Reimagining Capitalism in a World on Fire

by Rebecca Henderson

Markets have gone off the rails for three reasons: externalities are not properly priced, many people no longer have the skills necessary to give them genuine freedom of opportunity, and firms are increasingly able to fix the rules of the game in their own favor.

Markets only create genuine freedom of opportunity if everyone has the chance to play. When unchecked markets leave too many people too far behind, they destroy the freedom of opportunity that is fundamental to their own legitimacy.

GPIF is simply too big to be able to invest in only a limited set of firms. It owns about 7 percent of the Japanese equity market and roughly 1 percent of the world’s, and it is also a huge investor in the bond markets. This means that the fund is what is known as a “universal investor”—an investor with so much money to invest that it is effectively forced to hold stock in every available firm.40 Indeed 90 percent of GPIF’s Japanese equity portfolio and 86 percent of its foreign equity portfolio are invested in “passive funds”—funds that hold every available stock in a particular class and that are designed to track the performance of the entire market. Hiro therefore decided to try to improve GPIF’s performance by improving the health of the entire economy—by persuading every firm in Japan (and indeed in the world) to embrace the use of ESG.

One senior manager at Mondragon suggested that the firm played a significant role in reducing inequality, claiming that “if the Basque region in Spain were a country, it would have the second-lowest income inequality in the world.”