# A generalized strategy of ‘mission hedging’: investing in 'evil' to do more good

19 min read18th Feb 201820 comments

# 25

A generalized strategy of ‘mission hedging’: investing in 'evil' to do more good

Hauke Hillebrandt [1]

Version from: 18/02/2018

## Disclaimer

By reading this material, you acknowledge, understand and accept the following:

This material has been prepared by Hauke Hillebrandt (“Hauke Hillebrandt”). This material is subject to change without notice. This document is for information and illustrative purposes only. It is not, and should not be regarded as “investment advice” or as a “recommendation” regarding a course of action, including without limitation as those terms are used in any applicable law or regulation. This information is provided with the understanding that with respect to the material provided herein (i) Hauke Hillebrandt is not acting in a fiduciary or advisory capacity under any contract with you, or any applicable law or regulation, (ii) that you will make your own independent decision with respect to any course of action in connection herewith, as to whether such course of action is appropriate or proper based on your own judgment and your specific circumstances and objectives, (iii) that you are capable of understanding and assessing the merits of a course of action and evaluating investment risks independently. Hauke Hillebrandt does not purport to and does not, in any fashion, provide tax, accounting, actuarial, recordkeeping, legal, broker/dealer or any related services. You should consult your advisors with respect to these areas and the material presented herein. You may not rely on the material contained herein. Hauke Hillebrandt shall not have any liability for any damages of any kind whatsoever relating to this material. This material is being provided to you at no cost and any fees paid by you to Hauke Hillebrandt are solely for the provision of investment management services pursuant to a written agreement. All of the foregoing statements apply regardless of (i) whether you now currently or may in the future become a client of Hauke Hillebrandt and (ii) the terms contained in any applicable investment management agreement or similar contract between you and Hauke Hillebrandt.

## Acknowledgments

Thanks to Ben Todd, Kit Harris, Alexander Gordon Brown, and James Snowden for helpful discussion on this manuscript. Any mistakes are my own.

Table of contents

Disclaimer        1

Acknowledgments        2

Video abstract        4

Introduction to “Mission Hedging”        4

Conditions for mission hedging to be optimal        7

Markets must be efficient        7

Investment must be in entities that cause the bad activity and not merely covary        8

Corporation that one invests in must not themselves hedge against risks excessively        8

Mission hedging might work well for extreme risks        9

Mission hedging might be non trivial in practise        9

Extension of the strategy to shareholder activism        9

A mission hedging collective might bring an harmful industry to its knees        9

Shareholder activism and inside information        11

Applications for resource allocation between different causes        11

International organisations: example of the International Monetary Fund        12

Applications outside of investment        13

Career choice        13

Political donations        14

Retirement saving and hedging against unemployment in ‘earning to give’        14

Limitations        15

Other quick thoughts        16

## Video abstract

Useful introductory reading to understand efficient markets and investing

## Introduction to “Mission Hedging”

How should a foundation whose only mission is to prevent dangerous climate change invest their endowment? Surprisingly, in order to maximize expected utility, it might use ‘mission hedging’ investment principles and invest in fossil fuel stocks. This way it has more money to give to organisations that combat climate change when more fossil fuels are burned, fossil fuel stocks go up and climate change will get particularly bad. When fewer fossil fuels are burnt and fossil fuels stocks go down - the foundation will have less money, but it does not need the money as much. Under certain conditions the mission hedging investment strategy maximizes expected utility.

So generally, if you want to do more good, should you invest in ‘evil’ corporations with negative externalities? Corporations that cause harm such as those that sell arms, tobacco, factory farmed meat, fossil fuels, or advance potentially dangerous new technology? Here I argue that, though perhaps counterintuitively, that this might be the optimal investment strategy.

In this note, I extend the special case of an investment strategy for foundation endowments called 'Mission hedging', originally introduced by Brigitte Roth Tran. The generalized strategy proposed here suggests that, under certain conditions, agents should invest resources in entities that cause activity they want to prevent. I will focus only on the conceptual extension of mission hedging here, but more technical details, caveating and mathematical formalism can be found in Roth Trans original paper, all of which are also relevant to the more generalized theory.

Roth Tran [2] summarizes the basic mechanics of mission hedging for foundations as follows:

“”[M]ission hedging," [is] a new strategy in which the endowment “doubles down," skewing investments toward firms it opposes. If increased objectionable activities coincide with both higher firm returns and greater foundation revenue needs (with which to counteract the objectionable activities), then the foundation can align funding availability with need by increasing exposure to objectionable firms beyond that of a typical portfolio. Increasing investment in objectionable firms creates a hedge around the foundation's mission, maximizing expected utility.”

In other words, the basic idea is that, surprisingly, it might be optimal for an altruist whose mission is to combat global poverty, factory farming, mass unemployment, or existential risks from artificial intelligence, to invest in stocks of corporations that might make the problem worse and then give the profits to organisations that will counteract the problem.

For example, it might be a good strategy for donors or even other entities such as governmental organisations that are concerned with global health to invest in tobacco corporations and then give the profits to tobacco control lobbying efforts. Another example might be that animal welfare advocates should invest in companies engaged in factory farming such as those in meat packing industry, and then use the profits to invest in organisations that work to create lab grown meat. A final example: it might be optimal for donors who think that emerging risks from artificial intelligence is a pressing cause to invest in the technology companies that might speed up such dangerous technologies, and then donate the profits to organisations that work on guarding against such risks.

The basic mechanics of the mission hedging investment strategy are the following: when a bad industry does well, you as an investor can use your increased profits or dividends to counteract this trend. In other words, the more harm the industry does, e.g. increases CO2 emissions, sells more meat, or is on more on track to create technology that destroys jobs or is otherwise dangerous, the more you will profit and you can then use these profits to prevent the industry from doing bad things (potentially through donations or grants). If the bad industry is not doing well, then you will not profit as much, but you don't need to donate as much anyway because there is less bad activity. So either way, you will always donate a more optimal amount of money in proportion to the bad activity level.

Here is a simple toy model that illustrates the climate change case.

First consider, the following figure (taken from[3]) that shows that there is uncertainty about the world’s emission pathway and how how high warming will be above pre industrial levels:

Now consider how the oil price will develop correspondingly:

Now consider the following toy model (The spreadsheet can be found here):

## Limitations

Interestingly, mission hedging decidedly skews the portfolio away from diversification and thus does not maximize risk-adjusted financial returns. Most endowments are trying to maximize financial returns, but with mission hedging one moves away from an optimally diversified, (passively invested) global market portfolio[29]. Thus, one will likely sacrifice financial returns. For a ‘cause neutral’ agent, who doesn’t have a mission, favourite cause, or mandate, it might be best to not sacrifice the flexibility of switching causes and rather invest purely as to maximize financial returns. This is similar to the strategy of building up career capital in the face of uncertainty about what the most important cause is.

Also, because mission hedging is somewhat counterintuitive and people might be repulsed by being associated as profiting from e.g. evil corporations, there might be reputational risks associated with it that need to be factored in. If this is a decisive factor, then it might be better to buy stocks that are merely correlate with bad activity - such as buying stock in the pharmaceutical industry rather than the tobacco industry. One could also buy derivatives that merely track the stock price, and which would be de facto stocks for all intents and purposes, but an investor would not ‘own’ part the company.

However, there might be a way of using some upsides of mission hedging without investing in what might be seen as morally reprehensible companies. Say your foundation focuses on two rather than one focus areas (which in itself might be suboptimal[30]). Say area 1 is animal welfare and area 2 is global poverty. Your prior intuition is that these areas are equally important and you assign a 50-50 split of your annual disbursements to these two cause areas. Now, you could invest your entire endowment in stock in the developing world countries where your foundation supports say cash-transfer program. We will assume that corporations in those country doing well causes poverty reduction and they are not seen as morally reprehensible. Now, relative to how the developing world stock portfolio does you decide to invest excess profits (over the standard stock market return) to the other area (here animal welfare). If the developing world stock does well, you might not need to invest as much in poverty reduction, and have more funds for the more neglected animal welfare area. If the stock doesn’t do as well, and there are no excess profits, it is better to stick closer to the original 50-50 split.

## Other quick thoughts

• The process of hedging might also help to put clarify one's mission itself. If there would be a lot of resistance for the IMF to skew their portfolio towards technology companies because they state their mission is to keep unemployment low, and the hedge is accepted to work, then maybe the IMF is not really pursuing its mission or mandate. Mission hedging might clarify the mission of an organisation or agent, because one ‘puts their money where their mouth is’.
• Catastrophe (CAT) bonds are now a \$29 billion dollar market, and provide coverage against hurricanes, earthquakes, and pandemics [31]. There are new developments in this area of disaster insurance[32] with developments such as the creation over the counter catastrophe swaps[33].There is also ongoing research on cyber insurance and catastrophes on the cyberspace [34] and on liability of future robotics technology [35]
• “Betterment Investing just added a no-cost automatic donation feature. Using their existing tax-optimized system, they allow you to donate your most appreciated shares directly to any of their many connected charities. This gives you the maximum tax deduction right now, while reducing your taxes further when you later withdraw from your account later in life” [36]
• There are some artificial intelligence ETFs[37] that one could look into to hedge against risk from emerging technologies

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