Universal ownership is an idea whose time has come. The concept is not new — it was outlined by James Hawley and Andrew Williams as far back as 2000 — but it now is poised to step out from the shadows.
Growing interest in universal ownership is driven partly by strong interest in all things sustainability-related, partly by the emergence and growing influence of huge and outward-looking institutions such as Japan's ¥150.7 trillion ($1.36 trillion) Government Pension Investment Fund, Tokyo, and Norway's 8.89 trillion kroner ($1.03 trillion) Government Pension Fund Global, Oslo. It is a sign of a fundamental shift in attitude among leading investors.
In a 2011 overview of the topic, Roger Urwin, global head of investment content at Willis Towers Watson PLC, noted that "the core idea of a universal owner is a large institution investing long term in widely diversified holdings." The universal owner recognizes that they own, in effect, a slice of the whole economy. As a result, their approach to investing is built around managing total market exposure, rather than by focusing only on the individual components one-by-one.
This wouldn't make much difference if it weren't for externalities. Externalities are how economists describe the impact of corporations' activities on others. Where externalities exist, everyone acting in their own interest can combine to create a bad overall outcome (think plastic bags in the oceans).
So a company may increase its own profits while having a negative impact on others. The classic example of an externality would be pollution: A company motivated by profit alone will do the minimum required by law (or perhaps even less) to manage its harmful effect on the environment. The company is better off; society as a whole is worse off. These costs fall on others, depressing growth. It turns out, then, that the invisible hand that makes capitalism effective is not underpinned by magic. Rather, effective political and economic institutions are needed to ensure that externalities are dealt with appropriately .
The universal owner is invested in the whole system, so the externalities are internalized elsewhere in the portfolio. The United Nations-supported Principles for Responsible Investment have argued that environmental costs, for example, "are unavoidable as they come back into the portfolio as insurance premiums, taxes, inflated input prices and the physical cost associated with disasters. Social concerns, such as poverty and inequality, can lead to societal and political unrest and instability, which can also create costs that will reduce future cash flows and dividends."
The idea is perhaps best summed up as the returns we need can only come from a system that works.