Redefining Fiduciary Duty Investing in Global Priorities

Key Concepts

• ESG (Environmental, Social, and Governance): Not a distinct investment style, but a set of data points requiring further analysis. Its misuse has led to inconsistency and regulatory scrutiny.
• DEI (Diversity, Equity, and Inclusion): While often debated, research suggests diverse groups make better decisions, though they may appear less functional initially.
• Transition Investing: BlackRock’s term for what others label as ESG investing, highlighting the importance of focusing on the underlying analysis rather than the label.
• Unit Economics: A crucial factor in the “next economy,” focusing on the profitability of individual units to drive sustainable growth.
• Next Economy: A future economic model prioritizing sustainability, innovation, and alignment with environmental and social values.
• Systemic Risk: Identifying companies addressing fundamental, large-scale risks is a key investment criterion.
• Competitive Advantage: A crucial element for entrepreneurial success, ensuring a sustainable position in the market.
• Discounted Cash Flows: The fundamental principle of finance, emphasizing the importance of understanding basic financial concepts.
• Quantum Computing: A revolutionary technology allowing for simultaneous exploration of all possibilities, potentially transforming industries like drug discovery and logistics.

The Illusion of ESG Investing

Erica Carr argues that “ESG investing” as a defined style is fundamentally flawed. She emphasizes that ESG data is merely a starting point for deeper investigation, not an investment strategy in itself. She cautions against treating ESG ratings and rankings as definitive indicators, likening it to “taking a tool, like a hammer, and, like, thinking, ‘Oh, everything looks like a nail,’ so you just hammer around.” The proliferation of rebranded funds claiming ESG status – with 90% of new ESG funds in one quarter being simply renamed existing ones – exemplifies this misuse. This has led to inconsistency in data, regulatory scrutiny regarding disclosure, and ultimately, questionable outcomes. Carr stresses that the core issue arises when individuals lacking the necessary expertise apply this tool without proper understanding. However, she acknowledges ESG data remains a useful tool when employed with analytical rigor. She points to an example of Hess Oil Company receiving a poor rating due to including minor oil spills from customers filling their tanks, demonstrating the need for nuanced analysis. BlackRock, she notes, now refers to this type of investing as “transition investing,” recognizing the underlying analytical process is the key, not the label.

DEI: Painful but Profitable

Carr addresses the recent attacks on DEI initiatives, framing it similarly to the ESG debate. She references research by the late Professor Katherine Phillips of Columbia University, who demonstrated that while diverse groups make better decisions, they often appear less efficient and harmonious from an external perspective. Phillips’ research also revealed that members of diverse groups themselves often perceive their teams as less functional. Carr summarizes this with the phrase “Diversity, painful but profitable,” highlighting the research-backed benefits despite the challenges. She emphasizes that diversity is an “evolutionary imperative,” drawing parallels to the evolution of wolves into domesticated dogs and dinosaurs into birds. She acknowledges the discomfort some feel with DEI, but asserts that evolution will inevitably lead to greater diversity.

The Entrepreneurial Journey: Building a Parachute on the Way Down

Carr describes entrepreneurship as “jumping out of a plane and building the parachute on the way down,” acknowledging the inherent fear and uncertainty. However, she stresses the importance of self-belief and the fundamental principle that “people invest in people.” She emphasizes the need to inspire and move people, as capital follows leadership.

Investing in the Next Economy: Unit Economics and Systemic Risk

Carr outlines her investment criteria, focusing on three key factors: a company’s unique position to address a systemic risk, the defensibility of its strategy, and its potential for scalability. She highlights the importance of “unit economics,” as articulated by Preeti during a previous panel discussion, emphasizing the need for sustainable profitability at the individual unit level. She believes that as the cost of sustainable technologies like solar energy continues to decline (a 90% reduction in the past half-decade), the trade-offs between profit and environmental responsibility will diminish.

The Power of Data and the Future of Innovation

Carr emphasizes the importance of data-driven decision-making, citing examples of advancements in AI-driven drug discovery, which is now 15 times faster and achieving twice the early clinical success rates compared to traditional methods. She acknowledges her own limited understanding of quantum computing but highlights its potential to revolutionize industries by allowing for the simultaneous exploration of all possible solutions. She draws an analogy between AI and quantum computing, explaining that while AI rapidly explores options sequentially, quantum computing explores them all at once. She concludes by emphasizing that we are in the midst of the biggest transformation in history and urges listeners to actively participate in shaping the future.

Tolstoy’s Wisdom and the Importance of Values

Responding to a question about a manufacturing business facing a trade-off between profit and environmental harm ($10 million profit vs. $1 million profit), Carr acknowledges that the decision ultimately rests on individual priorities and values. She references Leo Tolstoy’s story “How Much Land Does a Man Need?” to illustrate the concept of diminishing returns and the importance of prioritizing relational, social, and natural capital over purely financial gain.

Beginner Investing for Nonprofits and Individuals

Addressing a question about beginner investing for nonprofits, Carr recommends studying the work of Clara Miller of the Heron Foundation, a leading expert in foundation investing. She emphasizes the importance of aligning investment strategies with organizational values and exploring earned income models, citing Greyston Bakeries as a successful example. For individual investors, she advocates for starting small and utilizing simple investment vehicles like The Next Economy ETF, stressing that finance is often unnecessarily complicated and that understanding basic principles like discounted cash flows and compound interest is sufficient.

Conclusion

Erica Carr’s presentation delivers a pragmatic and nuanced perspective on ESG, DEI, and the future of investing. She dismantles the notion of ESG as a standalone investment style, advocating for rigorous analysis and a focus on underlying data. She champions diversity as an evolutionary imperative and highlights the importance of addressing systemic risks and prioritizing sustainable unit economics. Her message is clear: investing should be grounded in fundamental financial principles, driven by values, and focused on building a more sustainable and equitable future. The key takeaway is to move beyond labels and embrace a thoughtful, analytical approach to investment, recognizing that the future belongs to those who can navigate the complexities of a rapidly changing world.