiency metric to meet minimum obligations. It's a different business model that may be, depending on the enterprise, easier to pitch than plain growth.
Q: This then starts to feel as if it is on the road to just designing new tradable asset classes under a Nature brand?
Reader also commented on Natural Asset Companies and their overlap with Bank of Nature.
"Trading asset classes" is status quo lingo for "securitization" — which is the default measure for financial success and reduces an enterprise to a share’s selling price. That's extractive and more than likely non-fiduciary for pensions in our proposal — but that's what's done in accepted fiduciary “best practice” and what we're trying to correct.
In trading ESG-rated stocks (that have a thin connection to fixing climate), investors are looking for capital gains by buying low and selling high. That's no different than an investor in BP.
NACs, we argue, may have a place but not as a climate-scale solution. Securitization of nature is a product of the same thinking that gave us ESG. Trading on share value is one strategy, but has it helped the eco-crisis? We're advocating a more direct route to engaging with "what's owed" to nature through stewardship.
Q: So, can the industry accept that part of its fully explicit fiduciary obligation will be at a net cost to its fund?
No. And, that’s not our pitch. Fiduciaries of public pension plans must generate a sufficient return to replenish its “corpus” dedicated to the financial security of people owed a dignified future.
There is this bias that enterprise that meets our fiduciary minimums somehow automatically drains cash value. What I hear in that assumption is the status quo defending itself against change. It's too easy for fiduciaries to defend their investments because they minimize hypothetical cash loss positions. We must include other types of loss.
As a general note to readers:
Bank of Nature was created around the question:
"Why is it not a cost of doing business to reinvest in nature?"
I've long wondered how we can accumulate negative externalities and damage to the future without a penalty (like, say, a climate crisis). KPMG, way back in 2012, estimated 41 cents of every dollar of earnings is "owed to nature" for the use of nature's resources. I think that sounds like a mortgage or rent in other lending contexts that come with terms and penalties. Apple, btw, still makes billions in net profit in this scenario.
Even if a company wanted to pay its debt to nature there is no mechanism to collect it and Bank of Nature was the concept for what we refer to as a “proxy for nature.” But, of course, no company is going to volunteer a nature tax without government pressure — and we know how that’s going to go.
It’s still a goal: The volume of money that could be directed at repairing nature, through a nature tax, is mind-bogglingly high even at a fraction of KPMG’s estimate. This nature payment also redefines corporate sustainability to mean what we want it to mean.
The fiduciary duty proposal was introduced to me (thanks,
) as an alternative way to fund a Bank of Nature that is a more likely and and reflects the urgency of the crisis. Also, if we're successful in revising fiduciary duty standards to be explicit about the role of fiduciary money in the global economy, it's not a voluntary/moral choice how they move money. It's legal.If I were a Chief Sustainability Officer with the CEO's ear in a business that relied on pension sector money for vital operations, I'd want to flag the possibility that the business might not qualify as an option for fiduciaries over the long term if the company doesn’t fit a fiduciary-grade enterprise profile. As CEO, you make changes, you find new investors, or you correct for the loss of financing. That strikes me as an incentive to think differently about what's acceptable.