#54: Dismantling Environmental and Social Protections – Why It Hurts Investors and What Can Be Done About It

The new US administration is weakening or removing environmental and social protections (e.g. laws, regulations, programs, departments, research) at a pace never seen in US history. It violates logic and common sense. It will impose huge risks and costs on investors, business and society.

However, this is a time of great opportunity. The current US political situation is the culmination of operating for over 40 years under flawed systems that degrade the environment and society, for example, by unfairly concentrating wealth. Historically, this type of turmoil often yields large improvements in society. We have the opportunity to be far more prosperous, individually and collectively.

System Change Investing (SCI) provides a practical and profitable way to drive the systemic changes needed to achieve this much higher level of prosperity. This article summarizes the importance of protecting the environment and society and how investors can use SCI to strongly promote this protection.

Reality Always Wins

Humans and all life are kept alive by the environment. Whatever we do to it, we ultimately do to ourselves. The environment is by far the most important aspect of society and national security, because there is no life without it. All other issues are irrelevant if we are not alive.

After environmental protection, the well-being of society (individually and collectively) is the most important factor. Essentially all human philosophies (e.g., capitalism, socialism, communism) are intended to produce this outcome. So far, they failed to achieve it for different reasons. Capitalism, for example, measured the means (economic growth) to the end (social well-being), and only achieved economic growth and partial well-being (largely because what gets measured gets managed).

Environmental and social protection benefits everyone, including business. There ultimately will be no profits or investment returns without them. A strong economy is built on a healthy environment and thriving society.

Removing laws against murder, assault and robbery would be absurd. Removing laws that prohibit companies from harming the environment and society is even more illogical and dangerous. Individuals can and usually would not harm anyone if harm was allowed.

However, in competitive markets, companies cannot voluntarily stop harming the environment and society. Beyond a certain point (generally about 20% negative impact mitigation), if they continue to voluntarily stop harm, costs often go up and they ultimately go out of business. Society would be far better off removing individual rather than business laws because individuals can voluntarily not cause harm, but companies cannot.

In competitive markets, companies can only stop harming the environment and society if they are required to do so (i.e. corporate responsibility is made mandatory). Failing to prohibit corporate harm does far more than allow it. It compels it.

Systems that allow harm essentially (and certainly unintentionally) say to companies, degrade the environment and society or cease to exist. Under our grossly flawed, reductionist systems, beyond a certain point, voluntary corporate responsibility equals voluntary corporate suicide.

Responsible investing and corporate sustainability have not come close to resolving climate change and other environmental and social challenges, largely because they are focused on changing companies instead of the systems that compel them to cause these problems.

From a corporate and financial perspective, the fundamental problem is the failure to hold companies fully responsible for harm. This is the meta system flaw. All other system flaws (e.g. externalities, time value of money, limited liability) are sub-elements of this meta flaw.

What’s Going On?

Removing sustainability protections will greatly accelerate environmental and social degradation. As companies are held less responsible, they will be compelled to cause more harm. This removal is occurring at a time when environmental, social, economic, and political challenges are rapidly expanding. It’s like stepping on the gas instead of the brakes when rushing towards a cliff.

Why would we take such an obviously irrational and destructive action? The answer almost certainly is that we have entered a phase of rapid system change, and this type of irrational behavior is common as system collapse approaches.

Throughout human history, all flawed, destructive systems changed, usually by collapsing quickly. As collapse nears and pain increases, there often as a reversion to old ideas. This usually accelerates collapse as ideas that failed before fail again.

Pushback against ESG and DEI perfectly illustrates this. Over the past 25 years, these programs have provided large benefits to business and society. Protecting the environmental and social systems that enable the economy and business to exist is obviously beneficial. Helping historically disadvantaged groups to achieve a quality of life equal to the rest of society also is obviously beneficial. Many studies have shown that corporate ESG and DEI leaders outperform in the stock market (mainly because they are better managed overall).

Rapidly dismantling US government structures with no apparent logical explanation or strategy can seem incomprehensible. The approach seems to be based on the grossly irrational idea that government is inherently bad. Therefore, reducing it is good. This concept has been promoted by vested interest-controlled media since the 1980s, in part because it facilitates the removal of regulations that inhibit ever-increasing shareholder returns.

However, the idea that government is inherently bad is patently absurd. Citizens form governments to protect themselves. There is no civilized society without government and laws that prohibit harming others. The US government fails to serve society well, not because it is too large, but rather because it is controlled by vested interests. Concentration of wealth over the past 40 years shows that government well serves those who control it. The solution to government problems generally is not to shrink it. It is to return control to We the People, as the US Constitution demands.

Many people focus on US political insanity and other quickly growing turmoil around the world. But these problems are like waves on the ocean. The far more important factors are the deeper systemic forces causing these waves.

For example, focusing on the moment-to-moment breakdown of the US government probably will not halt this decline. Instead, we should be focusing on the systemic factors that put us in this position. These include deceptive media, education reform that suppressed critical thinking, vested interest-controlled government, putting stock market returns ahead of the survival of humanity, and unintentionally destructive economic and political systems.

These systems place business in conflict with society and humanity in conflict with nature. They inevitably will change or fail. Collapse could wipe out trillions of dollars of investment and destroy many companies. Investors have strong incentives to drive system change. It is the only strategy that can reverse decline and protect business and society.

What Can Be Done?

Evolving human systems into sustainable forms ultimately requires collaboration among all segments of society – government, general public and corporate/financial. Governments in the US and some other countries largely are controlled by vested interests, and therefore are unlikely to change on their own (i.e. in a positive direction). Citizens in the US and many other countries are divided by vested interest-controlled deceptive media and other factors. As a result, they largely are unable to work together on their many common interests and drive system change.

This leaves only the corporate and financial sectors with the power to drive the pace and scale of change required to avoid further system collapse (i.e. dismantling the US government shows that collapse already is occurring). The corporate and financial sectors largely are controlled by investing. This potentially makes investing the most powerful lever for driving system change.

SCI is a new form of responsible investing that expands the focus to include system change. It can incentivize the work needed to reverse environmental and social degradation and achieve a truly prosperous society.

Essential systemic changes include holding companies fully responsible for harm, and thereby making responsible behavior the profit-maximizing strategy. Increasing democracy in ways that achieve widespread individual and collective prosperity also is essential.

Companies have the power to drive these changes. They can use their strong influence of government to compel systemic changes that incentivize responsible behavior. They also can use their strong influence of media and other means to unite and empower citizens.

SCI incentivizes corporate system change actions by measuring them. (What gets measured gets managed.) The approach rewards companies that drive positive systemic change (through enhanced share price, reputation and other benefits), and penalizes companies that block system change.

Flawed systems compel corporate and financial managers to focus mainly on maximizing profits and investment returns. Effectively engaging them in system change requires making the business case (i.e. showing how taking corporate system change performance into account can lower investment risk and protect returns).

SCI is easy to implement because it is based on ESG strategies that nearly all large asset managers already are using. In its simplest form, the approach involves adding system change metrics to ESG models. SCI enables investors to reduce investment risk, and enhance returns, impact, reputation, and assets under management.

SCI provides a powerful strategy for reversing government decline, protecting the environment, and achieving a truly prosperous society.

For more information about SCI, visit our website SystemChangeInvesting.com or listen to this SCI podcast.