The key to success in business is evoking the desired emotional response.
The allure of an investment policy with the potential to affect corporate and social change has been a recurring theme among a portion of socially-minded investors. Over the last decade, this very conversation has pushed its way to the forefront of business.
Tim Cook of Apple recently told his shareholders that if they are to only care about return on investment (ROI), they should get out of the stock. Elon Musk of Tesla is attempting to bring sustainable transport to the masses. CVS expunged tobacco from its shelves. And McDonalds is on an unyielding quest for sustainable beef.
An Evolution of Investment: SRI –> ESG –> Impact
SRI: Socially Responsible Investing (SRI) dates back to the 1970s, when managers of the likes of the Calvert Investment Group attempted to avoid specific stocks or industries when making investments. The major impediment with “stock restriction” is that multiple restricted lists result in too narrow an investable universe. Modern portfolio theory asserts that an optimal return per unit of risk cannot be achieved when tightening the universe in such a manner.
ESG: An outgrowth of previous attempts, Environmental, Social, and Governance (ESG) investing involves a consideration of environmental, social, and governance factors throughout the investment selection process. And why shouldn’t a manager consider these factors? Arguably, over any long-term investment horizon, all three will affect the longevity of a company.
Impact: The most recent iteration of “making money” and “doing good” simultaneously is impact investing, which is the investment into a company, fund, or organization with the intention of generating a measurable positive social and/or environmental impact alongside financial return. Key word: alongside. Not: instead of.
A common misconception is that there must be a trade-off between profit and impact. This is false. Of course, it is very possible to give up one for the other. But, if implemented correctly, profit and impact need not be mutually exclusive.
A successful ESG or impact investment manager will engage in the following portfolio construction process: First, identify a list of compelling investments. Then, apply an impact, or ESG, lens to this set of profitable investments. Last, but not least, choose those investments that will generate the most scalable positive impact. Simple right? Not entirely. But the point is that it can be done. The point is that a trade-off is a faulty misconception.
Today, consumers and investors are “demanding more” from consumption and investment. The profit fiends are shrinking – albeit, slowly. Consumers and investors are beginning to make decisions for reasons other than – or rather, in addition to – profit.
The somewhat rhetorical question I have is: “why?”
I pose a question to which I do not know the answer. Clearly, something is changing. Yes, it is slow. Yes, it is arguably still a minority view. But, why the shift from capitalist behemoths? Why are colossal companies like Apple and Google and Patagonia desperate to advocate their sustainable efforts? Why has the expectation of companies expanded?
Perhaps it is an advent of social media and technology. Perhaps it is the increased awareness of an activist millennial generation. Perhaps climate change has coerced companies to feel an innate duty to, at the very least, not be completely responsible for the destruction of our planet.