By: Kim Kastorff
"It's time to recognize that the philosophy of 'maximize shareholder value' is such a defunct economist's idea", says Lynn Stout, professor of Cornell Law School (http://articles.latimes.com/2012/sep/02/opinion/la-oe-stout-stock-prices-20120902).
We are seeing that this focus on the short-term share price can be damaging to a firms' employees, taxpayers and society, but also its shareholders. Still shareholders are concerned with financial returns and maximizing shareholder wealth. Are shareholders also concerned with social impact, and is there a trade-off?
Certainly some shareholders have little concern for society, our environment or our sustainable future. Yet, a growing number of impact investors such as those found at the Investors Circle Conference held in San Francisco in May 2013, are raising important questions around both the firms' financial sustainability and social impact. In seeking angel investing or VC funding, the entrepreneur or firm may have to demonstrate their alignment in social mission, and to demonstrate that with quantifiable social metrics, tracking and reports. Some of the firms seeking funding promote their high GIIRS (Global Impact Investing Rating System) score (giirs.org) similar to Morningstar Investment rankings. Other social enterprises displayed their B Corporation logo, which is offered by the B Lab, a non-profit agency which can certify firms “wishing to benefit society as well as their shareholders” (www.bcorporation.net), in exchange for an annual fee and a comprehensive questionnaire process.
Sustainability and social impact advocates (e.g. Kimpacto) and other promoters of corporate social responsibility (CSR) are encouraging firms to not only strive for third party ratings, but also to consider routine and current sustainability and social impact reports as part of their financial planning and competitive edge. Justification for your time and efforts include:
- Sustainability or Impact reports account for sector-specific environmental, social and corporate governance (ESG) factors which can assist with operational and strategic decisions;
- IRIS metrics and GIIN standards are globally accepted and therefore can offer insightful comparisons and competitive benchmarking;
- Routine measurement and reporting better prepares the firm for similar questions needed to achieve a high GIIRS rating every two years, or to obtain B Corp status; and
- More and more researchers are demonstrating that firms who measure and report on these factors actually obtain long-term financial returns and benefits. (http://www.greenbiz.com/blog, INCR propose listing standards for stock exchanges By Robert Kropp, Published May 03, 2013)
Possibly there are some choices to be made. Are you seeking immediate financial gains with little regard to long-term social or environmental issues? Or, are you striving for greater sustainable social change along with patient capital and long-term financial returns?
Increasingly more initiatives are pushing for the latter, a long-term sustainable financial + social impact approach. According to Kropp (May 2013), "Sustainable Stock Exchanges (SSE) is an initiative by the United Nations that seeks 'corporate transparency, and performance on ESG issues and responsible long-term approaches to investment." For example, both the "Johannesburg Stock Exchange (JSE) - requiring 450 companies to produce integrated reports, and the Brazilian Stock Exchange, adopted a report-or-explain position in order to promote sustainability reporting among listed companies.
Along with increased measurement and reporting on sustainability and social metrics, we now have greater insights into the correlation between financial returns and environmental / social returns. When making these comparisons, it is important to differentiate between negative screening, positive screening, ethical investments, sustainable investing, impact investing or responsible investments, to name a few. As with financial investments, these social and environmental mission driven approaches have various purposes, objectives and strategies. According to the book, Sustainable Investing: The Art of Long-Term Performance (Krosinsky and Robins, 2008), "Responsible investment is an overlay that can be performed on top of ethical, sustainable or mainstream strategies", but which falls under the SRI subcategory.
Each category or strategy may produce different performance results, so again, it is important not to lump all social / environmental mission investments into a catchall group from which to generalize the performance against market benchmarks. For example, a study of 850 global SRI portfolios, Krosinsky and Robins found that the 'ethical funds' performed basically in-line against the 5-year average of the FTSE 100 and S&P 500, and significantly under-performed in comparison to the MSCI World Index. However, the "sustainable investing" funds significantly outperformed returning 18.7% on a five-year average return from 2002-2007, against major indices: MSCI World (17%), S&P 500 (13.2%) and FTSE 100 (13%). Even when considering all 135 SRI funds together (i.e. not differentiating 'ethical' vs. 'sustainable'), the five-year average return was impressive at 15.2%, which is a competitive rate of return, with a lower risk profile and a focus on long-term sustainable social change. Again, we see that "funds that invest in a dual manner, both mitigating risk and seeking opportunity at the same time, have been outperforming most significantly of all" (Krosinky and Robins, 2008).
Similar to financially motivated investments, some will outperform and some will underperform. So, when you hear that a Social or Ethical or Sustainable Investment achieved lower returns....please do not conclude there is a "trade-off" between financial and social return. Like ALL investments, you take a risk and sometimes you place your eggs in the wrong basket.
According to the latest study (May 2013) from SJF Institute and Duke University, the "Impact commitment correlates with basic measures of business success. Contrary to the popular belief that companies working to have positive social and environmental impact have a hard time growing as fast or being as profitable as traditional enterprises, our research shows that at the enterprise level, a tangible commitment to impact... is strongly correlated with overall business growth. This trend is statistically valid across all industry segments.. company ages, and geographies." (http://sites.duke.edu/casei3/whats-new/publications/ “Accelerating Impact Enterprises: How to Lock, Stock and Anchor Impact Enterprises for Maximum Impact “ by Cathy Clark, Matt Allen, Bonny Moellenbrock and Chinwe Onyeagoro)
So, what is your financial return and social impact? Are you generating positive returns and positive social imapct? Do you even know? Will you be motivated to measure and report on social metrics if your business success is correlated to your impact commitment? If you are still resistant, what will you tell your employees, customers, donors, lenders, board of directors or investors when they ask about your social or environmental impact commitment? Or, maybe your competitors will explain for you!
Sooner or later, you will have no option but to measure and report your business success - both financial + social and environmental. And, why would you avoid it? After all, there is no real trade-off, which means that you can have both a financial return and social/environmental impact. Of course, the decision is up to you, since what you measure is what you achieve. Just remember, that in an era of greater transparency, communication and heightened social and environmental concerns ... 'Doing good makes good business sense" (Kimpacto.com).
Kim Kastorff has 15+ years of international finance experience and two Masters degrees - MBA and a Masters of Research in Impact Investing. Specific areas of expertise are in banking, financial and investment services, energy and sustainability, consulting, and financial education. Years ago, I told my students the purpose of business is to "Maximize shareholder returns." Today, it seems that stakeholders care about both "Maximizing financial + social impact." So, I am dedicated to helping impact investors and entrepreneurs adjust and remain competitive in this new environment. My goal is to promote impact investing and financial inclusion as we collectively strive for a more educated and financially sustainable global environment.