This is an excerpted chapter from The Purpose of Capital: Elements of Impact, Financial Flows and Natural Being.
Please note: As is taught in business schools the world over, “The purpose of capital is to seek its highest and best use.”
What professors mean by the phrase “highest and best use” is that diﬀerent types of capital seek diﬀerent levels of ﬁnancial return in exchange for various levels of assumed risk and liquidity lock ups. Capital’s highest and best use is to seek that combination of highest ﬁnancial return and lowest assumption of risk possible to optimize ﬁnancial returns. The thinking is that ﬁxed income—debt, bonds and various forms of lending secured by an underlying asset and ﬁrst position in the event of bankruptcy—are understood to generate levels of lower ﬁnancial gain in exchange for lower levels of assumed risk exposure. Equities (public or private) carry greater risk and therefore will seek—and deserve—higher ﬁnancial return in exchange for that increased risk exposure. In creating a portfolio of investments, one deploys a certain amount of capital into various types of investment instruments across an array of asset classes to achieve the overall returns a portfolio needs to reach the investor’s goals, some investors being more or less risk averse than others in their pursuit of total ﬁnancial returns for any given portfolio.
All of it—the notion of capital, the metrics by which we divide and track the performance of that capital, and the measures by which we assess its volatility, risk, and ﬁnancial returns—is merely a conceptual framework upon which one set of actors has come to agree and with which we all must ﬁnally come to terms. In deﬁning parameters of ﬁnancial performance, we state capital seeks its highest and best use and in that way are asked to embrace a ﬁnancial faith that believes capital itself to be neutral; it is viewed as assuming no moral, social or other character. Capital is considered as existing within some Swiss neutrality until being released in pursuit of its own highest and best use as deﬁned by the asset owner or asset owner in collaboration with an advisor, but it does so outside of any consideration or assessment of social, ethical or probative value.
Folks in mainstream ﬁnance take this point very seriously. As previously discussed, I recall one conversation with a good colleague of mine who became downright incensed when I stated the run up in the public markets over the months since Trump’s inauguration to be “immoral” since it represented investors’ greed in anticipating a President who would roll back taxes, environmental protections, and pretty much everything else save defense spending. My friend became as emotional as I’d ever seen him, exclaiming, “Markets are amoral….They merely exist; they just are.”
Within this frame, capital is viewed as a vehicle, or again, more accurately, a transparent social construct we’ve created as a proxy for a reality we have built in our world; a fact based upon materialism expressed in economic terms to the exclusion of social or environmental considerations. As described elsewhere in this document, it is a reality understood to be rational, quantitative and objective, while review of social and ecological aspects of our world have traditionally been interpreted as subjective, qualitative and ﬂeeting—and therefore existing outside a logical framework of economics and ﬁnance—in some ways, outside of reason itself. (Give up ﬁnancial return for greater equity and justice? Why, that’s just crazy!! Who would leave money on the table for someone else to beneﬁt?? Who would do that??)
We have the hidden potential to invest in good or bad…but at any one time, we and what we come in contact with is empty and neutral regarding whether or not the object under observation becomes “good” or “bad.” One could say, therefore, at risk of sounding like an NRA commercial, capital is viewed as neutral—it is a tool, a vehicle through which we may pursue something or bring something about. Its relative quality, its essence, comes not from what it is but rather what it becomes as a result of our putting it into motion, our releasing its energy upon the world. Accordingly, our ad would be along the lines of: Capital Investing doesn’t kill people—people kill people!—or something like that?!
As has been said, it is not money that is evil, but rather the love of money. It is how we manage, deploy and utilize capital in the world that it manifests as good or bad or degrees in between. However, I would argue capital markets, in reﬂecting the character of those within them, do also assume that character (and therefore, if humanity is greedy, then capital markets are greedy—if immoral, they are then to my mind, immoral). The irony in all this is that of the well known phrase, “Markets function in response to one of two things: fear and greed.” Well, if that is true are not these both examples of human, social emotions? But for now let’s accept the premise that markets simply reﬂect the values and practices of those within them and move on to the next part of our discussion, that of the social foundations of capital.
It is within a conceptual framework, inside this intellectual boundary set of what we take for a collective reality, that we deﬁne what is true for us, in this time—that capital and by extension capital markets reﬂect the purpose we’re driving toward and how we will understand whether we have achieved that purpose. And we as a society recognize the use of capital as author and environmentalist Jerry Mander presents it:
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Our society is characterized by an inability to leave anything in nature alone. Every piece of land, every creature, every mineral in the oceans, every growing plant, every mountain, every inch of desert is examined for its potential contribution to commercial development and exploitation, and to the expansion of technological society. Even the essential building blocks of nature—the atom, the proton, the electron—are subject to commercial scrutiny. Where science can intervene, science does so; corporations then package the process and sell it.1
Many asset owners accept without question ﬁnancial performance, that which we seek to do with our wealth, as its fundamental purpose, as simply a question of preserving and generating greater amounts of itself. The purpose of capital is to grow exponentially over time and increase its value in the form of ﬁnancial wealth. To “win” is to generate more wealth whereas to “lose” is to reduce the amount of capital under our immediate control. We fear nothing more than society’s cold description of our selves or our progeny as having trod the well-worn path from “shirtsleeves to shirtsleeves in but three generations,” as the saying goes. The only measure of not only our capital but also our performance is the amount with which we began versus that with which we conclude our journey at life’s end or the greater overall economic value we generate in the course of a life. The purpose of money is to be applied to its preservation and growth; any other outcome is a shame and a disgraced result of our entrepreneurial inabilities or ﬁduciary failures. Within this mindset, the purpose of capital is to make more capital.
By extension, many impact investors, with their commitment to doing well and good, enter the arena of capital considerations with the understanding their investments must ﬁrst and foremost generate market rate, risk adjusted ﬁnancial returns, together with the creation of social and environmental value. Some embrace this goal to convince traditional, mainstream investors focused solely upon ﬁnancial performance that the pursuit of social value does not have to be at the expense of ﬁnancial return, because as just stated, to end with less capital than one started with is assumed to be failure. Others embrace this notion of doing well as a possible way of preventing the potential loss of their capital, viewing consideration of impact factors as a form of risk mitigation. These asset owners do not want to be the ones who lost the family fortune on their watch or may not trust their capacity to create other forms of value in the world and so hold fast to this notion of ﬁnancial return as the sole measure of their worldly worth or goal as ﬁduciary.
That said, one must still ask what the highest and best use of capital indeed is—its ultimate purpose and not that measured by ﬁnancial performance alone. If one does believe capital to be merely a value-neutral demonstration of ﬁnancial performance within an exclusively economic framework, then our inquiry should conclude and be done. With the pride of the Chicago School, Milton Friedman (and perhaps, Friedrich Hayek) beaming down upon them, the current and historic practices of asset owners, mainstream ﬁnancial advisors, fund managers and investment institutions may be celebrated and aﬃrmed, whilst any notion of social value as commensurate with monetary value rightly turned aside and, having been brieﬂy considered, now placed in a wholly subordinate position to the goal of maximizing ﬁnancial returns to asset owners of all stripe and nature.
However, if one accepts the idea that capital is itself a neutral substance, void of moral or social considerations, and if we take as valid the idea that capital only assumes the measure of social attention we are willing to assign it, then the phrase “the asset owner is the market” is, in fact, correct and each investor is free to deﬁne the character, ﬁnancial terms and any other parameters of capital as she sees ﬁt. The mainstream, institutional, Wall Street and Chicago School deﬁnitions are merely that—the descriptions of institutional and social lemmings driven to the edge by warped crowd wisdom, seeking to organize themselves to squelch consideration of social or environmental factors and squeeze such notions right out of any ﬁnancial deal. But if capital is neutral, we must embrace an understanding of the purpose of wealth as being whatever we see ﬁt to assign it, with us each free to reﬁne our deﬁnitions, boundaries, and parameters as we like.
Each age is also then free to deﬁne the purpose of capital, its highest and best use, as it prefers. And we must acknowledge it is in each age, culture, and nation, that such has been the case. The aberration rests not with the past, but the present for in the past the purpose of capital was in points of history and within certain communities broadly understood to be that of service to society, to family and, lastly, to self.
- Jerry Mander, In the Absence of the Sacred: The Failure of Technology and the Survival of the Indian Nations, Sierra Club Books: San Francisco CA, 1991