Policy Corner: this coalition will change the game
A special TGN segment breaking down 🔥 hot 🔥 policy proposals designed to make our economy work for all people. Up first: the White House Initiative on Inclusive Economic Growth
Hey folks. This is the 13th edition of The Great Near, back after a little vacation. If you subscribe, you might notice that I play around with newsletter formats (it’s totally intentional). Today’s post is another experiment.
Public policy can be confusing, often by design, but it doesn’t have to be. Every so often, I’ll break down a policy proposal that aims to “fix” our economy by making it more equitable and fair. The White House Initiative on Inclusive Economic Growth is a new coalition of organizations promoting stakeholder capitalism and community investment. They recently put forward proposed reforms directed at the Biden Administration informed by nine related policy papers, including Common Future’s Bold Ideas Project. Common Future is a member of the coalition so I can say with confidence that this work is gaining exciting momentum.
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What’s up with the White House Initiative on Inclusive Economic Growth?
Why you should care
The proposal at a glance
Who’s leading it
The details
Terms and context
Why you should care
In 2020, our systems failed spectacularly during a time of emergency.
Global protests erupted against systemic racism while the pandemic disproportionately hurt Black and Brown communities with the most to lose. The effects of marginalization compound with time—look at any neighborhood today that was redlined 50 years ago—so it’s necessary to pause and ask: can we redesign our economy so that economic prosperity benefits more people?
This proposal is not a simple spending agenda. It offers a vision for federal economic policy that prioritizes people over corporations and uplifts the needs of BIPOC and rural communities that have been intentionally marginalized. Some policies would have short-term effects, like more capital for local lenders. In the long term, companies could be required to disclose their impact on the planet through systematized, mandatory reporting. Ultimately, this is about shifting the rules and incentives of capitalism in America, which will affect all of us.
The proposal at a glance
The proposal urges the administration to create a “White House Initiative on Inclusive Economic Growth:” a coordinating body at the federal level that would push for economic reform. The goal would be to coordinate federal policies and agencies to create a unified agenda for economic development that is more fair and sustainable. Here are links to the platform and the policy memo if you’re into the details.
Collectively, these policies are meant to shift incentives, so that companies and their investors couldn’t strip worker benefits to increase shareholder dividends, pursue profit at any cost to the environment, or exclude BIPOC communities from capital access without financial repercussions. What could that look like? Mandating that companies report environmental impact would allow investors to pay closer attention, thus incentivizing companies to behave more responsibly to attract more capital.
If this sounds like a big task, well it is. Shifting what we perceive as the natural laws of capitalism is hard but not impossible. This proposal is arguing that capitalism can work, but perhaps it needs some guardrails.
Who’s leading it
An impressive group of 50+ organizations and 18 philanthropic foundations, representing business, investors, and communities. Of this coalition, nine organizations have championed and signed the policy docket, including the U.S. Impact Investing Alliance, B Lab, Common Future 💁♀️, The Aspen Institute Business and Society Program, the Coalition for Inclusive Capitalism, the Roosevelt Institute, the American Sustainable Business Council, Pacific Community Ventures, and FCLTGlobal. Powerful people have already voiced support, like Darren Walker, president of the Ford Foundation, and political leaders like Senator Mark Warner (D-VA) and Representative Dean Phillips (D-MN).
The details
This proposal includes twelve recommendations which I’ve summarized with context. Remember that this proposal is meant to evolve as more stakeholders are brought to the table, so the details aren’t all worked out. If “stakeholder capitalism” and other terms are new to you, jump to the next section.
A. Community Investing
Equity Infusions for Community Small Business Lenders: CDFIs operate with three sources of capital—equity, debt, and deposits. Regulators require CDFIs to hold ~$8 on their books (in equity and deposits) for every $10 they can lend to low-income borrowers. All that means is that CDFIs must have a cushion to protect their investors and deposits when they lend out their money. Despite being so important for lending capacity, equity capital is also the hardest to raise. Think of equity capital like a grant. CDFIs are nonprofits so they don’t have to pay back equity or give up ownership as a public company would. This proposal calls for equity infusions into CDFIs and MDIs, specifically those that offer loans to employee-owned businesses or opportunities for local residents to invest into their communities.
Permanently Expand CDFI Fund: The CDFI Fund is an agency in the Treasury Department that certifies CDFIs and provides them with discretionary capital (read: equity capital). Putting aside valid concerns about the bureaucracy that has led to unspent funds and onerous application processes, there is still a funding gap between available capital and what CDFIs need. Though the Trump Administration sought to dismantle the budget entirely, it has hovered at $250M for years and will grow to $330M in 2022 under President Biden. The coalition is calling for three times this amount—$1 million—so that CDFIs can support the economic recovery of Main Street after COVID.
Reform and Reaffirm the Community Reinvestment Act: The CRA ensures that financial institutions meet the needs of low-income borrowers. Banks often fulfill this requirement by funding CDFIs. Reform has been discussed for years given the law’s outdated rules and performance measures for banks, yet this past May, new regulations were put on hold due to confusion across agencies that oversee the CRA. This proposal adds to this platform by calling for new incentives that encourage the financial sector to direct capital to a bigger group of organizations that support entrepreneurs, like women’s business centers and minority business development groups.
Ensure Transparency and Accountability in Community Investing: How much community input do you think went into Opportunity Zones? 👀 Communities rarely get timely, transparent information about economic development strategies that affect the future of their neighborhoods. Policies like Opportunity Zones have rarely accounted for the needs of residents or put decision-making power in their hands. (A handful of local, community investment funds have sought to change the dynamics of community investing but these efforts are still local.) While this proposal leaves me wanting more, it broadly urges policymakers to make transparency a priority and tie community involvement to incentives in future programs.
Create a Domestic Development Finance Program: Development finance is the use of public resources to spur private sector investment in low- or middle-income countries. It has become an important tool for reducing global inequality, and there have been calls to create a domestic development finance program to fund community development and green technology. The argument is that this kind of bank could provide below market-rate capital for high-risk projects that the market overlooks. There are a number of strong proposals being considered, including this recommendation.
Clarify Fiduciary Duty Standards and Incent Impact Investing by Charitable Institutions: Though DAFs and foundations are interested in impact investing, fuzzy tax and fiduciary guidance make it difficult to actually do it. Over $1 trillion dollars at foundations is are sitting in stocks, bonds, and other investments with no social impact. The returns from these investments are what fund a foundation’s grantmaking. Foundations are required to grant out 5% of their endowment each year, which means the other 95% is just sitting in the market. As Oscar Perry Abello explains, “a foundation that grants money to groups pushing for criminal justice reform might also invest in private prisons.” This proposal recommends new guidance be provided to donors and endowment managers to encourage more local, community-based impact investing.
B. Stakeholder Capitalism
Mandatory ESG reporting for public and large private companies: Up until now, ESG reporting has been voluntary. Companies do it to signal their values to the public or raise capital from investors who seem to care about the world. In a moment where our existence depends on understanding our environmental impact and diverting resources from bad actors casually leading to the mass extinction of species, 😅 we lack basic tools to assess companies on their performance. There have been efforts to fix this. Congress passed the “Disclosure Act” in June, H.R. 1187, which gives the SEC authority to require the "disclosure of ESG information that is of interest to investors.” In other words, it’s not a requirement for companies but a nod to the SEC to figure things out. The White House Initiative proposal goes further. It calls for mandatory disclosures from all large companies, not just public companies. It also calls for these disclosures to align with global ESG frameworks.
All large companies adopt stakeholder governance by becoming benefit corporations: To encourage businesses to act responsibly, we must first change the rules that govern their decisions. There are a few models, including the benefit corporation, that allow businesses to legally balance financial and non-financial interests. This means shareholders wouldn’t be able to bring a lawsuit against the company if stock values declined as a result of a decision that benefited another stakeholder—like raising wages for workers. These models also require public transparency regulated by third parties. This proposal calls for the federal government to set a goal for (and incentivize) more large companies to become benefit corporations. Most states already have statutes allowing companies to transition to benefit corporations, so this proposal doesn’t recommend a new federal structure.
Investor Transparency and ESG Disclosure: Building on the recommendation above for company ESG reporting, this proposal calls for institutional investors to disclose their ESG requirements to beneficiaries. For example, if I invest my retirement savings with Vanguard, they would have to be transparent about how they account for ESG in their investment decisions and how it is in my long-term interest. Simple enough!
Investor Responsibility: Amend Federal regulations and laws to align fiduciary duty with beneficiaries’ best interests: A bit of context… in 2019, the Trump Administration enacted a regulation for retirement and health plans. It determined that plan sponsors could not consider ESG factors in investment-decision making—that it fell outside the definition of “fiduciary duty." As Rehana Nathoo explained in Spectrum Impact, these regulations have flip-flopped in every administration. President Biden directed the Department of Labor to consider rescinding this rule, and this proposal indeed supports that. It also advises the administration to develop new regulations that help asset managers align their fiduciary duty with the long-term interests of beneficiaries.
Elevate the Importance of Workers: This proposal calls for a new requirement for public companies to shift compensation committees to “workforce committees.” These committees would take a more expansive view around worker rights, job quality, diversity, and equity while exploring ways to provide workers with a voice on key issues. TBH, this recommendation could use more definition. To push it further, we might draw from Germany’s codetermination requirements that require workers to elect representatives for almost half of a company’s board. A workforce committee is good, real worker power is better.
Align Market Incentives with Long-Termism: This idea sums up the whole proposal. The economy thrives on short-term wins—produce more, extract more, sell more, deal with the consequences later. This is because long-term consequences or “externalities,” like a fine for polluting, are not priced into today’s cost of doing business. Companies rarely pay for the cost to pollute, and the mere mention of a carbon tax has conservatives up in arms. What if business managers were incentivized to account for the long-term effects of their actions? One way to do this is to require their stock to vest over time, meaning CEOs, board members, and other employees rewarded with stock would be required to make decisions that pay off in the long-term if they are to reap any reward. The proposal goes even further by calling for executive and investor compensation to be tied to the achievement of ESG goals.
Terms and context
CDFI: A community development financial institution is a financial institution legally required to create economic opportunity in disadvantaged communities—like access to affordable lending! A CDFI can take many shapes, including community development banks, credit unions, loan funds, or venture capital funds. They are key players that provide capital to low-income communities, though there is some debate. CDFIs have been undercapitalized for decades, and fixing this is a key feature of the proposal.
Community Investing: Though “community” is a neutral, somewhat ambiguous word, “community investing” refers specifically to investments in low-income or underserved communities. CDFIs and other nonprofits are the primary institutions that carry out this type of investing, though increasingly opportunities are being developed for individuals to invest locally.
CRA: The Community Reinvestment Act is a 1977 law that requires all banks meet the needs of low- and moderate-income neighborhoods. It was created to counter redlining and other discriminatory lending practices. Banks are audited every five years, and their grade can affect branch openings and merger requests. This piece provides a great overview of that process.
Economic Inclusion: all people have equal access to economic opportunity. This includes access to loans, fair housing appraisals, living-wage jobs, safe deposits, local bank branches, affordable credit, quality education, and more.
ESG: shorthand to describe the consideration of environmental, social, and governance factors alongside financial factors in the process of making business or investment decisions. For example, an investor might ask about a company’s impact on the planet (environmental), its customers and employees, or its leadership diversity (governance), in her risk analysis of whether or not to invest in that company.
DAF: a donor-advised fund is a type of fund where wealthy people can park their money for a tax break while they figure out their charitable interests. Not only is there no requirement to ever give this money to communities, but donors can also spend it on whatever pet projects they’d like. How fun.
Fiduciary duty: the responsibility to act on another party’s behalf to benefit them financially. In this context, fiduciary duty usually comes up in the conversation around ESG, as companies are legally constrained by their duty to investors when making decisions that might affect shareholder returns. This might come up if a company wants to raise wages or reduce its carbon footprint through an expensive investment. If these actions negatively affected shareholders, the company could legally be at risk.
Long-termism: making decisions through the lens of how those actions will affect the future. Seems straightforward and smart, but in the real world, shareholder returns actually encourage business managers to focus on growing next quarter’s returns, or else they might be out of a job. This incentivizes short-term wins that sometimes have disastrous long-term effects on workers or the environment.
Main Street: shorthand for independent local small businesses; sometimes used with the phrase “Main Street not Wall Street.”
Market incentives: forces that correct for consumer or business behavior. In other words, people will change their behavior if it is in their financial best interest (I go to work because I get a paycheck). Tax benefits and subsidies are one way to incentivize good behavior. Conversely, negative market incentives punish people financially for certain actions or inaction, like the individual mandate of The Affordable Care Act.
MDI: minority depository institutions. While most of the banking industry is controlled by white men, MDIs are banks or credit unions that are majority-owned or majority-governed by minority individuals. Investing in MDIs is widely supported as a key strategy for closing the racial wealth gap.
Opportunity Zones: a program enacted in 2017 to incentivize investment in low-income communities. To no surprise of the skeptics, it was essentially a tax break for the wealthy that financed big projects in gentrifying neighborhoods.
Shareholder primacy: This idea argues that corporations exist primarily to serve shareholders. By default, this relegates all other company interests to a secondary status, under the guise that profit generation alone will produce the most value to society. In the century or so since this idea has taken root, it’s become abundantly clear that only some have shared in that value, and that laws born from this idea have constrained companies from being able to operate responsibly and sustainably.
Stakeholder capitalism: A rejection of shareholder primacy that places the interests of all stakeholders (employees, community, and the environment) on par with shareholders. Benefit corporations, one type of business entity, are legally able to do this. Currently, there are over 4,500 across the U.S. Stakeholder capitalism is both a legal shift and a new mindset for business. Employees and affected communities would no longer be an afterthought, but primary stakeholders whose needs are valued. (I recommend Matt Levine’s post on the stakeholder capitalism debate this week for an interesting take.)
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Would these policies increase economic opportunity in marginalized communities? Absolutely. Is this a complete list of the changes we need to stave off mass inequality and climate disaster? Absolutely not, but it’s a start. These ideas might allow us to work out the most consequential economic questions of our generation with the right stakeholders at the table. To redesign our systems so more people can share in economic growth.
Like this segment? Want updates about this initiative? Drop a note in the comments?
until next time,
Caitlin