What’s the Role of Public Equity Investing in Driving Systemic Change?

The challenge of designing synergistic investment portfolios across private and public markets

Over the past 5 years, the stocks of Tesla Inc. have increased a staggering 2,139%. Had you bought the stock back then, you would have made a lot of money. But would your investment have also contributed directly to deep, structural change in the real economy?
  • Take a real-economy system — a city, a landscape, a food supply chain — and articulate a transformation intent (“mission”).
  • Map the system, hypothesize transition pathways and transformation strategies, and identify sensitive intervention points.
  • Compose multi-asset-class portfolios of investments that generate combinatorial effects (i.e., strategic synergies) amongst each other.
  • Nest those investment portfolios within a broader systems intervention approach that engages “non-investable” levers of change (e.g. policy).
  • Run learning and sensemaking protocols to extract insights and generate strategic intelligence for follow-on investments.
The essence of the TranCap approach: strategic investment portfolios composed for a specific systems transformation challenge, nested within a broader systems intervention approach, and augmented by a learning and sensemaking layer.
  1. No additionality is generated when an investor trades shares in a company through a stock exchange. This investor just buys the shares from (or sells them to) some other investor, with zero consequences for what’s happening in the real economy.
  2. The causal chain between making an investment and generating impact in society is indeed long and diffuse. Let’s say someone buys shares in an IPO or participates in a capital raise: How long will it take for that capital to unleash real-economy effects, and how can the investor control that?
  3. Public equities investing is the quintessential single-asset investing. This means that it’s difficult to generate combinatorial effects with other assets in the portfolio and to work through the company to engage other levers of change (e.g. affect policy through the company’s lobbying practice). Investors can do either of these only if they can directly influence a company’s business strategy and conduct, and for that to be possible investors must either own so much of a company as to get board representation (e.g. Berkshire Hathaway) or make a material difference in a shareholder engagement campaign (e.g. Engine No 1).
  • Shareholder engagement is, relatively speaking, an effective way of effecting change but (i) relies on investors having a critical degree of influence and (ii) is more likely to trigger incremental improvements rather than transformative change.
  • Capital allocation decisions are likely to only generate additional impact when they affect companies that face capital constraints, which tends to be the case for young and risky companies (e.g., start-ups, which trade in private markets) but not for publicly listed companies.
  • As for indirect approaches — stigmatization, demonstration, endorsement, and benchmarking — there is too little empirical data to draw dependable conclusions, “so that the extent of investor impact remains a matter for speculation”.

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I write to inform, inspire, and trigger new strategies for tackling climate change.

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Dominic Hofstetter

I write to inform, inspire, and trigger new strategies for tackling climate change.