"A tragedy of practicality"

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I wouldn’t blame you for avoiding last week’s headlines about the World Economic Forum. In this annual conversation among dignitaries and the ultra-wealthy in Davos, the theme of “rebuilding trust” struck me as tone deaf.

It’s surprising that the climate crisis took a backseat to A.I. and the upcoming U.S. elections, though it shouldn’t be. The agenda is often dominated by the issues that investors are most afraid of and/or stand to make money on. Ray Dalio, the strange founder of Bridgewater Associates, the world’s largest hedge fund, made this abundantly clear on a panel with Bloomberg when he shared why climate financiers need to remember that private investors need to see a profit.

“There’s been a tragedy of practicality,” he told a panel. “There’s this notion of ‘we should we should we should,’ but there’s the fact of who has the money, what is the size of it and what are their motivations.”

Why pay attention to a man who has built a hedge fund notorious for “pain buttons” and excessively radical transparency? (The full story is stranger than you think.) Bridgewater manages a jaw-dropping $125bn in assets, meaning king-makers like Ray Dalio and Elon Musk often set the rules for a world that, like it or not, we all live in.

“A tragedy of practicality.”

This phrase has been eating at me. With his offhand words, Dalio evokes an image of naive climate advocates yapping about what should be done while ignoring the real constraints and motivations of the people holding the pursestrings. If investors need market-rate returns to write more/bigger checks, than climate advocates better find a way to produce them!

It’s no surprise that Dalio is looking for bigger returns and punting the responsibility. Bridgewater’s flagship fund lost 7.6% last year. By comparison, the S&P 500 ended 2023 with a 24% increase.

My question is this: why should the entrepreneurs and financiers trying to repair the climate be held to a higher standard than those who destroyed it? If the smartest investors with the best models can’t beat the market, why must everyone else?

The Great Fire of Rome, 64 CE. Hubert Robert

What’s your Roman Empire?

I spend no time thinking about the Roman Empire, but a friend who admittedly does recently told me a story that’s too fitting not to take a quick detour.

Marcus Crassus was a Roman general who is often credited for his role in transforming the Roman Empire. He’s also been called one of the richest people of all time. Crassus is also known for creating the first Roman fire brigade, with a small twist.

Fires were almost a daily occurrence in Rome, and Crassus took advantage of the fact that Rome had no fire department, by creating his own brigade—500 men strong—which rushed to burning buildings at the first cry of alarm. Upon arriving at the scene, however, the firefighters did nothing while Crassus offered to buy the burning building from the distressed property owner, at a miserable price. If the owner agreed to sell the property, his men would put out the fire; if the owner refused, then they would simply let the structure burn to the ground. After buying many properties this way, he rebuilt them, and often leased the properties to their original owners or new tenants.

Crassus bought up most of Rome’s property this way, building his vast wealth. If he couldn’t negotiate a price to his liking, he simply let the building burn.

If the analogy isn’t obvious, I think this pernicious greed persists in spheres of modern-day finance, extending far beyond Dalio, masked by language around “what the market will bear.” Investors are letting the world burn because saving it doesn’t offer the best opportunity to maximize their wealth—though it might be hard to spend all that money when vacation destinations are all ablaze or underwater.

Unreasonable wealth breeds unreasonable expectations

It’s time to start calling out these unreasonable, dare I say impractical, expectations about market rate returns.

The market rate of return is “the standard interest accepted in an industry for a specific type of transaction.” Put another way, it’s a social norm; a shared expectation based on past performance. Consequently, if venture capital has performed about 2.5x as well as public equivalents over the last 25 years, a hypothetical investor might expect the same, or more, from a fund she is invested in, even if that fund’s strategy prioritizes some form of impact, which may comes at a higher cost with more risk.

Dalio urges us to ask: “who has the money, what is the size of it and what are their motivations,” indicating that institutional investors are driven by their fiduciary duty to maximize returns. But it doesn’t take long to find examples of sophisticated investors throwing this out the window for questionable aims.

Take Sequoia, the behemoth venture capital firm. In 2022, they invested $800M in Elon Musk’s ill-fated Twitter acquisition. Unlike Sequoia, another co-investor in the deal, Fidelity, is required to disclose periodic valuations of their stake in Twitter. As of last June, Fidelity valued their investment at 2/3 below its initial cost. By that same logic, that could mean Sequoia’s investment is now valued somewhere in the ballpark of $2.6M.

As Matt Levine explains in Money Stuff, Sequoia definitely told their LPs that they ran financial models and did extensive due diligence. But proximity to Elon Musk seemed to be the driving factor that no model could contradict. Rationality be damned.

If we’re going to let investors get away with losing billions of dollars to be close to Elon Musk, surely we can pressure them to apply the same logic (with objectively less risk) to saving the climate, even if it comes at a loss.

In defense of practicality

After the hottest year in recorded history, climate and community leaders fighting for humanity’s basic survival deserve to be called practical at the very least.

There are plenty of climate solutions from battery tech to hydrogen that are lucrative enough to generate comfortable returns for investors. This is good news for unlocking capital from investors with real fiscal constraints, like public pension funds responsible for the retirement futures of millions of tens of middle-class workers that might not be able to take on more risk.

To everyone else—the investors who can afford to lose a little, the ones who say they want to “make real impact,” the asset managers representing the ultra-wealthy—I encourage you to do more. Take a risk on an emerging fund manager. Customize your terms to finance first-of-a-kind (FOAK) climate tech projects. Fill the gaps in funding climate adaptation efforts.

As I write this, I reflect on how this feels like an obvious, trite, and slightly naive response to the titans of finance. Then I remember what’s at stake.

As Kurt Vonnegut has said (or maybe Donella Meadows, the quote attribution is unclear!) “We’ll go down in history as the first society that wouldn’t save itself because it wasn’t cost-effective.”

— What I’m reading & listening to

Palestine’s death toll surpasses 25,000, an unimaginable tragedy // Radiolab re-aired one of my favorite episodes from Love + Radio // The Body by Bill Bryson, this book is teaching me more than I care to admit // How are funds tying their compensation to impact metrics? // A great song by Lucy Rose // What are the real gaps that impact investors must pay attention to? // Private equity is catching on to the benefits of employee ownership // Bye bye Pitchfork // Does anyone else read tiny love stories?