Earlier this week, I told the American Banker that the political battle over social-welfare finance is a fundamental question about the purpose of private capital. We each confront a similar dilemma as we try to do well to ensure our own and our family’s financial security while seeking also to do good for those outside our immediate circle. We usually meet the “be good” obligation associated with doing well through charitable contributions and pursuits, relying on government to do its best for the public. Despite the political firepower of the current banking debate, its solution for major financial companies is much the same.
The battle over ESG investing encapsulates the conundrum for both families and financial companies. As with each of us in our personal lives, financial institutions have the equivalent of dependents – shareholders, investors, and in some cases, also those for whom they have a fiduciary duty. As a result, making capital investment decisions is a choice between profit maximization and complex social-welfare, environmental-justice, and even moral criteria. But, because these criteria are inherently subjective, choosing among them is even more challenging for companies than for families.
One important way to do financially well and yet be socially beneficial is for government to use its financial might to achieve the social-welfare objectives supported by broad public sentiment. Were the Fed to do this through a “people’s QE,” this would be an unaccountable institution using its public purse for what might well be private moral goals. But, when Congress or the Administration do so, what they decide is subject to transparent debate and decision-makers can be readily accountable. Two straightforward policy solutions are readily at hand that make it possible for financial companies to achieve high-minded objectives without doing violence to their corporate and fiduciary obligations.
How? First, the federal government can partner with private capital through guarantees or (in my view less appropriate) equity arrangements. These are a fixture of federal policy and – as cases such as Solyndra, the credit unions, and the GSEs show – can too often become conduits for private profit without public purpose. But many other entities – the FDIC, CDFIs, and FHA, just for starters – show the social-welfare power of well-constructed federal backstops.
We have seen this clearly with green bonds, which resulted first from a tiny government guarantee and are now a huge global market more in need of discipline than additional public support. My late husband came up with similar financial incentives for a profoundly under-served social-welfare need: faster treatments and cures for disease and disability.
We call these BioBonds, and bipartisan legislation to create them should be introduced as soon as next week. Financial companies looking for a way to do a whole lot of good without any sacrifice of shareholder and fiduciary obligations: call me.
Another way to solve for the fundamental incompatibility of profit and purpose is to craft institutions targeted at new objectives with sound social-welfare controls to prevent capture. I detail one such option in my book: “Equality Bank” charters that use state-authorized public-benefit corporation legal constructs and an array of regulatory exemptions already built into current law.
One such equality bank – focused on persons with disabilities – is already under way. Charters with express racial-equity, community development, truly-responsible innovation, and many other objectives are also well within reach.
Again, pick up the phone – I am happy to do what I can when I can to make these social-welfare financial conduits a reality as quickly as possible to serve unmet needs as profitably as possible. FedFin’s path through the complex maze of private profit and public purpose is our work – now my husband’s legacy – to make private capital an instrument of the public good without expropriation or exploitation.