A Word from the CEO: Creating Social Value with Innovative Approaches to Finance
From Gordon Gecko to Jordan Belfort, redeeming qualities are almost always in short supply when Hollywood’s cameras focus on Wall Street.
Hollywood, fortunately, isn’t reality.
In the quant space, for example, some fascinating questions are now being asked — and solutions proposed. Practitioners are actively exploring ways to deliver social value by leveraging innovative approaches to finance, including the most sophisticated of quantitative tools and analysis.
Axioma’s Quant Forum in New York this September featured presentations by two such individuals. Robert Litterman, Chairman of the Risk Committee and Partner at Kepos Capital — who also happens to serve as treasurer on the board of the World Wildlife Fund — spoke on “Thinking about an Environmental, Social, and Governance (ESG) Policy.” Roger M. Stein, PhD, Senior Lecturer in Finance at the MIT Sloan School of Management, looked at ways of “Commercializing Biomedical Research through Securitization Techniques.”
At the conclusion of the Forum, Axioma Advisor spoke with Axioma’s CEO Sebastian Ceria about the presentations and Axioma’s decision to include them in this year’s AQF New York.
Axioma Advisor: How did these two presentations end up on the AQF agenda?
Ceria: They ended up on the agenda because — like all the other presentations — they brought an innovative perspective to the subject at hand. Plus, these particular presentations showed how quant tools can be put to use to create social value. And if the response of our attendees was any indication, there’s tremendous interest and enthusiasm for such efforts.
Axioma Advisor: What was your takeaway from Roger Stein’s presentation?
Ceria: Let me speak to that by asking a simple question: Are we as a society spending enough on cancer research? I think we all know the answer to that question. The challenge is, how can we increase that funding? How can we accelerate the effort to conquer cancer? Roger’s idea, and it’s a very powerful one, is to capitalize on the innovations in finance that led to the idea of securitization — an innovation that essentially allows you to deflect risk by packaging several diverse and hopefully uncorrelated investments into one package, such that together they are much more easily financed, because the securitized asset has lower risk.
Granted, it is vital to avoid a duplication of the all-too-familiar perils that came with the securitization of mortgages, but the potential value here cannot be disputed.
Axioma Advisor: And the Litterman presentation?
Ceria: Bob’s presentation is a compelling one, and I personally share the view that financial innovation can enable us to design policies that will change the behavior of those who are contaminating the planet. If everyone agrees that contaminating the environment is bad and that the value of the electric companies that do it should be reduced accordingly, then the result may be fewer new carbon plants, because owners know that the market is going to significantly underprice them.
The big challenge, of course, is enforcement. We can’t get the world to agree on a set of rules applying, for example, to tax havens, so why would you expect to get agreement on a set of global rules aimed at penalizing those who contaminate?
On the other hand, if you manage to create enough of an expectation that this is going to happen, it might be enough to reduce the value of these contaminating assets so that the owners would be less resistant to the change.
Axioma Advisor: You mentioned that both presentations were well received.
Ceria: It really was an uplifting experience. Look, everyone in that room was either in the business of managing assets or building tools that help people to manage assets. And the idea that we can apply our knowledge, our skills and tools to create social value clearly has tremendous appeal, judging from the reactions we observed. And I believe it is a trend that is gaining momentum.
About four years ago, for example, I became involved in an organization called the Neighborhood Trust, which was created in New York to help low-income families achieve financial stability and mobility by providing access to affordable financial services, credit establishment and so on. The concept is to help low-wage workers escape the cycle of burdensome debt, poor credit, and constant cash-flow crises. We are talking about people with an average income of about $18,000 a year who, for example, will spend more than $40,000 in their lifetime to turn their paychecks into cash by visiting check cashers instead of banks.
The Federal Credit Union operated by the Trust guarantees members access to affordable and fair financial services and, perhaps most important of all, good advice when it comes to savings, credit, and money management. But here, too, what makes the work of the Trust so compelling are the innovations that they are adding to the mix.
Axioma Advisor: How so?
Ceria: The Trust Card Program is a perfect example. The Trust Card applies behavioral economic principles to create a credit-card product that gives access to credit, but only in proportion to a user’s ability to manage and pay down debt.
The concept for the card largely came out of work done by Dean Karlan, a professor of economics at Yale who also happens to sit on the Trust’s advisory board. Dean has done a tremendous amount of research focusing on the efficacy of social policies and the development of microfinance programs for the poor. The Trust Card is designed to help low-income households avoid the trap of escalating debt and service costs — and it works!
Axioma Advisor: But will it ever become a major motion picture?
Ceria: Not very likely. But telling the story of Muhammad Yunus, the Bangladeshi banker who won the Nobel Peace Prize, now that’s a different story.*
*Bonsai People: The Vision of Muhammad Yunus (2011) and To Catch a Dollar: Muhammad Yunus Banks on America (2010).