The instinct to do better is a good one. It should be kindled, especially when time shows cracks and inefficiencies in the current model. That’s how progress gets made - we build a better mousetrap. Sometimes because the mice get wiser, and sometimes because better or cheaper materials get developed. Or even sometimes when we realize that the used and discarded mousetraps are piling up or we’re burning through our mousetrap-making supplies while only setting them out in certain places. But regardless of the circumstances that lead to the realization of the problem, improvement requires that we engineer a better solution. 

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Improvement requires that we engineer a better solution.

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Over the last decade, in the midst of extreme profit and production growth, some investors have rightfully questioned the cost of this expansion. Facing unprecedented wealth accumulation and dwindling resources, a prudent mind might ask what aren’t we accounting for in all this expansion? How can we more accurately incorporate the auxiliary costs on the balance sheet? These questions, in part, have explained the growing popularity of impact investing. Enter ESG or SDG or any host of other external scales. These measuring sticks attempt to define and quantify metrics with which to both judge and score a company's actions today, with the inherent assumption that without this rubric, businesses won’t be compelled to report these costs or make changes to improve them. 

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In a multi-part article that went viral, Tariq Fancy, who formerly headed up BlackRock’s impact investing arm with nearly $8 Trillion dollars under management, told a stark tale from the inside of the state of impact investing, constructing a compelling analogy between capitalism and the sport of basketball along the way. Unfortunately, he cynically concluded that despite all the dollars and attention ESG and other impact-determining tools had attracted, they would never be enough to actually change industries. In fact, his summation was a plea for the government to act now, for business would only change their ways if regulations required it. The rules of the game must be forever altered by the powers “in charge.” He reasoned that as long as we used soft metrics to determine if the teams were using good sportsmanship (his comparison to ESG qualifiers), industries would never do better.

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But I can’t help wondering, from his rather dire admonition, where does that leave the rest of us? While governmental action could certainly provide an undeniable momentum shift, waiting for such an action, to use his own analogy, is akin to canceling practice today because we’re hopeful that the league will change the venue for the big match. Surely we can do better than a wing and a prayer. 

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While governmental action could certainly provide an undeniable momentum shift, waiting for such an action, to use Fancy's own analogy, is akin to canceling practice today because we’re hopeful that the league will change the venue for the big match. Surely we can do better than a wing and a prayer. 

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As with any challenge, to effectively problem solve, you need to step back to more completely understand the issues and to envision a better approach. We must see the whole system within which we’re operating, which often means getting outside of sectors and beyond artificially defined marketplaces. Where are the bottlenecks? Where are the friction points? Where are resources limited and what other ignored or under-appreciated assets can be utilized? With more comprehensive understanding, better solutions are engineered. That’s when you can truly build a better mousetrap. 

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It’s true, ESG alone isn’t the magic bullet we’re hoping for, but its magnetism is a bellwether that investors and customers continue to believe in the urgency of a better way. At the end of the day, however, ESG standards (or any other impact investing scorecard) are simply tools of evaluation. They rate existing practices against a newly assembled list of criteria. But in most cases, the companies that are being scored were built decades before those metrics were determined - and to no one’s surprise, their business objectives and practices were not developed with these modern criteria in mind. In the best case, therefore, companies are left to re-tool while still maintaining fiduciary obligations to shareholders. In the worst case, however, they are dismissed and discredited, and the scoring systems along with their intended “positive outcomes” get labeled as invalid and useless by association. 

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In the best case, therefore, companies are left to re-tool while still maintaining fiduciary obligations to shareholders. In the worst case, however, they are dismissed and discredited, and the scoring systems along with their intended “positive outcomes” get labeled as invalid and useless by association. 

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With the limitations of impact investing, though, we don’t have to despair. Besides just waiting for big government to act, as Mr. Fancy urges, or turning a blind eye to the implications and cost of unchecked growth, there is indeed another option. We can instead tap into the ingenuity of humanity, utilizing the unprecedented technology and science that humanity has developed, and build better companies from the ground up now. Those companies will authentically score well with ESG metrics but also be engineered to thrive at that gear. Turns out, we don’t need the alphabet of impact investment rubrics to save us. We’ve got all the tools needed to save ourselves by building right today.

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We can instead tap into the ingenuity of humanity, utilizing the unprecedented technology and science that humanity has developed, and build better companies from the ground up now.