What Impact Do Investors Want?
This essay is the second in a four-part series titled “Social Investing v. Financial Investing” discussing the differences between financial investing tools vs. what’s available for social investors and charitable funders.
In the first article of this series, we talked about how useful it would be if there was a way to compare two social impact opportunities against each other. Suppose you wanted to support the best education organization that met your education objectives. Wouldn’t it be very helpful to go to a place where all of the education organizations were organized in a table so that you could compare them, their objectives, and their accomplishments? The financial pages are in every major newspaper and easy to find online, why couldn't they carry similar information about the social impact and outcomes of non-profits, B corporations, and corporate citizens?
Environmental, social and governance (ESG) funds are trying to lean in to capture social impact, and a plethora of standards setting bodies have emerged like the EU CSRD, SASB, GRI and CDP, but these tend to measure inputs and outputs, rather than impacts and outcomes. If you want to figure out which companies or nonprofits have contributed to the best developmental outcomes, that is still very much a challenge.
When you think about it, there are actually four different categories of investment across the spectrum of economic and social goods. At the two ends of the spectrum are finance investing and social charity (the expectation of no economic return). In between are the goals of yielding social benefits from economic goods and economic benefits from social goods.
The easiest type of investing to explain is financial investing. It is designed to generate economic wealth, economic productivity of available resources, jobs, income, and so on. A huge infrastructure exists to support this kind of investment. We have already discussed the financial press, GAAP, and FASB. In addition, there are a plethora of stock exchanges, investment banks, mutual funds, the Securities and Exchange Commission (SEC), and so on.
Where the corporate social responsibility (CSR) and sustainability community have been able to make significant inroads is in providing support for social investors who want to maximize their economic returns as well – EI(SG). ESG funds have attracted well over $30 trillion in capital, and have gone from being a sideshow to being enormously influential.
From the "triple bottom line" to sustainability reporting, companies are increasingly chasing socially conscious investors. The added benefit of adopting certain social and environmental causes is not that they are good for the income statement, but that they are good for the balance sheet and investor wealth. For many Fortune 500 companies the equation is simple. The more they invest in good will and enhance their intangible assets, the better their brand is, and the more support is built in to their stock price.
The third category is the least well-understood of the four quadrants – the so-called “social case for business.” This has emerged in recent years as free market supporters have started to quantify and compare social impacts of different economic systems, industries, businesses, and business operations.
In this view, job creation is a social good. Growth in pension fund assets is good so that seniors can retire with more income. Making the social case for business is about promoting institutional and community diversity that provides different pathways for people to make a living and contribute to society. The role of small businesses in community formation and support is particularly notable in this regard.
The final category is philanthropy – providing resources to address social objectives without seeking any form of economic return. Most socially-minded people give because they like the idea of the cause. They have no idea if the organization or its operations really makes a positive difference.
The challenge is that there are all different kinds of social objectives, sometimes at cross-purposes with each other. Take, for example, a favorite metric of the utilitarians – to provide the greatest good for the greatest number of people. That’s not how people think in the real world. Sure, some philanthropists want to help as many people as possible, so they focus on urban centers, countries, or humanity.
However, others want to work with a few people intensively, so they focus on a children’s hospital or drug rehab center. Still, others don’t want to work with people at all and want to preserve the environment or support animal rescue. So, a basic metric like “number of people served” cannot be the only social basis of comparison.
In financial investing, there is a single currency – money. Makes everything much simpler if you only have to use one currency or value. Whereas for social investors and philanthropists, there are many currencies. These include, but are certainly not limited to:
Number of people served
Quality of life
Immediacy of impact
The problem with this, and the problem with the Sustainable Development Goals in aggregate, is that they tend to channel social interests into silos. There is currently no real way to evaluate how much investing in one type of education or health or environmental project contributes to the over-all sustainable development of communities. Indeed, investing in a single social function may lead to a society that is out of balance, like the tennis player who had a huge right arm in comparison to the proportions of his other arm and legs.
One could argue that because social goods are so important, determining their social ROI is even more crucial than determining an economic ROI. How much more important is it to develop the best tools to save a town from flooding or find a cure for Alzheimer’s, than whether X, Y, or Z stock will yield an 8% return on an annual basis? Even more importantly, how does investing in education or health or the environment fit into the over-all context of development?
The lack of rigor and support for social impact investment and capturing the value of social goods has led to significant inefficiencies and misallocation of resources for social goods. Developing clarity, support systems, and most importantly, context, for different social objectives will enhance capital allocation for desired social goods. In a way, it’s amazing that none of this infrastructure has been developed yet. However, for government leaders, corporate citizens, philanthropists, and community residents, their necessity is becoming more apparent with each passing day.
Next week: Developing a model social impact framework