Why Investors Should Think Beyond Returns On Investments8 January, 2016 / Articles
It’s not just about money.
For many of us, December means reconciling our year-end charitable donations. This year, instead of just writing checks to non-profits, consider putting some of your investment money into a “social business” or social impact fund, a fund that holds shares in businesses that deliver financial returns and social good. Here’s the thinking – while you may make slightly lower returns, if meaningful social change is achieved, you can both feel good and consider the foregone gains a form of charitable giving. (After all, foregone gains are 100% tax deductible; and there’s no Schedule A limitation.)
It’s probably no surprise that as dean of one of the world’s leading business schools, I am a believer in business. In my mind, markets, and the businesses that comprise them, form the most potent and powerful social institution of our era. They create jobs that lift hundreds of thousands out of poverty each year and launch innovations like the Internet, smart phone and social media — creating unprecedented levels of market access and opportunity.
But this year, after encountering some very sobering life situations, I have come to appreciate with greater clarity the need for each of us to be more mindful in 1) how we invest our money and 2) how we invest in helping those less fortunate. Why? Because organizations funded through “giving” are typically not as sustainable or scalable as businesses focused on making a profit. Conversely, organizations designed to make money are not typically as socially-minded as NGOs. So, we need a third way.
Now I’m not saying that existing businesses are not socially minded. They are. In addition to providing value to their customers, many alter their supply chains to be fairer, more inclusive and more sustainable. They pay higher wages and create better working conditions for their employees. They offer goods and services on a pro bono basis.
But traditional public companies are limited in how much social impact they can deliver, if it puts them at odds with what analysts, activists, or even you and I want from them. Why? Because most people I know, including me, want to earn more money rather than less on our financial investments. We want to retire sooner rather than later. To the extent that we pursue social good, we typically do it through direct philanthropy, not our investments. So, we invest for high returns and donate for the “feel good,” social impact factor.
Instead of a siloed approach to giving and investment, the third way challenges each of us to take seriously the idea that business can pursue profit and social good with equal vigor. And it doesn’t call for new forms of incorporating, such as B-corps, in order to do it. What’s most important is access to capital. Social enterprise companies don’t need a specialized charter, just an aligned investor base. Imagine if a large group of us invested 10% of our assets in social impact capital, just as we have venture capital. The result would be large pools of funds available for spurring social innovation, wherever it occurs. And we all know that innovation inspires growth — in both new businesses and new markets.
Frankly, one could even argue that for a subset of current markets this solution may be the most responsible choice in the long-run. Think senior care, child care, environmental remediation, and payday loans to the working class. Some companies do provide them well and make a profit, but I’m not sure that we want all businesses in these sectors subject to ongoing profit maximization pressures. If we don’t put social impact on par with shareholder value in some market sectors, don’t we risk under-serving, and possibly even taking advantage of, some of the most vulnerable in our society?
So this year, in honor of global #Giving Tuesday, after you write that check to your favorite charity, consider shifting some portion of your investment dollars, say 5% or 10%, to funding social impact businesses. In the short term, you may make slightly lower returns on that portion of your portfolio. If so, do a mental recalculation and put those foregone gains into your giving column. But longer-term, I am confident that many of these businesses will deliver competitive returns.
Through a combination of investing, giving and the third way, together we can use the power of business to reach our fullest human potential — catalyzing innovation, increasing income and creating even greater positive global impact.