Reimagining Capitalism: The Role of Traditional Investors

How investors can move beyond outdated theories and drive greater resilience and restoration.

This is part two of a new series called “Reimagining Capitalism.”

As we delve into the meat of our “Reimagining Capitalism” series (click here for the intro if you missed it!), we’re going to focus each subsequent blog on the role one particular set of stakeholders plays in our economy, and the behavior change needed from them in order to usher in a more restorative, inclusive, sustainable economic model. Keep in mind, this series is meant to be a conversation-starter! With a topic so vast, we’re not offering rules or answers, just initial ideas to spark dialogue and iteration. We’d love to hear your input and treat this as a collaborative forum!

With that said, in today’s blog, we’ll be spotlighting investors.

Investors play a pivotal role in shaping our global economy, directing trillions of dollars into businesses, infrastructure, and innovations that underpin the world we live in. Whether it’s through public markets, private markets, credit financing and bond underwriting, or other enterprise-level investments, the decisions investors make directly and indirectly influence industries, labor markets, and even societal norms. Investors are the stewards and allocators of capital, tasked with seeking out growth and value creation on behalf of shareholders, institutional investors (such as pension funds) and retail investors (individuals). Their power is vast, and in today’s interconnected world, their choices carry significant weight, rippling through economies and ecosystems alike.

Given their massive role in the economy, behavior change among investors will be crucial if we want to build a more restorative model of capitalism. An imperative place to start is by unpacking the underlying theory that so many investors currently depend on to inform their investment strategy and allocation decisions: Modern Portfolio Theory.

The Flaws of Modern Portfolio Theory 

Harry Markowitz's Modern Portfolio Theory (MPT), developed in 1952, revolutionized investment strategy by emphasizing diversification of asset classes and sectors to optimize returns while minimizing risk. This has been the powerful mental model framework for all investors for the past 75 years. However, as outlined in "Moving Beyond Modern Portfolio Theory" by Jon Lukomnik and James P. Hawley, MPT's limitations are becoming increasingly apparent in a world shaped by systemic risks like climate change, geopolitical instability, and widening social inequality. While MPT may have worked (and worked well) in a stable state (post-WWII), we’re simply not in that stable state anymore.

One of the central critiques from "Moving Beyond MPT" is that MPT focuses solely on whether a portfolio outperforms a benchmark, without considering the broader impacts of those investments. What happens if a portfolio performs well financially but contributes to negative externalities like environmental degradation or social inequity? This kind of narrow thinking allows for investments that maximize short-term returns while eroding the foundations of long-term stability—an unsustainable approach in the context of today’s intertwined global challenges.

Additionally, as Lukomnik and Hawley argue, MPT separates financial markets from the broader economy and society, assuming that markets exist in a vacuum. This framework fails to address the root causes of systemic risk—whether environmental, social, or economic—and ignores how these risks affect the long-term stability of the markets themselves. MPT focuses on managing volatility but doesn’t consider the factors driving it, such as climate change, which is now reshaping entire industries.

The 2008 financial crisis provides a powerful example of MPT’s blind spots. Many investors believed they had well-diversified portfolios only to discover that systemic interconnections between financial assets exacerbated the crisis. The crisis was a wake-up call, revealing how MPT's focus on mitigating symptoms via superficial diversification failed to account for the deeper, systemic risks inherent in the global economy.

The Case for Systemic Investing

Systemic investing embraces the complexity of today’s world by considering the interconnections between environmental, social, and financial systems. Unlike MPT, which treats investments as isolated assets, this approach recognizes that financial markets are intertwined with the broader economy and natural world.

Systemic investors go beyond short-term gains and market benchmarks, focusing on root causes and the real-world impact of their decisions. By prioritizing long-term societal and environmental well-being, they help build resilience—not just for portfolios, but for the systems that enable sustainable capital creation. The adoption of systemic investing will be crucial if we aim to build a more restorative version of capitalism.

For more information and background on systemic investing, check out a few of our past blogs.

Additional Considerations for Investors

In addition to rethinking MPT as their foundational theory, investors must consider other behavior changes as well, including acknowledging that they write the rules by which companies operate. While venture-stage investors may have the flexibility to spark rapid, transformative changes (by helping shape companies from their genesis – stay tuned for more on this in our next blog!), institutional investors operate within the framework of larger, established organizations that cannot easily pivot. These investors will likely contribute to the shift to a reimagined capitalism incrementally, leveraging their vast pools of capital to encourage more sustainable, long-term strategies within the companies they finance. Even though these changes may seem slower, their impact can be profound, as they touch the foundational pillars of the global economy.

One example of how investors could make a very meaningful difference is to push companies to measure success by more than just financial benchmarks like the Internal Rate of Return (IRR). For too long, the IRR has been the gold standard for investors—a simple, familiar metric that prioritizes one thing: profit maximization in an efficient time scale – the bigger the return and the quicker it’s achieved, the better. It's the annualized rate of growth an investment generates, making it the go-to for evaluating the success of various investments. In traditional capitalism, driving up IRR often means squeezing more profit from the status quo in the quickest amount of time possible, while ignoring the potential negative impact derived along the way. It glosses over the external costs—the environmental degradation, social inequality, and depletion of natural resources—that businesses pass on to society. Businesses and investors inflate their IRR while asking the commons to pick up the tab for the consequences.

It's imperative for investors to supplement the IRR framework of evaluation with what could be described as an External Rate of Return (ERR)—a lens that forces us to consider the full scope of a business's impact, not just on profits, but on the planet and society. Using a framing such as ERR is just one example, but by requiring such disclosures, investors can embed accountability for societal and planetary well-being into corporate decision-making and evaluate investments using a more holistic approach that will give a nod to long-term sustainability.

Reimagining capitalism isn't about minor adjustments—it demands a fundamental shift in how investors approach their role. It calls for challenging outdated theories, recognizing the full power of capital, and steering it toward not only generating profits but also safeguarding the natural world. Investors must push for greater transparency, require meaningful disclosures, and help shape corporate rules to ensure businesses operate sustainably and responsibly. If we want business and the corporate world to change its behaviors, it must start with how investors communicate their framework for evaluating these businesses as a potential investment. It must extend far beyond the ESG conversation – which serves as an enterprise-level risk mitigation tool – toward a more systems-oriented approach that holistically considers portfolio construction, asset allocation, and investment evaluation. This necessary approach will transcend the MPT mental model to better address the growing reality of systemic risks affecting many sectors and geographies.

What changes do you think need to be made among the investor class?

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Stay tuned for the next part of our “Reimagining Capitalism” where we’ll explore the role of venture-stage investors. And be sure to follow us on LinkedIn for all the latest company updates and insights!