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October 22, 2010
An Interview with John Fullerton
    by Robert Kropp

The founder of the Capital Institute talks with SocialFunds.com about its goal of transforming the global financial system to reflect sustainable principles.


Last month, a network named the Committee on Transforming Finance issued a Transforming Finance statement, which stated, "Financial markets are founded on trust now eroded by the irresponsible and unethical behavior of many players, including many of our leading financial institutions."

The statement continued, "Prices must include social and environmental costs of production reflected in company accounts. Corporate funds and private money should never corrupt votes in politics."

One of the co-conveners of the Committee is John Fullerton, who is the founder of the
Capital Institute. Founded in 2009, the Institute is a Connecticut-based transdisciplinary think tank whose mission is to raise "awareness of the need to harness the power of capital and markets to advance a just, resilient, and sustainable economic system that will improve lives and preserve the planet."

Until 2001, Fullerton was a Managing Director at JPMorgan Chase. SocialFunds.com spoke with Fullerton, and the first question was, how does an individual formerly in such a role come to found an organization with the aspirations of the Capital Institute?

Fullerton replied, "I left Morgan in 2001, after the merger with Chase. I sensed there was something fundamentally out of whack with my idea of how finance worked, and while still at Morgan I started aligning my values and social purpose with capital. Learning about the environmental crisis from a systemic perspective, I realized that the economic system is systemically flawed and that finance is the fuel that drives the economic system."

"I looked in the mirror and understood that twenty years of my life was invested in something that was fundamentally in conflict with the laws of nature," he continued. "Because I did private equity at JPMorgan, I was attracted to the idea of impact investing, but realized the world did not need just another impact investment fund. There was a much more critical rethinking of finance and economics that I sensed was really needed. That led to my launch of the Capital Institute."

Regarding the focus of the Institute, Fullerton said, "We've decided to focus on four areas. The first is the flow of real investment capital, which gets to the issue of tying together socially responsible investing (SRI), environmental, social and governance (ESG) issues, and impact investing. The premise is that the future economy will be determined by the real investment capital decisions made today. Those decisions are made by corporations and governments, and SRI and ESG is the best way to get at those decisions thus far. But no one has looked at the aggregate real investment capital and tried to think about it in a sustainable perspective, as a macro flow of the real economy."

"There is a need in the world for a post-modern portfolio theory," he continued. "We now know that modern portfolio theory is fundamentally flawed. It takes no account of the qualitative difference between sustainable investment and non-sustainable investment. Working on this issue is high on my agenda."

"The second thing we're focused on is the metrics question," Fullerton said. "There's a lot of work going on in such areas as integrated reporting, both for public companies and increasingly on the private investment side. We plan on being a thoughtful integrator of these ideas."

"The third area addresses monetary issues, the question of whether banks or governments should make money. I tried to avoid the topic for several years, because it is radical," Fullerton said. "I thought a few years ago that maybe if we went into a worldwide depression these ideas would become relevant. In Japan, the economy hit the wall in the early nineties, and now there are some 600 alternative currencies actively in use there. Many thoughtful people believe that the monetary system is such an important feedback mechanism for the economy that unless we evolve it into a far more complex system than it is today, the single currency system will not be up to the challenges ahead."

"We create money by lending it into existence," he continued. "By doing that, if you start with the presumption that the planet is finite and that the economic system can't grow indefinitely as the debt-based monetary system demands, then you set yourself up for a conflict."

"The fourth area is public policy or advocacy. All of this thinking has to translate into practice," Fullerton said.

"The mainstream debate about what's wrong with the economy has been about how to get the economy growing, and not about how to transition it to an economy that is sustainable," Fullerton said. "The aim of the project is to create a global consensus on an economic system that is bound by natural laws and ecological boundaries."

In their practice, sustainable investors have been addressing such issues for many years, albeit on a smaller scale than the Capital Institute envisions. Asked about the alignment of sustainable investment practices with the ambitious goals of the Institute, Fullerton said, "One thing we're trying to do is be relevant for people who are not investment experts, but are aligned with their values. People who have decided to act with their 401Ks understand what we're working on. If you want to build a sustainable system, you have to structure it in a way that the feedback loops reinforce stability. Economics is all about optimizing efficiency, and capital investment is all about interest and return on capital. If you drive for efficiency long enough, you'll break the system. A re-architecture of the financial system has to balance resiliency and efficiency."

"The current response to the financial crisis is inadequate," Fullerton continued, "Because all it does is throw a few buffers at an unsustainable system. We're trying to take the intuition that SocialFunds.com readers have been acting on and translate it into a sophisticated systemic change agenda, to educate the people in power."

"We want to help contribute to and foster the movement" driven thus far by sustainable investors, Fullerton concluded.

 

 
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