Alright, we are back with another episode of My Weird Prompts. I have to say, this one is hitting close to home today. Our housemate Daniel has been spending quite a bit of time lately looking into the world of impact investing, and he just sent over a prompt that really gets to the heart of how we value progress versus profit.
Herman Poppleberry here, and I am ready for this one. Daniel has been mentioning his work with the social impact world quite a bit over breakfast lately, and it is a fascinating rabbit hole. It is one thing to say you want to do good with your money, but it is an entirely different challenge to define what good actually looks like on a balance sheet.
Exactly. The prompt is asking about the parameters of doing good and whether we can actually maintain a blacklist of industries that should be excluded from impact investing. Or, as Daniel suggests, is it all becoming so complex that we need a case by case evaluation system instead?
It is the ultimate dilemma of modern finance. For a long time, the world of ethical investing was pretty simple. You just looked at what were called sin stocks and you stayed away from them. We are talking about the classic quartet of tobacco, gambling, weapons, and pornography. If a company made those things, you did not buy their stock. Simple, right?
It was simple, but was it effective? I feel like the shift from that kind of passive exclusion to what we now call impact investing is a huge leap in philosophy.
You are spot on. Impact investing is not just about avoiding the bad stuff. It is about intentionally seeking out companies or projects that generate a measurable, beneficial social or environmental impact alongside a financial return. It is the double bottom line. According to the Global Impact Investing Network, which people in the industry call the GIIN, the market size for this has ballooned to over one point five trillion dollars as of their latest report. That is trillion with a T, and it has been growing at a compound annual rate of twenty-one percent over the last few years.
That is a staggering amount of capital. But this brings us to the core of Daniel's question. If you have over one point five trillion dollars looking for a home that does good, how do you decide what is out? Let us talk about that blacklist idea. Is the concept of a categorical exclusion even viable anymore?
It is getting harder every day. Take tobacco as an example. Most people would agree that it belongs on a blacklist. It is a product that, when used as intended, kills its users. There is very little social upside there. But then you look at something like the defense industry, which is what Daniel specifically called out. For decades, defense was a hard no for any social-minded investor. But recently, we have seen a massive shift. In late twenty-twenty-four, even Germany—which has historically been very conservative on this—removed guidelines that prevented defense companies from being included in sustainable funds.
That is a massive pivot. I have seen those arguments. The idea is that you cannot have a sustainable society or a functioning democracy if you cannot defend it. Some people are even calling it the S in ESG, arguing that national security is a prerequisite for social stability. But I have also heard critics call this peace-washing. It feels like we are moving into very gray territory there.
It is incredibly gray. And it gets even more complicated when you look at the technology itself. Think about dual use technology. If a company develops an advanced artificial intelligence system for autonomous drone navigation, they might sell it to a logistics company for delivering medicine in rural areas. That is clearly a positive impact. But they might also sell that exact same software to a military contractor for loitering munitions. How do you categorize that company? Do they go on the blacklist because of the military application, or do they stay on the impact list because of the life saving potential in logistics?
This is where the categorical approach really starts to crumble. If you just blanket exclude anything related to aerospace or defense, you might be missing out on the very innovations that are going to drive the next generation of environmental monitoring or emergency response.
Exactly. And it is not just defense. Think about the energy sector. A lot of traditional ethical funds just had a total ban on fossil fuels. But now, we are seeing the rise of what is called transition finance or brown-to-green investing. The idea is that if you want to actually solve climate change, you cannot just invest in a tiny boutique solar firm. You might actually achieve a greater net impact by investing in a massive oil major and using your position as a shareholder to force them to pivot their entire infrastructure toward renewables.
We actually touched on some of the complexities of large scale infrastructure and impact back in episode one hundred and fifty-nine when we talked about the high cost of flight and aviation. It is that same problem. Do you walk away from the industry entirely, or do you stay and try to fund the massive capital expenditures needed for green hydrogen or sustainable aviation fuel?
Right. If you divest, you lose your seat at the table. You lose your ability to vote on board members or influence strategy. So, if the goal is to do good, sometimes staying invested in a brown company to turn it green is more impactful than only buying into companies that are already green. But that makes the definition of an impact investment very slippery. If I buy shares in a coal company because I want to help them close their mines faster, am I an impact investor or just a guy holding coal stocks?
That brings us to the second part of Daniel's prompt. Is the answer a more robust internal governance structure and a case by case evaluation? Because if we cannot rely on a simple blacklist, we need something much more sophisticated to keep ourselves honest.
That is exactly where the leading thinkers in the field are going. Sir Ronald Cohen, who Daniel mentioned, just released the second edition of his book, Impact, in late twenty-twenty-five. He has been a huge proponent of what he calls impact weighted accounts. The goal is to move beyond just words and feelings and actually put a dollar value on the social and environmental impact of a company. There was even a major merger recently between the Capitals Coalition and the International Foundation for Valuing Impacts to try and mainstream this kind of impact accounting.
That would change everything. It would turn impact into a hard metric that can be audited. But how do you actually measure those things without it becoming a total exercise in creative accounting? I can see a world where companies just hire the best consultants to make their impact numbers look better than they really are.
Oh, the greenwashing risk is massive. That is why the governance side is so critical. We are seeing the development of standardized frameworks like the IFRS Sustainability Disclosure Standards, often called S-one and S-two. In fact, right now in early twenty-twenty-six, the UK is consulting on its own version called the UK Sustainability Reporting Standards, which could make these disclosures mandatory for listed companies as early as twenty-twenty-seven. They are trying to create a common language for things like intentionality and materiality.
So, it is about looking at the core business model, not just the corporate social responsibility fluff on the sidelines. I like that. But it sounds like a lot of work for an investor. If I am a pension fund manager and I have to do a deep dive case by case evaluation on every single company in my portfolio, that is a huge operational burden.
It is. But that is also why we are seeing a specialized sector of the finance world growing so fast. People are realizing that traditional financial analysis is incomplete. It is like trying to fly a plane with only half the instruments working. If you are ignoring the social and environmental risks or opportunities, you are not actually doing your job as a fiduciary. You are missing the big picture.
Let us go back to the defense question for a second, because I think it is a perfect test case for this case by case approach. If a fund decided that defense was no longer on a universal blacklist, what kind of internal governance would they need to make sure they are still doing good?
Well, they would have to look at the specific behavior of the company. Are they selling to regimes with poor human rights records? Are they producing indiscriminate weapons like landmines or cluster munitions, which the European Commission specifically excludes from its security budgets? Or are they focused on defensive systems like missile shields or cyber defense? A case by case approach would say that a company making iron dome interceptors is fundamentally different from a company making small arms that end up in civil wars.
I can see the logic, but I also see the slippery slope. Once you start making those distinctions, the lines get very blurry. It feels like it could lead to a lot of justification for things that, at their core, are still about destruction.
It is a slippery slope. And that is why some people still argue for the blacklist. They say that the moral clarity of a hard no is better than the moral ambiguity of a case by case evaluation. But the world is becoming so interconnected that a hard no is becoming almost impossible. If you want to avoid anything related to defense, you might have to stop investing in companies like Boeing or even Google and Microsoft, because they all have massive government contracts that involve defense applications.
That is a great point. If you divest from the entire S and P five hundred because of some tangential connection to an excluded industry, you basically cannot participate in the modern economy. So, the case by case approach isn’t just a preference, it might be a necessity.
I think it is. And I think the real innovation is going to be in the transparency of that evaluation. If a fund decides to invest in a defense contractor or a transitioning oil company, they should have to publish their reasoning. They should have to show the data that supports the idea that this investment is creating a net positive impact.
That would be a huge step forward. Instead of just saying we are an impact fund, they have to prove it with specific benchmarks. Like, we invested in this company because they committed to a forty percent reduction in methane emissions by twenty-twenty-eight, and here is our progress report on that.
Exactly. It moves the conversation from labels to outcomes. And that is really what Daniel was getting at with the idea of outcome funds. We are seeing these structures where the government or a philanthropic organization only pays if a specific social result is achieved. Like a program that reduces recidivism among former prisoners. If the program works, the investors get a return. If it doesn't, they lose their money. That is the ultimate form of impact investing because the financial return is literally tied to the social good.
I love that model because it aligns incentives so perfectly. It is not just about doing good; it is about being effective at doing good. But it is still relatively small scale compared to the trillion dollars in the broader impact market, isn’t it?
It is, but it is the gold standard that the rest of the industry is trying to learn from. The goal is to bring that level of rigor to every investment. We are moving away from the era of feel good investing and into the era of impact performance.
It is a fascinating shift. It is almost like we are trying to build a more honest version of capitalism. One that acknowledges that every dollar spent or invested has a footprint, whether we choose to look at it or not.
That is exactly it. There is no such thing as a neutral investment. Every time you buy a stock or a bond, you are voting for a certain kind of future. Impact investing is just about being conscious of that vote.
Well, I think we have given Daniel plenty to think about for his next meeting. It seems like the era of the simple blacklist is ending, and we are entering a much more demanding era of transparency and governance. It is harder, but it is probably more honest.
I agree. It is about embracing the complexity rather than hiding from it.
Before we wrap up today, I want to say that if you are enjoying these deep dives into the weird and wonderful prompts that come our way, we would really appreciate it if you could leave us a review on your podcast app or on Spotify. It genuinely helps other people find the show and helps us keep this collaboration going.
Yeah, it really does make a big difference. And as always, you can find our entire archive of over four hundred episodes at myweirdprompts dot com. We have a search bar there so you can look up specific topics like our previous discussions on AI ethics or the economics of climate change.
Thanks for listening to My Weird Prompts. We will be back soon with more from our housemate Daniel and the rest of the world.
See you next time.
So, Herman, I was thinking about what you said regarding the transition finance and the oil companies. If we are moving toward a case by case model, who are the people actually making these calls? Is it just a bunch of twenty something analysts in New York or London? Because that feels like a lot of power to put in the hands of people who might not have the broader context.
That is one of the biggest criticisms of the current system. We have these ESG rating agencies, companies like MSCI or Sustainalytics, and they are the ones who basically decide who gets a high score and who gets a low score. But their methodologies are often opaque and they can vary wildly. You might have a company that gets an A rating from one agency and a C from another.
That sounds like a nightmare for an investor. If the experts cannot agree on what is good, how am I supposed to know?
It is a huge problem. It is called rating divergence. In the traditional financial world, if Moody’s and S and P give a bond a different rating, it is a big deal, but they are usually pretty close because they are looking at the same financial ratios. But with impact and ESG, they are looking at thousands of different data points and weighting them differently. One agency might care more about carbon emissions, while another cares more about board diversity.
So, we need more than just internal governance at the fund level. We need some kind of global standard for what these metrics even mean.
We are getting there. The International Sustainability Standards Board, or the ISSB, was created recently to try and harmonize all these different reporting frameworks. They want to make sustainability disclosures as standardized as financial disclosures. It is a massive undertaking, but it is necessary if we want impact investing to be taken seriously by the mainstream.
It feels like we are watching the birth of a new profession. The impact auditor. Someone whose job is not just to check the math on the profit, but to verify the claims about the carbon or the social outcomes.
Exactly. And that is where the tech comes back in. We are seeing companies using satellite imagery to verify reforestation claims or blockchain to track fair trade supply chains. The more we can automate the data collection, the less room there is for human bias or greenwashing.
It is interesting how it all circles back to the technology. Daniel mentioned his background in tech communications, and it really feels like the bridge between the two worlds. You need the high tech tools to measure the high stakes impact.
You really do. And I think that is why the defense industry question is so poignant. Much of that high tech measurement capability actually comes out of defense research. Satellites, advanced sensors, AI. It is all intertwined.
It really is. It is a tangled web, but exploring it is what makes this fun.
Guilty as charged. I could talk about this for another three hours, but I think we should probably let the listeners get on with their day.
Fair enough. Thanks again for joining us on My Weird Prompts. We will catch you on the next one.
Take care, everyone.
Actually, before we go, I just remembered something. Remember when we were talking about the social impact bonds in the UK? The ones that were focused on reducing the number of children in the foster care system?
Oh, right. The ones in Manchester and some other cities funded through things like the Life Chances Fund.
Yeah. That was such a fascinating example because it showed how you could take a really difficult social problem and turn it into an investable product. But I remember there was a lot of pushback from people who felt it was wrong to profit from social services.
That is the moral hurdle that a lot of people cannot get over. The idea that someone is making a five or ten percent return on a project that is helping vulnerable children feels exploitative to some. But the counter argument is that if the private capital wasn't there, the project wouldn't happen at all because the government budget was already tapped out. We have seen over eighty of these bonds launched in the UK now, tackling everything from homelessness to youth employment.
It is the pragmatism versus the idealism. If the children are better off and the government saves money in the long run, does it matter if an investor made a profit?
In a purely utilitarian sense, no. But humans are not purely utilitarian. We care about the why just as much as the what. And that is why the governance and the transparency we talked about are so vital. If people can see exactly how the money is being used and why the profit is being earned, they are much more likely to accept it.
It is about building trust. And in the world of finance, trust is the most valuable currency there is.
Well said, Corn. Well said.
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