“Capitalism cannot function in a world that lives beyond its environmental means and creates massive inequalities.”
Matthew Forti, Managing Director at One Acre Fund and a Strategic Advisory Board member at Lebec Consulting, shared this statement with me last week as we dove deep into how environmental, social, and governance (ESG) investing can translate into actual impact that will transform the unsustainable world we’ve created around us.
A lightbulb went off as I connected this to a recent conversation I had with a community of family offices and business leaders at the Miami Summit, where I participated in a panel with several fund managers. I shared the notion: If businesses do not take radical steps toward changing their priorities and how they approach making a profit, they will not last. It’s as simple as that.
They might not feel the pinch today, but they’ll feel it five to 10 years from now. Today, investors representing trillions of dollars are already looking for more consistent, comparable, and decision-useful information and metrics on the climate risk of the companies in which they invest.
Failure to evolve impacts bottom line
Let me explain. If the natural resources (minerals, water, forests) that a business relies on are depleted; if its top talent quits and joins more courageous and innovative competitors; if its supply chains become unreliable; if its customer base narrows because people feel uninspired by its products and services; and if the local communities it depends on walk away from working with it—ultimately, that business will fail. And failure to evolve will absolutely impact its bottom line.
Today’s most progressive and visionary business leaders are already ahead of the curve. They’re thinking differently and staffing differently—with significantly more gender and racial diversity—and already identifying how to achieve a triple bottom line that starts with the three Ps: People, Planet, and Profit. Case in point: More than 80% of ESG funds outperformed their benchmarks in 2020.
Moreover, these companies understand that 90% of the world’s population under the age of 30 lives in emerging markets, and that steering more capital toward emerging market consumers—in addition to low-carbon and climate-resilient infrastructure—is key. Hence, in a world that will rely on durable profitability and stakeholder capitalism, now is the time for a transformational shift.
There are already global bonds and impact investment funds out there that are providing critical water, finance, sanitation, renewable energy, and healthcare services and solutions to emerging market consumers and low-income families. What if I were to tell you that they can actually reduce risk in a portfolio and deliver financial returns that are just as attractive—if not more attractive—than the private equity funds and government bonds people continue to bet on (which are, consequently, not moving the needle on climate change)?
That’s right—they do exist. Just look at LeapFrog Investments, Ellevest, WaterEquity, Beyond Capital Ventures, Root Capital, and Acumen. These are all purpose-driven firms that not only help meet ESG requirements, but also help drive growth and profitability—and they’ve had enormous success in doing so.
Hiring differently
Identifying investment opportunities like these will require businesses to hire differently–which means hiring a greater percentage of women and diverse team members. They need to recruit talent and board members who understand the immense value of these investment opportunities, and the markets in which they exist.
To Gender Smart Investing Founder Suzanne Biegel’s point, when it comes to climate change investments, it just doesn’t make sense to ignore 50% of the population on your investment, sourcing, due diligence, and research teams—whether you’re looking at entrepreneurs, leaders, innovators, customers, or suppliers. In other words: It’s critical to hire more people who look and think differently than you. Boston Consulting Group found a strong correlation between gender and racial equity and business performance, with leaders seeing higher rates of revenue growth, stronger innovation, and greater employee and customer satisfaction.
Leaders are paving new path forward
Now, the reality is that many in the business and financial industries admittedly didn’t sign up to figure out how to solve climate change or the global water crisis. Many attended business schools that taught them to place profit at the forefront of decision-making. However, there are pockets of incredible industry leaders who are paving a new path forward. And it is these leaders—the Microsofts, Chobanis, IKEAs, Patagonias, and Ellevests of the world—that will define the future.
This is the path that Blackrock Founder and CEO Larry Fink urged his fellow business leaders to take in his most recent annual letter. He emphasized that companies must care about and address issues that affect workers, customers, communities, and the climate to succeed—or risk becoming obsolete. “Putting your company’s purpose at the foundation of your relationship with your stakeholders is critical to long-term success.” Further, he argued, caring about these issues does not conflict with making a profit; it actually makes a business more resilient in the long term, which is in an investor’s best interest.
Yet, more is needed
This is great—but if I’m being honest, it’s not enough. We need to go one step further. Until we change our very definition of success—and the standards and metrics we use to determine this success among global businesses and financial institutions (including CEO compensation)—change will continue to be negligible against the enormity of the issues we are all facing. The attainment of real, scalable, tangible social impact needs to be just as high of a priority for these businesses and institutions as financial gains and market share.
This also means redefining risk, how it’s measured, and how it influences our financial decisions. For instance, there’s a disbelief among many investors that it’s possible to invest in water and sanitation in ways that generate attractive financial and social returns. WaterEquity has proven that thesis wrong—demonstrating the tremendous value-add and portfolio diversification that investing in water presents for investors. We need to teach this at business schools. And we need to radically shift who’s at the decision-making table. Today, 98.7% of all assets in the United States are managed by white men.
We need a much more balanced perspective on how trillions of dollars will be spent to address climate change, risk, and rising inequality. Social impact needs to be in the driver’s seat. What if our global financial system rewarded real, scalable social impact as much as it rewards financial returns? What if the world’s leading companies had to report to shareholders quarterly on both types of gains–with equal value awarded to each? What if CEO compensation was determined by the achievement of both? Then maybe the prioritization of addressing climate change as a high-ranking global risk and potential catastrophe, both economically and environmentally, would be there.
Social impact needs to be in the driver’s seat.
That said, there have been some positive developments. Salesforce is committing to tying executive pay to several ESG goals. And Citigroup exceeded its goals for increasing the percentage of women and Black executives at the firm. However, only 1.2% of Fortune 500 CEOS are women of color, and only a small percentage of ESG investments target emerging markets and actually translate to more financing to solve the world’s most pressing issues.
We’re willing to stake a claim to the next artificial intelligence app or iPhone model, and yet we’re willing to risk so little to solve some of humanity’s most basic needs—like water access and infrastructure, access to financial and healthcare services, sustainable eye health, and renewable energy. We don’t strictly regulate or heavily tax the industries, like fossil fuels, that are devastating our planet and preventing our children from having the chance at a sustainable future. The reality is: We simply cannot move the needle on these issues with the same decision-makers at the table.
We need courage, risk-taking and vision
Show me the companies who have figured out how to partner with social enterprises and social entrepreneurs—and who know how to address the global water crisis, extreme poverty, and inequality—in addition to making a profit. Because here’s the thing: Today, whether global businesses and financial institutions signed up for this or not, we have the financial tools, expertise, insights, and resources to make it happen—from philanthropy, to impact investing, to ESG investing. Doing so successfully will give us all the data points necessary to keep nudging global and local government leaders to follow the same path.
We need courage, leadership, vision, creativity, and greater risk-taking to solve humanity’s primary challenges. Because, in a world where stakeholder capitalism is a necessity, companies have a real opportunity to gain a long-term competitive advantage—by investing strategically in ways that not only meet ESG criteria, but actually create a net positive value that improves the well-being of every stakeholder at every scale.
As Ellevest CEO and Co-Founder Sallie Krawcheck wisely and succinctly said, “If you’re doing things the right way, might you outperform every year? Maybe not. But missing the big scandal, the slow bleed—the impact of that is real.”
About Lebec Consulting
We are a women-owned and women-led firm that advises corporations, foundations, high net-worth individuals, financial institutions, and entrepreneurs on how to achieve their greatest social impact through philanthropy; impact investing; and environmental, social, and governance (ESG) investing. We are a creative team that helps clients break with conventionality to reach their most ambitious impact goals.