BRAINTRUST

Thought Leaders of the Emerging Regenerative Economy

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STEVEN CRANE & SCOTT FULLWILER

At The Universities for a New Economy Conference held at the New School held in May 2013, we had a chance to share insights gleaned from recent conversations with Scott Fullwiler and Steve Crane, two professors at Presidio Graduate School’s pioneering MBA in Sustainable Management Program. Both professors know their students need to be conversant in the old language of modern finance but they also want them to be fluent in a new vocabulary of holistic finance that acknowledges that some of the most critical values to be considered by anyone who cares about an investable future will often elude measurement. 

Scott Fullwiler

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Fullwiler uses a standard finance textbook to ensure that his students firmly grasp the capital asset pricing model, present value analysis, and modern portfolio theory, in other words he wants them to be literate in the traditional frameworks for investing. But what sets his capital markets course apart from the ones students take in a typical MBA program is that he teaches all this as a special narrow case where the underlying assumption is that the only thing that matters to the investor is financial returns. He then quickly broadens out to a systems-level discussion, talking about risks like climate change and resource scarcity, and how they might impact a portfolio of assets in ways that CAPM and modern finance in general largely ignore.“We are struggling in a field where what matters are financial returns and where only what can be expressed via numbers or math can be analyzed,” says Fullwiler, who is lead faculty for Presidio’s capital markets course and studied economics under the systems theorist F. Gregory Hayden at the University of Nebraska. “But we are trying to find a way to bring in, philosophically and methodologically, what we know about systems and how they work. The biggest challenge continues to be, how do you demonstrate with really rigorous analysis, that there are values beyond utility maximization and the maximization of returns versus financial risk?”

For example, he invites his students to think critically about discounting the value of future cash flows to calculate the present value of an investment. Is present value the best way to value assets when it minimizes or ignores future natural and social capital risks?  Do you really want to assign a trivial value, as present value analysis does, to a world that has in 20 years been spared the worst impacts of climate change or that has invested in a workforce that can continue to drive an innovative economy? Is that really prudent investing? He asks his students to liken the current costs of dealing now with the longer-term impacts of climate change to buying a call option on a future investible world. What price might you be willing to pay for that option?

Crane, who teaches the Managerial Finance course at Presidio, has 20 years of experience working in mainstream finance institutions and holds a PhD in organizational psychology. He invokes renowned systems theorist Donella Meadows when he says that to affect change in a predominant system you have to address the deep-rooted assumptions of that system. “I try to uncover the assumptions that underpin our current financial system and make them visible and then begin to push back at them and propose alternatives,” Crane says, describing his teaching methodology. “I recognize if you are going to engage a system in change you have to appreciate where it is coming from and what it is based on, and use those leverage points to converse with the old system and help it shift.”

Steve Crane

Crane does this by trying to shift the conversation from a narrow focus on return on investment based on market price to alternative models that trace the flow of value in an enterprise. “Value is a language that makes sense to finance people,” he says. “So if you can move a value flow towards quantifying and monetizing it as much as possible, including environmental and societal values, and approach it from a systemic perspective you can affect how a finance person looks for valuation in a more holistic way.”

Because students come to Presidio already converts to sustainability and systems thinking, Crane finds himself often preaching to the choir. Like Fullwiler, he sees his task, then, as ensuring that his students are “bilingual” and broad enough in their perspective to engage with the dominant mainstream world of finance. “I say to my students, ‘money matters, you have to speak to this sector in their language.’” It is really about empowering his students to be the agents for change. “My goal is to make them conversant in the mainstream tools, in how they might be adapted and expanded, but also in how they might be used, sometimes without any alteration, to support the creation of sustainable enterprise.”

For example Crane first frames CAPM for his students as a tool to measure and quantify risk and connect it to expectations of financial return.  He then asks, if you have an enterprise that does a good job of identifying social and natural capital risk and developing practices and organizational structures that really address those risks, then as a potential investor shouldn’t you expect a more reliable return from that enterprise? And if it is providing a more stable source of returns doesn’t it deserve a lower cost of capital? “This is how you begin to use the current language of finance as a bridge to a new understanding of what finance should be,” he explains.

From time to time, Crane takes his students on nature walks with a trained naturalist or an ecologist.  It is amazing, he says, to see his students’ perceptions of the world shift as the ecologist asks them to immerse themselves in the natural systems they see around them, and then to closely observe, for example, the color of a flower and to think about what the color of that flower might signify as a node in a larger system.   These kinds of direct experiential retrainings of perceptions, Crane reports, often provide surprisingly powerful opportunities to infuse the concepts of complexity and holism into the otherwise reductionist modern finance curriculum.–Susan Arterian Chang is Director of Capital Institute’s Field Guide to Investing in a Regenerative Economy project.