Mega-institutional investors have different incentives than individuals or small stock pickers with narrow portfolios. So argue economics professors James P. Hawley and Andrew T. Williams, coauthors of "The Rise of Fiduciary Capitalism." Since institutions such as CalPERS -- California's huge public employees pension fund -- are virtually stuck in their investments, the professors contend, these leviathans invest for the long term whether they recognize it or not. By default.

The upshot is, since institutional investors own huge swaths of the entire economy, they absorb many of the costs that individual companies don't pay for or reflect on their balance sheets but that are bankrupting society at large. In the language of economics, these costs are called "externalities."

Milton Friedman describes an externality as "the effect of a transaction ... on a third party who has not consented to or played any role in the carrying out of that transaction." Monks calls corporations "externalizing machines."

The most blatant examples: the costs of environmental and health problems caused by manufacturing. A company that produces old-style plastic garbage bags, for example, also produces toxic chemicals that leach out into drinking water when the bags break down. The plastic bag manufacturer forces society as a whole to pay the cost of cleaning up these chemicals and for the health problems they cause, thus externalizing part of its cost of doing business. It is these externalities, of course, that we usually think of as "social issues."

To put it another way: Over time, institutional investors absorb the externalities produced by the companies in one part of their portfolio in other parts of their portfolio.

How does this work? Consider, for example, a company that is downstream from a company polluting a river. If the water is polluted and the downstream company needs the water, it will have to pay the cost of mitigation. This adds to the cost of its input, which will add to the cost of its output.

Of course, it's hard to know whether a particular corporation in a downstream model will be hurt or how its stock price might be affected. The downstream firm might be able to pass that cost onto consumers -- if it's not in a competitive industry. But if it is in a competitive industry, it may not.

"There are many variables," Hawley says, "and the devil is in the details. But changing the cost of the inputs affects the economy in a way that it would not otherwise be affected. And someone has to absorb that cost."

We already know taxpayers and consumers take their hit. But so do institutional investors and other businesses. That is the gist of Hawley and Williams' argument.

Nor is this just an economic issue. For fiduciaries, it is a financial, or "total return" issue.

"If you are looking at [negative] externalities, the portfolio by definition has to be underperforming," Hawley says.

This is so provocative it bears repeating. If there are negative externalities -- climate change caused by carbon emissions, an accumulation of hormone-mimicking substances (so-called endocrine disrupters) in the world food chain, a mega-pension fund's portfolio is by definition underperforming.

Ironically, this is good news for progressives, who usually fight over so-called externalities in the political arena. Institutional investors and their shareholders keep a close eye on the total return earned by their portfolio. And as soon as you use the phrase "total return" in the same context as "fiduciary," you are talking about fiduciary responsibility. That's important language to know. It means the fiduciary has a legal responsibility to manage the shareholder's money to maximize "a portfolio's total return."

But if there are negative externalities, he's not doing that. He is, in fact, shortchanging the investor. So if a pension fund wants to boost performance of its portfolio across the board, then it should do its best to ensure that none of the individual companies it is invested in are doing business in such a way as to hurt the prospects of the other companies in the portfolio.

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