After
Breaking the Bank of England
During the late 1980s, European countries were working to align their currencies so that they could eventually adopt the Euro. Each country’s central bank was tasked with maintaining a relatively small trading range between their individual currencies and those of other European countries.
George Soros and his fellow traders understood that England’s central bank would struggle to keep the British pound in line with the German mark after the Berlin Wall fell. Working as a syndicate of sorts, the traders bet so heavily against the pound that the Bank of England failed to maintain the pound’s value. On Black Wednesday (Sept. 16, 1992), the European government was forced to pull the pound from the European Exchange Rate Mechanism (ERM).
Many British citizens viewed Black Wednesday as a national disaster that harmed the country’s reputation. However, the event also led to a revitalization of Britain’s economy that included Tony Blair’s election and the establishment of Britain’s Monetary Policy Committee.
Through well-structured trades, Soros and fellow traders were able to pressure the pound’s value into a downward plunge. The Bank of England and British people temporarily paid a hefty price for the pound’s fall, which cost the country billions and kept Britain off of the Euro.
How Might Impact Investors Leverage Financial Pressure?
Similar to George Soros and his fellow traders, impact investors may be able to leverage financial pressure to bet against detrimental social and environmental systems. By investing across asset classes and harnessing the power of syndicates, impact investors can gain newfound power to affect social and environmental outcomes. Plus, they can generate substantial financial returns for their clients.
In Social Impact Finance: Achieving Profitable Solutions to Society’s Problems, Conor Flynn outlines a theoretical scenario where investors could leverage financial pressure to influence markets:
In highly unique cases, large organizations or syndicates may use
Social Impact Finance: Achieving Profitable Solutions to Society’s Problemsmoney to acquire a primary set of assets and proceed to create social impacts that alter prices for a secondary set of assets. If the large organization or syndicate takes positions in the secondary set of assets, then it can generate substantial profits. For example, a syndicate could acquire every mine for a rare metal and restrict output to improve working conditions, as well as protect the environment. If all new smartphones requirethe rare metal, then the syndicate could short sell the stocks of all smartphone producers since they would not be able to hit production and sales targets. Although this practice is highly risky, it is possible for capital-heavy organizations or syndicates to exert extreme influence over markets.
Such price manipulation tactics may be considered market abuses in certain cases and lead to legal consequences if poorly executed. However, techniques of applying financial pressure can also create substantial environmental, social, and governance (ESG) impacts.
Breaking the Bank of Global Problems Using Impact Investment Strategies
Staying within legal boundaries, impact investors possess substantial power to influence positive social change by using strategic coalitions and well-placed bets. Impact investment coalitions, such as the Refugee Investment Network, are emerging to address pressing global problems. By applying coordinated strategies to hit financial pressure points, these coalitions can accelerate social change and achieve sustainable development outcomes. If impact investors effectively learn from the past and apply emerging financial innovations, they will soon be breaking the bank of global problems.
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