Thanks for writing up this idea! I think the risk management aspect of ESG is important, and this could definitely be a step in the right direction.
My main concern is that I am not sure how likely it is that there is a clear path to get investors to adopt Universal Ownership, it is not something I had heard of before. It seems to me the amount of risk reduction in the portfolio a single investor, caused by their individual marginal divestment/shareholder activism from a company with negative externalities would be quite small, so it would really only work if at least a majority of investors adopted a Universal Ownership model. Are there many investors who are adopting or taking this seriously already?
Also, to get a truly accurate pricing of externalities to maximize public/social good, each investor would ideally model and internalize the effects of externalities on ALL of society, not just their own portfolio, which would only incentivize them to consider a small fraction of the actual value investors and companies could provide to society. I realize this would be an even bigger ask of investors, but my hope is that there is an alternative social stock market or public goods market that systemically, financially rewards positive externalities and taxes negative externalities by design.
That said I could be wrong, would definitely be excited to see something like this gain more traction as it would be much better than what we currently have and I think it is possible something like this could gradually become more popular, especially if there was at least a small but reliable increase in value for investors by better accounting for risk which outweighs costs of modeling and is not countered by displacement effects.
Thanks for this. Your main concern is a very reasonable one.
To my mind, there is (at the moment) no clear path to get investors to adopt UO, and most of them have not heard of it before. There are someasset owners who have adopted it, but they are very much the exception, not the rule.
While these challenges definitely do reduce the probability of success of this project, it also increases the impact.
The counterfactual is that without this work, it would be highly unlikely that this would happen anyway.
I also agree that pricing externalities well is really hard.
Things that help here are:
the standard approach to modelling externalities is to do no modelling at all—so if we aim to outperform the existing models, we only have to produce a model which is better than nothing;
the financial system has successfully attracted lots of talented people—with enough time, getting lots of talented people to think about these problems should hopefully allow us to do a better job (maybe even a good job) of creating such models
Thanks for writing up this idea! I think the risk management aspect of ESG is important, and this could definitely be a step in the right direction.
My main concern is that I am not sure how likely it is that there is a clear path to get investors to adopt Universal Ownership, it is not something I had heard of before. It seems to me the amount of risk reduction in the portfolio a single investor, caused by their individual marginal divestment/shareholder activism from a company with negative externalities would be quite small, so it would really only work if at least a majority of investors adopted a Universal Ownership model. Are there many investors who are adopting or taking this seriously already?
Also, to get a truly accurate pricing of externalities to maximize public/social good, each investor would ideally model and internalize the effects of externalities on ALL of society, not just their own portfolio, which would only incentivize them to consider a small fraction of the actual value investors and companies could provide to society. I realize this would be an even bigger ask of investors, but my hope is that there is an alternative social stock market or public goods market that systemically, financially rewards positive externalities and taxes negative externalities by design.
That said I could be wrong, would definitely be excited to see something like this gain more traction as it would be much better than what we currently have and I think it is possible something like this could gradually become more popular, especially if there was at least a small but reliable increase in value for investors by better accounting for risk which outweighs costs of modeling and is not countered by displacement effects.
Thanks for this. Your main concern is a very reasonable one.
To my mind, there is (at the moment) no clear path to get investors to adopt UO, and most of them have not heard of it before. There are some asset owners who have adopted it, but they are very much the exception, not the rule.
While these challenges definitely do reduce the probability of success of this project, it also increases the impact.
The counterfactual is that without this work, it would be highly unlikely that this would happen anyway.
I also agree that pricing externalities well is really hard.
Things that help here are:
the standard approach to modelling externalities is to do no modelling at all—so if we aim to outperform the existing models, we only have to produce a model which is better than nothing;
the financial system has successfully attracted lots of talented people—with enough time, getting lots of talented people to think about these problems should hopefully allow us to do a better job (maybe even a good job) of creating such models