Recently, TSC’s CEO Rick Alexander had the opportunity to speak at the Intentional Endowments Network’s 2025 Annual Forum. His remarks are reprinted here:

Good morning.

Thanks for that nice introduction and to everyone at IEN for putting this forum together. Instead of the opening joke, I thought I would start with flattery: I believe the people in this room have the ability and courage to save civilization by uniting two seemingly disparate aspects of our economy: long-term investment and social purpose.

Investment: you seek to preserve and enhance your funds’ financial value. Social purpose: your endowment’s reason for being. What is unique about this room is explicit intentionality, taking care that asset management does not depart from or oppose your purpose.

I believe the understanding that finance impacts purpose can be a bridge to understanding that the connection runs both ways: just as financial management impacts social outcomes, social outcomes affect financial returns.

That is what I want to focus on today: optimizing long-term financial returns requires that investors work as a class to protect the systems that undergird our economy because the impact that capital has on those systems has a huge influence on returns.

In other words, all investing is impact investing.

Your awareness of the broad impacts of finance means you are well-positioned to help fellow investors understand and utilize the full path of influence: the through-line from how institutions invest to whether society thrives and back to how portfolios perform.

Embedding that understanding throughout the financial community is key to solving problems, like taming our addiction to carbon, repairing the bonds broken by inequality, and avoiding artificial intelligence development that undermines our future.

The systems/investment connection isn’t new: we have been talking for years about system stewardship and there is a growing understanding that healthy systems will optimize returns. But I am concerned that the discussion hasn’t changed the reality that institutional investors measure financial success by comparing their performance to benchmarks and to peers. They often look for their own “special sauce,” something that sets them apart.

The systemic issues we face, however, require a collective response, which the individualistic, competitive culture of the financial industry resists; it is not easy for investors to prioritize systems when that means deprioritizing relative returns at individual companies and in portfolios, but that reprioritization is critical.

This community could lead a cultural shift that prioritizes authentic value creation and demotes extractive alpha chasing.

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To understand why investing culture is so important, consider the function of finance. Capital markets allocate resources, deciding how business operates in the real economy. They are responsible for decisions like:

• How much cement and steel to make and how carbon intensive the process will be.
• Whether to accord workers freedom of association and pay them a living wage.

Business choices that increase cash flows and enterprise values are rewarded in capital markets and these market valuations drive critical decisions about social and environmental systems. And those markets are calibrated to cash flows, not impact.

The theory behind this model is that the prices set in capital markets steer resources to their best use, so that both investors and society win: Mandeville’s private vice leading to public benefit.

But there is an error in this market source code that misallocates resources, threatening our economy and your portfolios.

Start with a truism: a portfolio’s returns equal its benchmark plus or minus the amount it differs from that benchmark, less fees. Take an asset owner with a global portfolio, and the relevant international index returns 4%. The investor might beat that mark by 1% if it has smart (or lucky) managers and pay 50 basis points in fees. This means its absolute return—the additional amount available to satisfy obligations–is 4.5%. That absolute return is what matters—it’s what allows the investor to satisfy its obligations. Compare this to a situation where the market returns 7%, but tracks the market

You can see where the perspective of the owner and manager of that portfolio might be different. The manager may be very happy in the first scenario, where it outpaced the market by 100 basis points, rather than just matching it. But in the second scenario, the asset owner has more proceeds from which to satisfy liabilities. Stylized, but you see the issue.

This different perspective matters because most investors are broadly diversified, so that beta—the market return–makes up most of their returns. Moreover, investors as a class receive exactly beta, less fees. And the point that people like Jon Lukomnik, Jim Hawley, Steve Lydenberg, Bill Burkhart, and others have been making for years is that institutional investors should make sure that their investments do not undermine beta. Not undermining beta means not undermining the economy because beta has an almost linear relationship to the economy, since owning the market is like owning a slice of the economy.

For example, if the climate warms too much or too quickly, the global economy will suffer, and that will threaten diversified portfolios. The theory of systemic investing tells us investors should engage, vote, and take other measures to stop company practices that contribute to climate change. That’s system level investing.

Despite some bumps, I would say that investors are increasingly interested taking action to address concerns like climate and nature loss. To some degree, investors are recognizing the need to preserve systems.

But I also fear that the systemic work will be diluted, and ultimately ineffective if we don’t face up to the fundamental conflict at the heart of finance: while diversified investors depend upon beta, companies and active asset managers continue to be graded on alpha.

Alpha and beta are not just different; they are often in opposition: the blind pursuit of alpha threatens beta. The current investing culture—the almost sole focus on alpha in measuring returns–is not just failing to address systemic issues; in many cases, it is the root cause of those issues. One clear example is the fossil fuel industry’s battle to preserve profits through campaigns that have undermined carbon regulation: diversified portfolios are at risk of 30-50% lowered performance over the coming decades compared to a future where we align with Paris.

Why is investor capital being used to lobby against climate regulation, even though such regulation would protect portfolios from losses of up to 50% in the coming decades? Why has one industry’s alpha been allowed to threaten the entire market?

Over-indexing alpha has three sources: first, it seems like a good way to align agents and principals—give the CEO stock in the company, and she will work to raise its stock price. Second, there is a strong belief that markets guide scarce resources to their most efficient uses. Finally, alpha just stands out in a way beta does not—everyone can tell where a company or portfolio manager stands in relation to peers. In contrast, beta is not easy to see or attribute, because today’s beta can only be compared to counterfactuals.

Let’s take an example: if a portfolio overweights McDonald’s, and it outperforms the market by increasing cash flow, it feels win/win. The portfolio has a higher return. The market drove a superior use for resources, as evidenced by profits, which reflect the creation of high market value outputs from low market value inputs. The ROI for burger making rises, more capital flows to burger makers, and more people get to eat burgers

Shouldn’t that cycle grow the economy—and thus beta along with alpha?

This is where the source code error comes in: a few years ago, economist Raj Patel calculated that a then-$2.00 fast food hamburger cost more than $200 when deforestation, carbon emissions, degraded public health, inequality, and other externalities were priced in. So, while McDonald’s maintains high margins, the economy loses value for every burger sold—someone pays for those externalities. That extraction threatens the diversified portfolios of McDonald’s own shareholders because investment in an economy burdened by nature loss, inequality, and climate change is a less valuable portfolio. The more money McDonald’s makes by externalizing the true cost of its business, the greater the threat to overall market returns of diversified investors. This is alpha driving economic value destruction and portfolio value loss.

Yet, fast food executives and active portfolio managers who overweight such companies are still rewarded in our alpha-first financial system. Until we address the bias towards alpha, extractive profit-seeking will undermine all attempts to heal our broken economy.

Prisoners Dilemma

Even if we understand this problem, solving it requires overcoming some problematic math, which I apologize for imposing on you on a Monday morning.

Remember our hypothetical return scenarios, where responsible investing increased beta by 3% (the difference between a 4% and a 7% overall return). In that case, we also assumed that investors who did not act responsibly could increase their alpha by 1%. If we put those numbers into a two-by-two matrix, we see a disturbing result:

If asset owners engage in systems level investing that makes most companies act responsibly, they should benefit from a 3% better economy, but those investors will surrender the smaller benefit secured by chasing profits created by practices that threaten critical systems

The first column shows the responsible owner earning the extra 3% in a sustainable economy, but no gain in beta if investors collectively fail to rein in corporate externalities.  So the responsible investor gets +3% or 0. The second column shows an irresponsible owner who earns a =4% return in a world where most other investors do the right thing (it gets the 3% better beta of a sustainable economy, but also the 1% alpha from continuing extractive profits); that “bad” investor also retains the 1% externality bonus in a sustainability failure scenario. So, the bad guy gets =4% or +1%.

Again, this is highly stylized, but you can see the problem—even if all investors benefit from responsible action to improve the economy, any individual investor can always do better, whatever the scenario—sustainable or not–by being irresponsible themselves, if they can get away with it. So even though the upper left quadrant–where most investors are responsible—is optimal for everyone, investors have micromotives to externalize costs. All similar investors face the same set of choices, and if everyone’s careers depend upon relative returns, they all do the wrong thing –the equilibrium solution is the lower right quadrant. This called a “Nash Equlibrium,” after John Nash, the mathematician profiled in A Beautiful Mind.

This is the prisoner’s dilemma that portfolio managers face every day. Investors may well use their tools to try and improve systems, but often they only do things that don’t affect alpha, because everyone is watching alpha so carefully. But that isn’t enough–it is the alpha-earning externalities that are the source of the critical systemic threats.

To summarize, it is very hard to use investing tools to preserve systems when doing so would lower relative financial returns at one or more companies because:

1. The financial system is rife with incentives to produce alpha, and has no built-in incentives to protect beta
2. We believe in markets
3. Alpha is very salient, while beta is silent
4. Even when companies or investors know that they would benefit from a higher beta if everyone acted to protect systemic health, the free rider temptation (and suspicion that others will free ride) makes action very challenging.

I do not have a silver bullet to solve the alpha problem. It is deeply entrenched.

But I do believe in the story of the old fish who asked the young fish how the water was, only to be met with a blank stare, and the question, “What’s water?”

We need to make sure everyone understands the shark-filled nature of the water that is finance. Here are some ideas we need to get out there:

• It is a myth that all long-term profits are good for the economy and good for investors
• It’s dangerous to blindly accept price signals on companies when those prices do not reflect the true cost of operations
• Alpha achieved by externalizing costs should not be rewarded.
• System-level investors must make it clear that alpha is secondary to preserving the critical systems that all investing relies upon.
• A shareholder’s argument that a company must change an unsustainable practice to protect diversified portfolio value—especially at a cost to alpha—is the most credible argument shareholders can make, because it shifts the sustainability argument away from the corporate management’s domain of company value to the shareholders’ rightful domain of policing misuse of their capital.

What would things look like if we preserved markets as capital allocators, but accounted for externalities?

• Equity compensation would be clawed back if a company didn’t meet appropriate climate and other targets well into the future, ensuring cap ex programs locked in sustainability.
• Active and passive mandates would require stewardship to address externalities.
• Owning companies that extracted systemic value would be considered a failure of management even if the portfolio beat or tracked the benchmark.
• Private equity carries would be subject to sustainability hurdles as well financial ones, so that gains generated by unsustainable practices would not benefit the managers.

This might sound like the John Lennon’s song Imagine for finance, but as long as we reward executives, managers and others for extractive profits, markets will continue to allocate resources to extraction, and all the ESG targets and engagements in the world will not alter outcomes we should most fear.

At The Shareholder Commons, we believe it is time to develop a clear framework for investors to insist on a capital market designed to serve their needs, rather than the needs of company executives and financial intermediaries. The core of the framework will be a four-step analysis:

• Identify economic systems that underpin portfolio value.
• Identify company practices that degrade those systems.
• Identify “guardrails,” to limit corporate behaviors that contribute to such degradation
• Identify specific shareholder actions that would be effective to implement such guardrails.

This framework will enable action by investors to shift away from markets that reward dangerous extractive practices to markets that incentivize the authentic value creation that leads to valuable enterprises without raiding the global commons. We hope we can persuade committed professionals like you to join us on this journey.

Let’s change the investing water.

Thank you.