The financial sector has become top-heavy, and that poses real dangers to generalized wellbeing and sustainable prosperity. Too much wealth is accumulating around a small group of institutions and investors at the top of the wealth pyramid. With 10 years of steady recovery, we still see two extremely worrying trends:

  • The Capital Trap — Capital gains are exceedingly capital-focused (meaning labor and quality of life considerations are not built into the value measured by the capital gains).
  • Household Vulnerability — The majority of Americans (more than 60%) are within a single unforeseen ($1,000) expense of household financial crisis.

These two drivers of overall economic productivity suggest an escalating systemic weakness in the financial sector of the United States and other wealthy nations, which means that fragility will ripple out from the G8 (financial market leaders) to the G20 (which represent 80% of global GDP), to the entire world economy. This means no one’s wealth is safe from these ripple effects.

Toward Sustainable Profitability

Sustainable prosperity requires a different dynamic than the one we have now. Consider the following:

  • Sustainability means the ability to continue at or above existing levels, whatever the metric.
  • Investor confidence is necessarily linked to consumer confidence, which is driven by household solvency and the expectation of future solvency.
  • Sustainable prosperity requires measurable good health of both direct and indirect drivers of wellbeing.
  • Household vulnerability erodes the expectation of future solvency, undermines consumer confidence, and makes excessive investor confidence irrational.

In the current situation, major financial institutions are becoming dependent on extraction of wealth from consumers to generate capital gains. Put another way, major investors are putting far too much faith in the idea that moving wealth from people who don’t want to lose it to people who wish to accumulate it can serve as a sustainable substitute for earned income.

This means the efficiencies finance is hunting for right now are not the efficiencies that build generalized prosperity. Whatever measures one might take to secure and expand one’s existing capital holdings, a deficit in prosperity-building efficiencies will eventually put downward pressure on all financial interests.

A simple example: when there wasn’t enough money to sustain the rates of growth in real-estate prices across the world, and mortgage-backed derivatives turned out not to be able to hold their value, the financial sector collapsed, triggering the Great Recession.

We need to distinguish between value-building capital gains and trend-seeking capital gains.

Fortunately, the pressure to find sustainable business models—that build value at the human scale, while securing natural capital and expanding overall prosperity—points toward the solution to this other problem. We are moving into a world where trend-based capital gains will be scarce if they are not also driven by reliable generalized value-generation.

Five Levels of Value Creation

Profitable investments, as we move into a sustainable innovation economy, will have to perform on 5 levels:

  1. Performance Quality
  2. Ecological Integrity
  3. Climate Intelligence
  4. End-user Empowerment
  5. Adaptive Ingenuity

The first is business standard: produce a quality product or service, and customers will come back. The next four are variations on XROI — external returns on investment. Even the most privileged industries in the old economy must begin to generate reliable XROI, or the market will begin to move away from them.

  • Ecological Integrity means near-zero pollution, and where necessary, harmonization with natural systems (as with water usage, infrastructure or construction).
  • Climate Intelligence means avoiding climate-disrupting effects, and aligning with climate-resilient practices (including but not limited to climate-smart agriculture and biopolymers).
  • End-user Empowerment means operational comfort with decentralization of power and influence. (Oil gives you mobility; smart phones give you millions of functions and a world of information; solar micro-grids give you energy independence and resilience in the face of natural disaster.)
  • Adaptive Ingenuity means being able to evolve through complex changes in market standards and breakthrough industrial practices — ready to change how you get energy and deliver end products.

The energy bloodstream of enterprise is rapidly evolving, and will soon be characterized by a flexibility not known before. Competitive businesses will have to be sustainable on the 5 levels listed above, and also in their ability to maximize energy-use productivity—affordably, and with minimal negative environmental, public health or climate impact.

A shift in capital allocation to these five standards of integral enterprise sustainability, aligned with the aim of maximizing XROI, is a shift to value-building capital gains. In simpler terms: Investing in maximum generalized benefits over time is a better bet than hoping trends will favor those who visibly generate harm and cost for everyone else.

This article was originally published by as part of its future market guidance reporting.liberate-logo-190122-2258