we need a global impact market now

March 1st, 2010 • posts i've written

At last week’s Apple shareholder meeting, along with the announcement of a $40 billion stockpile of cash, shareholders voted against proposals to measure the company’s impact on the environment:

Voted down were two shareholder proposals, each of which the board recommended voting against. The first was a proposal for Apple to prepare a “sustainability” report on the company’s environmental policies and the effects that climate change may have on the company’s competitiveness. … The second was a proposal to amend the company’s bylaws to establish a board-of-directors sustainability committee to “ensure [Apple's] sustained viability” in the face of “changing conditions and knowledge of the natural environment, including…natural resource limitations, energy use, waste disposal, and climate change.” The board’s position was, again, that management was performing “exceptionally well in this area” and thus such a committee was unnecessary.

Astoundingly, just days after the shareholder meeting, Apple released its suppliers report which detailed abuses in its China-based production, including:

• Child labor – at least eleven 15-year-old children were discovered to be working last year in three factories
• Sweatshop conditions – at least 55 of the 102 factories that produce its goods were ignoring Apple’s rule that staff cannot work more than 60 hours a week and only 65% of the factories were paying their staff the correct wages and benefits – and Apple found 24 factories where workers had not even been paid China’s minimum wage of around 800 yuan ($117 USD) a month
• Environmental destruction – a mere 57% of factories had the correct environmental permits to operate and three factories were discovered to be shipping hazardous waste to unqualified disposal companies

As an Apple fanboy, it’s difficult to reconcile their stock price and cash on-hand with the working conditions at their suppliers. I appreciate that Apple at least reports on these conditions, but I have a hard time understanding how these practices continue when a fraction of their war chest could be used to force dramatically improved conditions on behalf of the people working in these factories. As someone contemplating a new iMac, this latest report offers a chilling reason to reconsider my purchase.

It’s disturbing how toiling away in one of Apple’s Chinese suppliers, at over 60 hours a week for an entire month, won’t even earn you enough money to purchase one half of an Apple stock, let alone an Apple product.

a financial abstraction

One of the basic lessons from behavioral economics is that when you abstract money into things like stocks and tax credits, people feel less compelled to be honest and ethical. You’re not stealing money – you’re just fibbing on your taxes.

And the stock market is the ultimate abstraction – a system that was originally intended to provide public companies with easier access to liquid capital (they hand over a piece of ownership in exchange for immediate cash) has become a system for the rapid exchange of increasingly complicated instruments by skilled players. As complexity has increased, so has long term risk, thus making the window of time an average stock purchase is held shorter and shorter (the average holding time for a stock on the NYSE is now down to 6 months). People aren’t investing, they’re speculating on an ever-increasing short-term timeframe.

Moreover, when we affix a single value to a publicly traded company – their stock price – we’re valuing companies on a specific set of data points which do not take long-term public health (and inevitably health of the company) into account. The traditional markets in place are too short-sighted to correctly value the long-term impact of a company’s activities on an increasingly connected world.

As an example, The Stern Review on the Economics Of Climate Change recently said, “Climate change presents a unique challenge for economics: it is the greatest example of market failure we have ever seen.”

outside of the equation

Traditional economists dub environmental impacts negative externalities – a negative externality occurs when an individual or firm making a decision does not have to pay the full cost of the decision. Right now, Apple is a perfect example of that. Typically, the response would be for the government to institute a tax on the corporation for that decision, to ensure the cost is paid and that the corporation understands that it is responsible for those decisions. But in our global economy, a company like Apple can export its supply chain to China, a country with lax standards and a higher incentive to ignore those external costs. Couple this with our increased myopia with the present moment, and you have a financial recipe for worldwide collapse.

a new market

We need a new market, one that values publicly traded companies based on their global impact. We need an impact market where companies can exchange ownership with investors that are interested in socially responsible practices.

An environmental stock market is not a new idea – but it usually only values new companies or new technologies and is used as an incubation tool for new industries (often a way for green tech firms to raise quick capital). Moreover, social stock markets are under development in many countries with the aim of providing money to organizations working on social projects, but these markets are crafted for very specific investors and companies and do not offer ownership in exchange for capital – they are merely grants.

While I’m certainly no expert on financial markets, it does seem clear that only a market can provide an opportunity rather than a penalty for publicly traded companies and investors to focus on impact. People will look for any way around a penalty (like outsourcing their production) but they’ll seek out the biggest opportunity. Markets offer liquid capital for the brand and profit opportunities for investors.

An impact market, one that aims to value the human and environmental impacts of firms that operate across international borders through a market system, will reward companies for marginal improvements in reducing their global impact. The impact trading price of a company will also help internalize environmental impacts into the overall value of a company – investors will have to reconcile a high traditional stock price with a very low and unattractive impact trading price.

Of course, this is far easier said than done. First and foremost, investors need third party sources to inform their investment decisions. We need a group, for-profit company, or governmental agency that will hunt down information on the global impact of publicly traded companies. This group will have to make sense out of how to value such elements as: total employment, relative quality of life of employees, environmental conditions from carbon footprint to environmental disasters, and whatever else seems germane to the discussion. This information search will need to ignore international borders in order to be successful – impact cannot be limited to a single country – and will need to examine a firm’s full supply chain. As information is gathered, we can explore building the mechanics of the market.

Why an impact market makes sense: (I’d love to hear your thoughts for or against the idea or its feasibility)

• An impact market creates capital – companies should see this as another form of capital access, where they can exchange ownership for cash, and this should be attractive especially in an economy where access to liquid funds is more difficult to find for everyone
• An impact market rewards companies for long-term investments – the traditional stock market often punishes a company for infusing itself with capital to improve its supply chain or environmental practices, but an impact market would reward these kinds of investments
• An impact market brings new kinds of investors – an impact market connects firms with people who value responsible practices over inflated earnings

Perhaps we should start with a virtual market, where people can exchange virtual currencies with companies in exchange for greater awareness of socially responsible actions. In theory, the companies with the best policies would gain higher value in the marketplace. Just as Hollywood Stock Exchange is doing, this market could ultimately apply for license and operate with real currency between investors and firms.

Related posts:

1. AAPL: take your best guess
2. obama the venture capitalist
3. apple’s opening stock price and iPad exuberance

Tags: economics, environmental markets, future markets, green technologies, impact markets, social good

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