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What if every dollar of global capital has been misallocated, wrongly committed because of outmoded or somehow misguided risk models? This worry seized me after I asked a seemingly innocuous question of a world renowned climate expert at a large investment conference in spring 2021.

“It’s 2070, about fifty years from now. Exactly how much warmer are global temperatures?”

Her response was a gut punch.

My climate expert was a key architect of the Paris Agreement in which all but six United Nations member states agreed to enact policies to limit global warming to around 1.5 degrees Celsius versus pre-industrial levels. Better than most, she knew all the daunting tasks that needed to be done for the goals of Paris to be achieved. In short, we human beings must stop pumping carbon into the air and/or find an economical way to take a lot of the carbon that’s already there out. She had devoted her entire career to helping policy-makers, corporations, and local communities prepare for the coming energy transition. My job was to interview her before a large audience of investment advisors.

“Well,” she started slowly, “the answer is—we just don’t know. It could be less than we committed to in the Paris Agreement. But it could also be much more, maybe as high as 4.5 degrees Celsius.”

It was a stunning, if honest, answer. It landed on the audience like a neutron bomb. To be clear, an increase of 4.5 degrees Celsius would put us close

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to the last days of the Paleocene–Eocene era about fifty-six million years ago, when there was no polar ice and seas were at least sixty feet higher. Our world would be unrecognizable.

“Oh my God,” we all thought. “What are we supposed to tell our clients?”

It was not a hypothetical question. The job of everyone in the room, myself included, was to advise the world’s largest sovereign wealth funds, insurance companies, public pension plans, and endowments about where to invest their money safely for decades to come. The vast majority of their assets were being managed against long-term liabilities—often for retirement needs but also to pay out insurance claims, cover future health care costs, or fund philanthropic endeavors like college scholarships. These assets belong to them and to their beneficiaries. Our job was to help make sure they achieved very specific returns, come hell or high water. It was suddenly clear we could end up with both—both hell and high water, that is.

I worried about what was racing through my guest speaker’s head, but I was even more concerned about what the audience was thinking. They needed to come away from this interview with actionable insights. Allegedly, I was the expert interviewer. Telling thousands of clients, “Sorry, but the planet is toast, and all your savings may go up in smoke,” was simply not an option. My guest had never met most of the folks she was addressing, moreover. I had to find some way out of this abyss.

“Your job,” she continued, thankfully, “is to advise your clients about how to prepare for whatever future will come. Uncertainty is inherent in all investing. You need to help them get it right. Of course, you also need to remind them that their investment decisions could impact the outcome.”

This longer answer calmed fears somewhat, but it also slipped in an important point: investors are not innocent bystanders. Where people ultimately put their money has consequences. Those consequences may make all the difference in the end.

Though certainly top of mind, an existential climate threat is not the only challenge the human family faces in the twenty-first century. There is a daunting list of other geopolitical and social challenges, ranging from Russia’s outrageous military adventurism and an ascendent China to growing social unrest caused by mounting disparities between the haves and the have-nots. Equally important, the human family is still recovering from a once-in-a-century body blow—the seemingly never-ending global COVID-19 pandemic. Countries caught in military crossfire and/or lacking

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access to vaccines and primary health care could well be scarred for generations. This scarring could hold everyone back. Viruses are a lot like war, after all; they don’t respect national borders. We need to confront our existing challenges while simultaneously tackling future ones.

Those of us who have been privileged enough to make a living in the financial services industry have another challenge, too. Increasingly we are expected to shift from being part of the globe’s problems to an important part of its solutions.

Since the infamous tulip bulb bubble of the early seventeenth century, there have been recurrent, pointed accusations that the financial services industry invariably looks after itself while creating imbalance and mayhem for others. This was a principal conclusion that came out of the Global Financial Crisis: Wall Street thrived while Main Street writhed. Today, it’s widely thought that the financial services industry actively supports big oil and thermal coal, intentionally exacerbates income inequality, and is concerned about only one thing: protecting itself and its profits. Some of these accusations have turned violent. A few years back, hundreds of Occupy Wall Street protestors were forcibly evicted from tent camps, resulting in three deaths and many hospitalizations. More recently, protestors have broken into business offices, including those of my alma mater BlackRock, spilling fake blood on desks and hallways. Some even glued themselves to headquarter doors, attempting to force the world’s largest asset manager and other financial institutions to abandon their presumed evil ways. Whatever and wherever bad is happening, financiers are assumed to be complicit. It just comes with the job.

Over the past four decades of my career in finance, I have accepted a clear, professional responsibility. That responsibility is to be a fiduciary. To be a fiduciary means I am responsible for helping my clients—the endowments and foundations, sovereign wealth funds, central bankers, and others who somehow listen to me—navigate a very uncertain future. More specifically, my job has been to help ensure they and all their beneficiaries achieve their financial goals within clearly specified and appropriate risk limits. Their financial interests have always come before my own. I serve by helping them obtain the financial resources they need to do whatever it is they have to do.

But as a man of conscience, I also have personal responsibilities. Well before I became a fiduciary, I committed myself to living a principlecentered life inspired by the Catholic traditions that have formed me. My real “job” is to care for my family and the broader human family while remaining

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true to my core convictions. These personal obligations both inform and heighten my professional obligations. Among other things, they require that I examine my actions and words as well as the actions and words of every organization I affiliate with for moral consistency. I have always tried to do so privately and publicly. For example, after the Global Financial Crisis, I wrote about excesses in the financial services industry and examined my personal culpability for them.1 In response, I started a voluntary financial Hippocratic oath movement, dedicating myself alongside thousands of others to abiding strictly by the Golden Rule—that is, treating others only as I, myself, would hope to be treated. I maintain this vow to this day, as a supplement to my other fiduciary commitments. If the asset management industry has been complicit in environmental desecration, selfish profiteering, or any other ignoble pursuit, please know I am wholly prepared to unveil those transgressions and do whatever I can to stop them. After all, my ultimate judge is not of this world. My ultimate goal in this life is to be somehow deserving of the next.

So, now you understand how this book came into being. It is the outgrowth of deep, inextricably interwoven personal and professional responsibilities. In some ways, it has been forty years in the making since that’s how long my financial services career has been. It has three immodest yet interrelated goals.

First, it seeks to add clarity and substance to the “stakeholder capitalism” debate. Today, there is a broad consensus that businesses should do more than look after the financial interests of their shareholders. I agree. Businesses have responsibilities to their employees, their suppliers, the communities in which they operate, and our environment, all in addition to their shareholders. A substantial portion of this book examines how the corporate world could do more to benefit society and what financiers can and should do to promote better corporate outcomes. But here, things quickly get complicated. Businesses, above all else, must create economic vitality. That is their sine qua non. If businesses don’t foster economic growth, nothing else will. Without economic growth, moreover, few other forms of progress will prove possible. For its part, finance optimizes risk and reward trade-offs. If finance fails, the whole system fails. Financiers and corporate CEOs are not, nor should they ever be, social or environmental justice warriors, forever prioritizing stakeholders at the long-run expense of their shareholders. This is not their primary responsibility. After a first chapter outlining all that is at stake, I examine this heated stakeholder-versus-shareholder

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debate, underscoring the urgent need for more comprehensive, longer-term thinking. Most pensioners need their assets thirty years from now, not thirty minutes from now. Our obligations are to them. Fortunately, focusing on a thirty-year horizon transforms many of the decisions we must make today very much for the better.

Second, it seeks to demystify and elucidate the phenomenon of ESG investing, “ESG” standing for Environmental, Social, and Governance objectives. The reason for this is simple: ESG investing is the newest, most sophisticated, and fastest-growing tool the financial services industry has created to help solve the world’s most pressing problems. If finance is going to be a crucial part of the solution instead of the problem, ESG investing has got to work. As my chosen profession has birthed it, I am at least inferentially responsible for its success. Of course, this also means I must help ensure it doesn’t do more harm than good, a nonacademic worry. All too often, wellintentioned, government-blessed financial innovations grow exponentially before bursting. The proverbial road to hell too often finds good intentions in its pavement. More pertinently, it’s possible to agree with all the goals of ESG investing while having some misgivings about all its probable impacts— but now I am getting ahead of myself.

Third, it highlights and drives home the principle of comparative advantage. A fundamental premise of this book is that finance and business have essential roles to play in fashioning more inclusive, sustainable growth, but they cannot and will not succeed on their own. If more inclusive, sustainable growth is our ultimate objective, which I deeply believe it should be, business and finance need regulators, public policies, private corporations, civil society, and individuals to play specific, complementary roles. Financiers and businesses have no special powers to right others’ wrongs or turn the carbon clock backward. If tax laws, regulatory regimes, and/or personal consumption patterns do not simultaneously support better social and environmental outcomes, business and finance won’t be able to compensate for those failings. Comparative advantage helps us understand how to assign the right roles to the appropriate agents. It also helps us imagine comprehensive solutions. A final related and hoped-for bonus of this book is to highlight financial strategies and organizations of unique promise—including green bonds, new forms of impact investing, and many extraordinary nongovernmental organizations (NGOs), which I refer to as exemplars of hope. These activities, investments, and organizations can, already are, and will continue to promote more inclusive, sustainable growth. They are essential to achieving

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our most sought-after long-term goals. I believe there is an optimal way forward—but it’s going to require more than our current medley of ESG strategies and endless shaming of publicly listed companies. Much more.

The Nobel Prize–winning and rightly revered professor of economics and finance at Yale, Robert Shiller, has written what is almost certainly my profession’s most authoritative book on the role finance can and should play in creating the “good society.” Professor Shiller does not go into detail defining what the good society entails. Still, one readily infers that economic efficiency and the Aristotelian conceptions of fairness—that is, fostering social equanimity by correcting all that is inequitable—are essential underpinnings. Shiller’s principal thesis is that finance has a specific responsibility for stewarding society’s assets efficiently and fairly while simultaneously facilitating its most profound aspirations. A corollary of this claim is that no society can be good—that is to say, no society can be fair and efficient— if finance fails to perform its essential assigned duties. In his book, Shiller helpfully profiles many specific skills and sensibilities that more than one dozen types of financial specialists must perform if finance is to help achieve ubiquitous goodness and well-being. These range from mortgage lenders and accountants to derivatives traders. He assigns a notably important role to investment managers:

Investment managers—those who manage portfolios of shares in companies, bonds, and other investments—are among the most important stewards of our wealth, and thus vitally important players in the service of healthy and prosperous market democracies—all in the service of the Good Society.2

Of course, I recognize that many will disagree with Professor Shiller’s depiction of investors as vital agents who can, must, and should contribute to social well-being. They likely believe anyone who has anything to do with money forever belongs to the world of Mammon. In some sense, this book is especially directed to you, finance’s deepest skeptics. Financiers have given us all plenty to doubt and despise over the years. Believe me, I know! I have witnessed many such failures up close and personally. Note Shiller does not say all finance and investment contribute to the realization of the good society, however. Instead, he argues it will not be possible for the good society to flourish unless finance and investment play specific supporting roles. I agree with Shiller. Part of what I hope to do in the pages ahead is to convince you to agree with Shiller, too. Financial professionals and investors

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have crucial roles to play in maximizing human prospects and achieving optimal environmental, social, and economic outcomes. The principal question addressed in this book is what specific roles business and finance should play in helping to create the good society—as well as what everyone else must do so the human experiment succeeds. I think it is possible to create the good society, but we must begin with goodwill and forge a sense of common purpose. We must also be clearer about who should be doing what. I hope you’ll agree.

As befits a book of such immodest scope, there is deliberate modularity to its presentation. Certain chapters will appeal to some readers more than others. Chapters 1 to 6 are primarily historical, for example. They set the stage for a more technical deep dive. They help explain how and why stakeholder capitalism and ESG investing have emerged in their current forms and what they are trying to do. They canvass the stakeholder-versus-shareholder debate and dissect the most common arguments waged by modernday activists. They also review what many CEOs have recently promised to do differently, briefly profile the central role of the United Nations in promoting more responsible investment principles, and lay bare the stultifying financial exigencies of climate change. Laypeople will appreciate this background, but so should financiers. Past is prologue. We won’t be able to fashion the world we say we want if we don’t fully appreciate all that has led us to where we now are.

Chapters 7 to 11 are the more technical parts of the book. While somewhat harder to navigate, they carefully explain how ESG investing functions today. An understanding of the concept of materiality, how stock market indices are created and updated, governance challenges to “hardwiring” corporate goodness, the dynamic relationship between values and valuations, and a range of indexed and active trading strategies that incorporate ESG themes are essential to understanding what modern ESG investing is and is not, as well as what it can and cannot do. If finance is your field, be sure not to miss these chapters.

The discussion in chapters 12 to 14 gets to the heart of some of the challenges ESG investing faces, including the nonnegligible risk of unintended consequences and its surfeit of verifiable impact. These include the limited efficacy of the “cost-of-capital transmission mechanism,” the risk of investment bubbles, the growing probability of unwanted corporate activities shifting from publicly listed corporations to privately or state-owned hands, gross capital misallocation, and the dangerous obfuscation of the roles regulatory

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and consumer behaviors play. Please don’t be intimidated by these concepts; they will all be clearly explained. These chapters also highlight the growing importance of investment stewardship. If ESG is to deliver all that is being asked, the specific perils outlined in chapters 12 to 14 need to be addressed. I hope regulators, financial industry insiders, and corporate CEOs will pay special heed to these concerns. I also hope everyone will come to understand the importance of enlightened stewardship. The best way to improve corporate behavior is from within. And the best way to improve corporate behavior from within is to have the right board and management team working assiduously toward long-term goals that promote all societal interests, including their company’s profitability.

The final three chapters of the book focus on solutions. They highlight the importance of civic society and several of the most promising investment techniques that verifiably produce better environmental and social outcomes while also producing market-related returns. They shine a bright light on a number of NGOs that have proven, scalable solutions for promoting more inclusive, sustainable growth; these are my exemplars of hope. These chapters also describe multiple impact investment strategies like green and social impact bonds, which generate investment income while verifiably doing good. It is no use positing a litany of societal and environmental problems without also identifying viable solutions. I bundle all these arguments in a final chapter grandiosely titled “The 1.6 Percent ‘Solution,’” with “Solution” appropriately within quotation marks. Let me level-set expectations by explaining what I mean about this right now.

In one fundamental respect, solving our ongoing social and environmental challenges is a question of mobilizing the right amount and types of investment. As it so happens, collectively, humanity has more than enough capital to solve all the problems we choose to address. If we want to deal with excess emissions, economic immobility, polluted oceans, poor public health standards, and rebuilding war-torn lands, we will need to reallocate some assets from their current, less impactful use to more deliberate and productive ends. As it so happens, this is both easier and harder than it sounds. Still, it is doable, and I explain how at the end. In my considered judgment, embracing something like my 1.6 percent “solution”—where a modest share of financial assets is deliberately reallocated to explicit impact investment strategies—would be the best way for modern finance to play its vitally important role in creating the good society. Of course, you could be forgiven for skipping the earlier chapters and jumping straight to these concluding

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pages to see if they make any sense; that’s what I usually do! If I’ve done my job well, though, my closing chapters might encourage you to go back to the earlier ones just to see what you may have missed. I hope so, anyway.

There is an Irish joke that speaks of a tourist visiting Dublin. He stops a local hurrying by and politely asks how to find one of its most famous pubs, the Temple Bar.

“Oh,” the journeyman quips, “I certainly wouldn’t start from here.” Then, shaking his head despondently, he shuffles away.

Well, we are starting from here. Actually, “here” is the only place we ever get to start from. As you know, “here” is full of problems and worries, including environmental woes we wish we had never created, yet another unnecessary European war, and social challenges we must find some comprehensive way to address. “Here” is not where we want to be.

But “here” is all we’ve got. And if we do not make the most of “here,” we will never get “there.” Obviously, “there” is where we need to go.

It’s best we get going!

PART 1 The Promise . . .