Remember the 80s and 90s? Shoulder pads, briefcases—and the movie Wall St., which captured the spirit of the age. At the time, a couple of beliefs carried a lot of cultural currency: that maximizing shareholder value was the only thing that mattered, and that doing something good for the world had to come at a cost.
Looking back, we can see those assumptions for what they are: misguided and false. What we’ve learned from the last two to three decades of research in ESG (environmental, social, governance) investing and SRI (socially responsible investing) is that investing in businesses that commit to good governance, treating their staff, customers, and communities well, and not making a mess of our planet doesn’t cut into corporate profitability.
In fact, what we’ve learned, and in retrospect it seems like this should have been patently obvious to us all along, is that behaving responsibly is good for business and actually increases shareholder value. As the Gordon Gekkos of the world continue to lose their grip and new socially conscious investors begin to flood the scene, the pendulum has swung dramatically to the other end.
Many well-meaning investors, excited by the prospect of profiting from doing good, bandy about – with nearly as much intensity as the Gordon Gekkos proclaimed “greed is good” – the notion that you don’t have to sacrifice returns to make impact. Sadly, that’s also not entirely true. Much depends on the “impact” we’re trying to have and how we define that term.
In the loosest sense, every investment is an impact investment because all of our investments have a consequence; on the environment, employees, clients, communities, etc. The impact of our investments can be positive or negative, large or small, but there is always an impact. So, for instance, if you want to positively impact a crucial issue like Gender Equality, you could decide to sell your holdings in the S&P 500 ETF you own and replace it with an ETF that screens US companies based on Equileap’s comprehensive gender scorecard.
An investment like this supports businesses that create safe and nurturing workplaces for women across the entire organization; not just at the Board or C-Level suite. The good news here is that we have some early data that says businesses committed to gender equality outperform those that score poorly on gender equality. So, in all likelihood, you’re not sacrificing returns to make an impact here.
However, if you want to address a different problem, let’s say you want to improve the lives of even more vulnerable people, facing even tougher challenges, in harder to reach places, you should be prepared to sacrifice a little.
Tackling issues like maternal newborn child health (reducing deaths of mothers and their babies) in places like Democratic Republic of Congo or Afghanistan comes with a level of uncertainty, risk, and costs that will absolutely bite into your return. That it may even be possible (and this has yet to be proven) to make a profit while tackling an issue like this should be considered a huge win.
Even less egregious problems such as high unemployment and lack of economic growth in countries like Sri Lanka, Myanmar, Ghana, or Mexico, are likely to come at some cost to your expected return.
I know from experience.
At Origin Capital, we’re tackling this problem (SDG 8), by addressing one of its root causes, lack of access to credit for small business owners. Credit greases the wheels of most small businesses in the developed world and allows them to scale. Business growth fuels increased demand through the value chain, creates new jobs, and increases government income (through taxes).
We’ve created a product (the Small and Growing Business Bond) that allows Canadians to make an investment that supplies us with the capital necessary to lend to small and growing businesses in places where credit is scarce. The loans we provide are for successful businesses that have outgrown their microloans (we lend between $5k – $25k) but have nowhere to turn. We also provide business coaching to help these entrepreneurs make the most of their loans.
Our clients (the borrowers) pay interest on their loans at market rates relative to their country. The interest they pay is used to cover our costs and pay our investors a return (a 3% annual return over a 3-year term).
As you can see, an investment in our Small and Growing Business Bond isn’t going to make you rich. There are a lot of other investments you can make to earn a higher return. But the issue and the places in which we’re trying to make an impact, don’t make it easy to do the work we do. At any given time we’re having to navigate complexities, uncertainties, and costs (e.g. geopolitics, corruption, currency risk, etc.).
Video: How one Sri Lankan couple escaped the grip of loan sharks
And if a 3% return is still disappointing to you, keep in mind, 15 years ago most people would have called you crazy if you had even suggested something like this could turn a profit.
Don’t be discouraged. The practical solution is, don’t put all your eggs in one basket. When you’re considering making an investment, consider not only how that investment contributes to the risk/return profile of your portfolio but also how it affects your impact profile.
For instance, someone might allocate 70% – 80% of their portfolio to broad-based bond or stock market indices that employ ESG or SRI screens; meaning you’re investing in responsible businesses. The remaining amount could be allocated across riskier investments that have a higher return potential or investments with a lower return potential but higher impact. When you take a total portfolio perspective, you’ll find that the cost of pursuing high impact investments can be significantly muted.
Will that small amount of money change the world? Probably not. But if many of us simply begin walking down this path, the industry will gather momentum—momentum which has the power to shift the markets away from “greed” and a little closer to “good.”
