Preserving the American Dream Requires a Focus on the ‘Social’ of ESG Investing
Capitalism in America is broken. The gaps between rich and poor are deepening as the labor market struggles to remain innovative in the face of a changing global economic landscape. On the other hand, emerging market economies are growing in strength with a velocity never seen before. In the next decade, emerging market economies will account for roughly 70 percent of global GDP. This dramatic reordering of the economic landscape is driven by a rising middle class (with a slight hiccup during Covid-19), better technological connectivity, and increasing urbanization rates. The explosion of impact investing, inclusive capitalism and environmental, social, and governance (ESG) standards signifies the changing investor climate.
When it comes to environmental standards in ESG standards, the market has dramatically changed over the past two decades. The remarkable shift in climate technology is proof positive that the market has enough tools to transform itself. Two decades ago, clean energy technology was nowhere near as powerful as it is today. As the technology improved and the costs of clean energy fell, the market began pricing out fossil fuels. Half the world’s fossil fuel assets could be worthless by 2036 as the world moves to clean energy. The situation recalls the famous Hemingway quote that change happens gradually and then suddenly. When the market has a material interest to change, it will.
It’s not just environmental standards. A new global middle class is taking shape as investors swoon the millions of people joining the formal financial, health, and education sectors every day. Consider the rise of financial inclusion efforts over the last decade in emerging markets. With the proliferation of cheap smartphones flooding countries in Africa, for example, millions of people that formally depended on fiat money had the chance to use digital currency and join the formal banking class. The result was an explosion of new banking customers, which international fintech companies rushed to obtain. While this shift has been transformative for the newly banked, the market has rushed to grab millions of new customers. Thus, the market solved a problem essentially by itself with little government intervention.
The market can fix itself
When the market has an incentive to solve a problem, few barriers stand its way. The problem arises when there is unrealized potential that the market hasn’t recognized. The market hasn’t realized the ultimate potential for social transformation in the same way for environmental standards. There are billions of dollars in unrealized revenue just waiting to be unlocked through similar changes in environmental technology.
Let’s consider this from the vantage point of income inequality and worker empowerment. The top 1 percent of Americans now own more wealth than the entire middle class combined. The last time this happened was before the Great Depression. For American capitalism and democracy to reach their potential, we need to provide opportunities to all. Government can remedy this problem, but only to an extent. The key to structural change will be harnessing the power of small and medium enterprises (SMEs). Government policy experiments with universal basic income and the $15 minimum wage campaign signal that quality jobs no longer exist to provide a middle-class lifestyle. After all, a $15 minimum wage can only afford a two-bedroom rental in a total of 4 states across the country.
We are in a service sector economy where simply giving money away for consumers to spend is a form of intervention. But it is not sustainable. An inclusive capitalism approach would invest in workers, improve productivity and efficiency, and allow workers to participate in the economy through their earnings. This aligns economic growth and labor mobility to ensure everyone wins.
SMEs are a key ingredient for social change
For the American economy to realize its full potential, we need to think creatively about tapping into the power of the traditional backbone of the US economy: SMEs. It is the ideal time to demonstrate the unrealized potential in this sector because SMEs have proven how integral they are to the economy during the Covid-19 pandemic.
During the pandemic, the dramatic reorganization of the economy reinforced how our system benefits a minority and prioritizes large corporations over SMEs. Yet, this sector has massive potential for growth considering the diverse range of gig and hourly employees that dominate SMEs. If we are going to close the wealth gap in this country, then we should focus on those businesses that are high-contact, diverse and employ what are traditionally considered low-skilled workers.
This is where the ideology of inclusive capital comes into play. Good Scout Capital’s vision is to advance inclusive capitalism in America by introducing a concept of a worker equity floor for SMEs, which are traditional wealth generators for middle-class Americans. Technology and Zoom workers are often valued with equity in their compensation packages, leading to the profitability and sustainability of those sectors.
At Good Scout, we see a world where equity is part of all compensation, in all industries, no matter the class of worker. We proselytize an equity floor of 20% for rank and file workers. We have models to demonstrate its long-term profitability and wealth generation for investors, operators, and rank-and-file workers. American capitalism leads the world and sets the standard, and the next great innovation comes from innovating with workers in mind.
While this might not be the same as environmental advances via technological innovation, the ethos (and the potential) is the same. We are focused on giving people and workers the tools they need to transform their lives inside a framework of inclusive capitalism. American capitalism might be broken, but it has all the tools necessary to pursue its transformation. We just need to look to the workers, ensure they have every opportunity to innovate, and make sure the market is aware of the potential of this sector to grow.
By: Good Scout Capital. Los Angeles, California.