Investing in Shared Value

Around the world, corporate leaders are beginning to embrace competitive strategies built on positive social and environmental impact. These companies are creating shared value by addressing societal needs in ways that improve their bottom line results. Tomorrow, many of these leaders will gather together in Lausanne, Switzerland at a forum on Creating Shared Value, along with NGO and government representatives. Attendance from the investment community, however, will be noticeably sparse. Why have investors remained skeptical about this emerging synergy between social and economic goals? What do corporate leaders see that investors are missing?

Whether under the banner of shared value, sustainability, inclusive capitalism, impact investing, the B team, or many other related initiatives, the importance of social and environmental factors to corporate strategy is no longer seriously being questioned in the C-suite. Corporate leaders increasingly recognize the cost of their companies' environmental footprints, the market opportunities in serving neglected populations, the risks of selling unhealthy products, and the constraints that threaten their workforces and supply chains.

On Wall Street, however, the story is different. Investors are quick to dismiss any non-financial factors not traditionally included in security analyses. A century ago, when socially responsible investing (SRI) began, that might have been correct. After all, early SRI screens excluded alcohol, firearms, gambling and similar industries based on moral and religious principles. Their criteria were not intended to predict a company's economic performance. If fidelity to their principles lowered their financial returns, it was a price they were willing to pay.

When the sustainability movement began fifty years ago, however, SRI's moral principles were expanded to include much more economically relevant criteria. Companies were at risk of costly regulations for pollution, lawsuits for harmful products and unsafe working conditions, consumer boycotts for irresponsible behavior, or price spikes if they relied on scarce natural resources. Many of these factors could influence a company's financial performance, although just as many were not material to the company's overall results. The effort at comprehensive accountability meant that companies were ranked on a checklist of items, whether financially material or not.

The historical influence of SRI further complicated sustainability rankings, which often indistinguishably combined environmental performance with personal or political values about animal testing, doing business with politically controversial countries such as Israel or Sudan, or excess CEO compensation. Organizations constructed their own rankings based on competing social agendas, such as access to medicines in lower income countries or the nutritional content of food. At the same time, many rankings missed highly material aspects of sustainability -- banks were ranked on their carbon footprints, for example, but not on the social and financial risks of subprime lending. The cacophony of rankings gave neither companies nor investors clear guidance about the social issues that mattered most to their success.

This profusion of comprehensive and often contradictory rankings gave rise to a "checklist sustainability" that surveyed and ranked companies on numerous factors, all of which were important to the welfare of people and the planet, but not necessarily correlated with economic performance on any reasonable investment timeframe. A majority of investors understandably declined to consider these rankings in their stock selections.

Today, however, shared value and related movements such as the Sustainability Accounting Standards Board and Integrated Reporting have brought a much sharper lens to the relationship between social and economic performance, isolating those factors that matter most to corporate strategy and financial performance. Shared value strategies identify the very small number of social issues that offer the greatest business opportunities for each company, then develop innovative solutions to address those issues. One pharmaceutical company, for example, created programs to train health care workers in China to diagnose and treat diabetes, and captured the dominant market share in a multi-billion dollar market. A global food company developed and sells hundreds of millions of nutritionally fortified products each day, reducing malnutrition in India and West Africa. A U.S. multinational developed heart healthy cooking oils that take a billion pounds of transfat out of the American diet and generate over $800 million in revenues annually. A major retailer saved hundreds of millions of dollars through its commitment to renewable energy and eliminating waste. Companies such as these are all contributing to a better world in ways that significantly affect their financial performance.

Shared value companies may not fit the preferences of every SRI investor, nor will they necessarily score highest in checklist sustainability rankings. Pursuing shared value does not replace a company's other obligations to society or diminish the importance of a broader sustainability agenda. It does, however, establish a clear connection between the creation of social value and the economic success that rewards shareholders.

A new breed of investment managers, such as the UK-based Generation Management, are following this model of shared value investing to achieve superior returns. These shared value investors have a considerable edge -- and they will retain that advantage as long as the mainstream investment community continues to confuse the historical origins of SRI and checklist sustainability rankings with the increasingly sophisticated shared value strategies that leading corporations are pursuing today. A few more money managers would do well to join the webcast from Lausanne tomorrow.

This blog post is part of a series produced for the Nestlé Creating Shared Value Forum, co-organized with UNCTAD on Oct. 9 in Switzerland. For more information about the Forum or to follow the event live, click here.