If you do a Google or DuckDuckGo search today to answer the question, “do social impact businesses have better returns,” you will get every possible answer from yes to no. Everyone seems to have a different definition for what qualifies as an impact business. The consensus seems to be settling on ‘businesses that create a meaningful, positive social outcome by an inherent virtue of the business model.’ However, just because there is a commonly agreed to definition, does not mean that everyone applies this definition in the same way. After all, everyone has different values and standards for what is good for society.
Thinking about social impact
Take the Trans Mountain Pipeline in Western Canada as a good example. The initial stakes of the project was that it was a pipeline owned by Kinder Morgan to transport heavy crude oil from Alberta, a province where the labour market depends heavily on the price and market for oil, to British Colombia, another province with ports that access the Chinese and international oil markets. The source of the oil, the Athabasca Tar Sands, has been heavily criticized for its high environmental impact. However, it is worth thinking about the other sources of oil and their resulting societal impact. Without the pipeline, British Colombia has lower risk of oil spills and environmental contamination, and Alberta has less demand for oil and therefore jobs. It seems that this business negatively impacts society because it is based around fossil fuels, which makes money in a way that damages our collective environment and employs skilled people who can find other work, right?
Now, it gets really interesting when the Government of Canada buys the pipeline for $4.5 B from the international company to maintain the country’s business reputation. Then, some of the most disadvantaged communities in the country, the First Nations of Canada, enter into talks with the Canadian government to buy equity in the pipeline project. Now, it can be argued that the social intent behind the pipeline is to help develop the economies of the communities most in need. Does the good of developing these communities outweigh the bad of damaging the environment? Can developing economies make the same argument for their environmentally damaging projects in light of the Paris Climate Agreement?
It honestly goes on and on and people can take different philosophical positions, jumping into Kantian or Nitzschean ethics, spending ages talking about everything and nothing. The point is, if you’re an investor or a professional trying to apply your ethics by doing business for good, it’s going to be messy and public opinion can be unforgiving.
Do positive impact businesses have better returns?
This is the really interesting question to ask and is especially difficult to answer! There are no public, social impact companies. Only in the past 5-10 years have large companies been assessed by their shareholders on Environmental, Social and Governance (ESG) criteria and now, just barely, are investors taking actions based on these criteria.
Without any public companies in similar industries that we can compare, we have to rely on the studies of private investors and deal advisors in their portfolios as they assess this very question. McKinsey looked at 48 exits of private Indian companies to try to achieve a consensus on this. Despite covering over 50 different investors deploying $5.2 B over a 6 year period, the study was unable to conclusively determine whether or not social impact businesses generated better returns. They did identify that financial businesses focused on financial inclusion were in the top 2/3 of performers, but lacked sufficient information to determine whether or not social impact businesses in other industries were high, regular or poor performers.
We’re really not going to have the information we need to answer this question for likely another 10-20 years. Efforts like the S&P 500 ESG Index are great experiments and offer tremendous opportunity to have leading indictors for assessing the longer-term potential of companies. By assessing current, non-social impact companies on their relationships with society at large, investors can have a rating system that reveals how society, governments and consumers, will end up treating these companies. A great example is Facebook’s disastrous fall in public opinion from the Cambridge Analytica scandal, among many other Facebook gaffs. The resulting regulatory scrutiny of Libra, the Congressional interest in pursuing anti monopoly litigation and the #deletefacebook campaigns were inevitable.
Are there any leading indicators?
Continuing Facebook as an example, we can see that their ESG score dropped briefly before the 2017 crises and does not seem to be a really leading indicator. It is however the most commonly talked about scoring mechanism by the investment community, though it is not universally applied in a standardized format to all companies. Nonetheless, a study from the Boston Consulting Group identifies that more highly rated ESG companies out-preform their peers by 0.8% to 2.4% growth in company value. So, we may not have enough information social impact but there are trends that we can know.
We know that purpose driven companies deliver higher returns, by 9% to 13% over a 10 year period, in annual company value growth. We know that companies with a collective purpose drive higher levels of innovation, employee engagement and capacity for strategic decision-making. We also know that consumer and employee preferences are changing dramatically. People are protesting and making advocacy decisions with their wallets and as a workforce. Over three quarters of global consumers would buy a product solely based on values and boycott a company if its actions conflicted with their values. 88% of 20–38 year olds want to work for companies that share their same set of values; these employees are going to represent three quarters of the global workforce in just 5 years.
What can we expect going forward?
There’s a great deal of uncertainty in the realm of impact investing and social impact businesses. There are reputable brands on both sides taking positions that social impact businesses do or do not create more value. The most important thing to pay attention to is this uncertainty because it creates opportunity for you to be right, and the greater the risk, the greater the reward. This uncertainty will not last forever though and the greater returns will disappear as more and more data becomes available. The one word of caution that I would give is do not measure a company solely on the value of its mission or on its ability to create profit. Just like the Trans Mountain pipeline, there is likely always going to be a mix of good with bad.
As we become more interconnected as a community, with more and more information, society as an organized collective will respond to how companies treat it. Good behaviour will be rewarded and bad behaviour will be punished to the extent that our wallets and our laws allow. Make the investments with your time and money that serve both you and society, and you’ll likely be rewarded for it.