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Dec 12, 2018

Move Fast and Mend Things

The Silicon Valley adage “move fast and break things” might have worked in the past, but it’s time for new thinking.

The recent derision of Silicon Valley’s ideology of “move fast and break things” is summed up by Jonathan Taplin, who writes that the tech industry has become “some kind of nightmarish children’s playground, populated by overgrown babies with no idea of the consequences of their actions.” Examples of this lack of consideration for outcomes of actions abound. Indeed, it has become clear that moving fast—especially within technology—can and does have significant negative consequences. But does it have to? Maybe breaking things is what happens on the way (quickly producing a semiconductor or software and deploying a pretty good version, fixing problems in the next version) to working on the big things. The Googles of the world would probably say mistakes are a necessary evil to achieve those bigger goals (they don’t exist just to move fast and break things). But what I want to address here are the big ideas that need to be mended, because the world today is moving fast, more so than at any time in human history, and the time is now to think about where all this tech is headed, and to be deliberate about our desired endgame.

Rapid change is occurring in two key realms. The first is escalating, system-level risks. We can see today that most of our big threats—resource degradation and scarcity, health and mortality risks, inequality, security issues and climate disruption—are interconnected and exacerbate one another. The World Economic Forum summarizes these in its annual Global Risks Report, saying “the urgency of facing up to systemic challenges has intensified over the past year amid proliferating signs of uncertainty, instability and fragility…” So we need to move fast, because it’s not as if we’re just moving too slowly, in some ways we’re moving in the wrong direction. At a minimum, it’s time to stop breaking things—like our climate—that result in major risks.

Existential threats to life aside, how great are the growing economic risks? In an Axios article, Felix Salmon cites research that says “a 3.7°C increase will cause a stunning $551 trillion in damage.” Salmon adds, “$551 trillion is more than all the wealth currently existing in the world, which gives an indication of just how much richer humanity could become if we don’t first destroy our planet.” That pretty well covers it.

The second area of unprecedented change is technology itself. Innovation and technological advancement are accelerating, seemingly as fast as our risks, meaning our ability to manage global threats is improving at just the right time. Yes, I’m thinking of renewable energies here, but this is also very much about leveraging efficiency-driven technologies with the power to drastically reduce humanity’s stress on our ecological underpinnings. As one of the world’s foremost conservation scientists, biologist EO Wilson, has remarked, “why would I be optimistic that the digital world is going to shrink [humanity’s ecological footprint]? That is the nature of economic evolution, that people want and they will select if they have any choice, instruments and material goods that are smaller, consume less energy and material, need to be fixed less frequently and all of that means that the ecological footprint is destined to shrink” (emphasis mine).

It may be surprising that EO Wilson would turn out also to be an economist, but he’s right. He’s saying via innovation we get more economic outputs out of fewer and fewer inputs. That creates wealth, and it also greatly shrinks our ecological footprint, meaning we have the opportunity to provide a good standard of living for the 100 percent without crossing more planetary boundaries.

As Ramez Naam has pointed out, if there is one inexhaustible resource on earth, it is human innovation.

So economic growth does not have to mean using more resources and crashing through planetary boundaries. Economic growth can simply mean doing things more efficiently and taking advantage of innovation to de-risk our economy. Dangerous as tech can be, it is also our most powerful solution set. As Ramez Naam has pointed out, if there is one inexhaustible resource on earth, it is human innovation.

Economic growth must target the right areas of the economy—areas that reduce our exposure to the risks of fossil fuels and to the other main causes of our problems. This next economy is unfolding now, and it’s evolving to rest on four pillars: 1. massive productivity gains, powered by 2. indefinitely renewable energies built, along with everything we use, using basic materials that are almost exclusively sourced from 3. waste-to-value (recycled) materials (as opposed to primary geological) and 4. far more equitable ownership of these new means of production as a way of reducing inequality, itself an existential risk.

But many say that to truly mend a major risk like climate change, we need to end growth of the economy. One of these voices is Naomi Klein, who has written, “It is absolutely true that the drive for endless growth and profits stands squarely opposed to the imperative for a rapid transition off fossil fuels.” Yet we need solution sets that fit the scale of our challenges, and we need them soon. Growth in the four areas encompassed by the four pillars of next economics, at the expense of growth in their destructive, legacy economy predecessors and counterparts, is how we are de-risking the world while growing the economy. Economic growth is notthe same as resource degradation and increasing pollution. Although some economic sectors—fossil fuels!—must sunset very soon, the end of growth overall is the last thing we should wish for if we hope to rise to meet our most pressing challenges. Since where capital flows is where change happens most quickly, it is important to leverage capital to bring about this de-risked global economy.

Risks and solutions are peaking together, and, as investors, we need a unified framework for how to respond. At my firm, we call the framework we’ve developed in response to this confluence Next Economics.

It is the leaders in de-risking the world, not those with the glossiest ESG copy, that will be rewarded.

The foundation of this framework is simple: In terms of its revenues, a company has to be doing more to solve systemic risk than it is doing to cause it. Seeing where a company is getting paid is the clearest line of sight here. We think it’s wise to start with a top-down picture of what a company is producing. Let’s look, for example, at an industry that is adding to our problems, but is nevertheless a common investment. An internal combustion engine (ICE) car company may have a great employee stock ownership plan or even good ESG (environmental, social and governance) scores, but it is still responsible for large-scale fossil fuel demand, and therefore for the cause of climate disruption. Corporate leadership in mending the economy does not mean publishing ESG reports or website copy about CSR (corporate social responsibility) niceties. It means providing a real alternative to causing large-scale risk. An ICE maker may sell a relative handful of plug-in electric or hybrid vehicles, but a review of their revenue sources will reveal that the lion’s share of their business rests on causing and augmenting risks. The old chestnut “follow the money” applies here: If a company isn’t getting paid to fix things, its stock is likely to be of limited return utility over time. More generally, the causes of risk definitionally make poor long-term investments. It is the leaders in de-risking the world, not those with the glossiest ESG copy, that will be rewarded.

As portfolio managers, investing only in the components of this next economy requires us to think less like stock portfolio managers and more like venture capitalists, even with our regular stock investments. In light of a rapidly shifting economic risk and reward landscape, investors need to seek out what concepts are going to meaningfully address resource, climate and social risks. Then, they need to identify which firms are producing solutions that can grow at scale, address a largely unmet market and are disrupting their legacy counterparts with business models that reward their owners.

Given the pace and scale of dangers like climate change, and the solutions seeking to address them, forward investment risk won’t be measured solelyby how well a fund or a stock performs against an index. More importantly, it will be based on how an investment is positioned to address threats to the economy itself. Economist Auke Hoestra tweeted, “Wall Street considers increasing shareholder value as the only legitimate target. Tesla’s focus on saving humanity (or even other species) is seen an illegitimate distraction.” But that view of business is not a distraction. It is now, on the contrary, the point: Economic tailwinds for a business won’t be there going forward if that company isn’t doing something to lower the economy’s risk profile.

Suchitra Sebastian, associate professor in physics at the University of Cambridge, paints a vivid picture of the Next Economy:“Imagine a world where ultra-fast levitating trains zip between destinations, where wind energy from the North Sea and solar energy from the Sahara power the electric grid in New York, where carbon-free electric aircraft crisscross the skies and handheld MRIs deliver bedside scans.” This is one scientist’s vision, but one thing is clear: Realizing a de-risked economy will require massive investment and economic growth, and yes, moving fast. You’re not being a rule breaker if you invest exclusively in that world, you’re investing as conservatively as possible, from the standpoint of global risks. You’re also giving yourself a great chance at long-term returns.

There are a lot of brilliant people in Silicon Valley, and when it comes to “move fast and break things,” they’re half right. Again, Hoekstra: “…it is great that we have the technology to make tomorrow good, but we also need the insight to make good use of that technology.” It’s time to mend things.

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