Before the Easter/Passover break, my memo took strong exception to increasingly strident demands that banks do business only with “good” companies or conversely that banks do business no matter how “bad” the bank thinks the borrower might be. One side presses for what its opponents denigrate as rampant socialism; the other demands what its foes characterize as unbridled capitalism. Both are wrong: many banks and other financial institutions are wrestling with some of the most complex and pressing social-welfare challenges of our time, trying to come up with answers that somehow balance the urgent needs of the broad community against the relentless demands of their own investors. Charting a moral course through the bottom-line thicket is extremely difficult – if it were easy to know which causes are not only just and true, but also likely to return capital back to a banker, billions and billions of what has come to be called social-impact financing would be happily flowing into all sorts of environmental, social, and government (ESG) asset classes. Since they aren’t, banks and politicians are battling over how best to fund those each side thinks most worthy. There is, though, a better way to marry public purpose with private wealth: new financial instruments backed by the rule of law marrying public resources with private wealth to align social and market incentives. An example of this, incentive-based strategy is in upcoming legislation to create a new ESG investment class dedicated to one goal – speeding biomedical treatments and cures.
As detailed in a just-released article, we call the new investment class “Bio Bonds.” My husband and I came up with the concept after several years working hard with biomedical researchers, venture capitalists, and some big banks just as eager as we to find ways to speed treatments and cures for one affliction – blindness – and then to do the same for lots of others.
Despite a lot of promising research modelling financial risk in another area of at least as much urgency as blindness – cancer – not a single dollar of truly private money has ever been raised for early-stage clinical research outside the investments from biopharma companies and the VCs. Although these companies do put billions into biomed, they are only rarely found in the early, “translational” stage of biomedical research – i.e., right at the point when promising basic research either stays locked in the test tube or starts the costly path through challenging trials to a friend or loved one near you.
Eye Bonds in the new legislation and Bio Bonds to come thereafter align public and private objectives in a single financial instrument, assigning certain social-welfare risks to taxpayers and limiting the profit earned by private capital in return for the government’s participation. The article goes into detail on how this would work, with more on the legislation to be found here. We expect the legislation to be introduced in the next week or so after Congress comes back and look forward to rapid bipartisan action to move this new ESG investment construct first to enactment and then to the market.
I’d love to hear from any of you interested in helping to bring Bio Bonds through the legislative process and then across the financial-market finish line. However, the point of this note is to demonstrate that politicians should turn from demanding that bankers stand with them on the barricades to devoting some of their own political capital to stimulate private funding for causes on which there is broad national consensus such as reducing the human and financial cost of unnecessary disease and disability. Surely this is preferable to trying to isolate “bad” companies or trying to bully banks to lend to customers they or the broader public disdain. Even if banks walk away from bad actors, someone will find a way to funnel money to them; even if some banks can be badgered into lending, others will demur. In either case, little will have been gained but political points. Greater need warrants a better solution.