"Indexing is absolutely compatible with impact. Index funds are not." An interview with Josh Levin of OpenInvest
When I first heard about OpenInvest a few years ago, I was intrigued by their combination of a digital platform for customizing portfolios to investors’ unique ESG and impact investing desires while also letting those investors vote their shares via their smartphones. Since they are based in San Francisco, I went to meet them in person. It’s been a pleasure getting to know Josh Levin, Co-Founder of OpenInvest over the past few years. Just as fun has been watching them open up their platform to RIAs so that advisors could take advantage of the values customization technology. Though we agree on almost all of the big picture items, we don’t always agree on the details. I hope you enjoy this spirited conversation as much as I did.
Sonya: I like to ask everyone- what was your impact investing a-ha moment?
It became obvious to me that we couldn't rope off the world's remaining wild places. In order to protect them in the long run, it is essential to foster sustainable economic development for the people who live in and around the world's biodiversity centers.
Josh: To be honest, it's been more of an evolution, which continues to this day. The closest thing to an "a-ha" would be around social enterprise more generally.
Ever since I was a toddler, I've felt a strong personal and spiritual connectedness to the environment - particularly forests. I pursued that passion as an adult. In 2003-2004, I worked for Conservation International in Cambodia, managing the "camera trapping" program doing traditional environmental law enforcement: tracking species, and arresting poachers and illegal loggers. The problem was, most of the folks we arrested were poor, local farmers, looking to make raise a little cash. The few times we could catch larger, organized criminals, we couldn't successfully prosecute them through the corrupt court system. It became obvious to me that we couldn't rope off the world's remaining wild places. In order to protect them in the long run, it is essential to foster sustainable economic development for the people who live in and around the world's biodiversity centers.
This experience put me into social enterprise, which was a very new concept at the time. I was granted the Catherine B. Reynolds Fellowship for Social Enterprise to attend NYU Stern for my MBA - a program famous for its Wall Street focus. When I graduated in 2009, I started working in sustainable finance.
Sonya: Recently I wrote about index funds, questioning whether they are compatible with Impact Investing. What are your thoughts?
In the 21st century, funds are not the impact solution. They're the bottleneck. The ESG industry will thrive, but it will monetize through other means.
Sonya: Tell me more about how you approach shareholder voting without the proxy voting mechanisms that funds have.
Josh: Clients and advisors get alerts when there's a shareholder resolution relevant to their personal values. They receive a summary and can swipe right through their queue, directly engaging in board-level decision making. Any votes they don’t act on default to ESG/SRI guidance.
Sonya: Some folks in the impact and responsible investing industry argue that many facets of capitalism have brought environmental and social destruction, and those same issues are reflected in a traditional stock market index. They ask why we should be benchmarking to an index if that index is reflective of a broken system. Your thoughts?
Josh: We tried the alternative to capitalism. It's called Bolshevism. Didn't work out that well.
Then there's the utopian approach. You can invest all your money in small co-ops and other social experiments. This is great both for the borrowers, the intermediaries, and the investor's cocktail party stories. But it's simply not scalable. Meanwhile, history is marching on and writing itself without you.
Sonya: Hmm, not sure I agree there – small corporations not listed in the indexes, loans to small businesses can both be impactful and relatively scalable. Go on though.
Josh: Hold that thought. But when it comes to large cap, no one can say that large corporations aren't having an impact - whether you like it or not. They employ hundreds of thousands of people, they cut down forests, they plant forests, they reshape our lives with technology, etc., and they are only getting bigger. More technology supports larger systems. This is just the reality from the 100-thousand foot point-of-view.
But it also gives us bigger opportunities for impact. Changing the bathroom policy in a S&P100 company will affect far more people than all the impact-investor privately backed social enterprises in history...combined. In order to stay competitive, these companies raise money from all of us. They socialize themselves. We all have votes, we all have a say over the most powerful entities in human history. There is a socialism embedded in late-modern capitalism. There is a global democracy that already exists, and it is not in politics, but in global capital markets.
With current technologies - new media and dynamic custom indexing - there's no reason that all the shareholders in Apple, for example, can't have a conversation about what their company should be doing.
Sonya: OK, but OpenInvest bucks convention in many ways yet sticks to this old school idea that an artificially created index is the gold standard for portfolio allocations and performance. Why?
Josh: Great – this is the “hold that thought” I mentioned before.
It sounds like we might be talking about which index you choose – e.g. small cap vs. large cap, etc. etc. We can also overlay customization on someone else’s alpha as the benchmark. With technology, the best ESG thinking can be overlaid on the best financial thinking. Let the ESG analysts focus on what they do best, and let the finance experts – human or automated – do what they do best.
Sonya: Thank you so much for taking the time to share your thoughts with me. It’s been a pleasure!