Social Investors vs. Social Businesses: Who will win the struggle for the future of SRI investing?

little box boxer knocks out dad boxerBy Marta Maretich @maximpactdotcom

We all like to talk about how the social, responsible and impact (SRI) investing sector is growing—and current research indicates that it is flourishing, with more capital and a wider range of investors now entering the field.

All that is good—and it’s what we’ve all be working for. Yet if there’s one thing experience has taught us about deploying the new market approaches to generating social and environmental benefit, it’s that the detail matters at least as much as the big picture.

A closer look at the way the sector has developed in recent years reveals more than just growth: There’s been an important shift in the story we’re telling ourselves about SRI investing. A movement that began with an emphasis on social entrepreneurs and social businesses serving the needs of beneficiaries has become preoccupied with investors and the mechanisms of the marketplace. What caused this shift to happen? And is it necessarily a bad thing for SRI investing?

Changing the subject

As we’ve tracked the growing body of research documenting the exponential growth of the SRI marketplace, we’ve noticed something strange:

Once most of the literature in the field came from social investors, like Root Capital, and accelerators, like the Skoll Foundation, who were actively engaged in developing socially beneficial businesses.

Today the focus has shifted away from social businesses and their beneficiaries. Instead, sector bodies, like the WEF, the G8 Social Impact Investment Taskforce, UK SIF and USSIF, as well as big financial advisory firms (EY, Deloitte, Citi to name just a few), are turning their analytical lenses on investors and markets in an effort to demonstrate (and, in some cases, capitalize on) the potential of the new SRI investment approaches.

In a sector that has its deepest roots in social entrepreneurship, microfinance and microlending, this change may seem surprising, even worrying. Why has it happened?

1. Investors demand attention

First, investors are driving the market for SRI investing and this has lead financial firms and other analysts to study them, and their investment habits, more intensively.

As one example, a USSIF trend report for 2014 tells us that: “Money managers increasingly are incorporating ESG factors into their investment analysis and portfolio construction, driven by the demand for ESG investing products from institutional and individual investors and by the mission and values of their management firms. Of the managers that responded to an information request about reasons for incorporating ESG, the highest percentage, 80%, cited client demand as their motivation.”

This is one more piece in a growing body of evidence that shows personnel in financial firms finally waking up to the fact that their clients are interested in SRI investing. At the same time, they’re realizing that the ability to use these approaches is likely to be an important selling point for their businesses in the future.

This realization comes rather late in a sector that saw small, socially concerned family offices, like Omidyar, pioneering the practice of impact investing back in 2007. But with a new generation of private investors, led by wealthy young millennials and women, now asking for SRI investment options, the message is finally getting through. Mainstream financial firms are focussing more of their attention on socially-motivated investors and promoting SRI offerings to attract what they now realize is a growing client base.

2. Mainstreaming forces a market focus

The second reason for the focus on investors and markets has to do with the recent raft of mainstreaming initiatives for social investing.

In an effort to draw larger investors into the SRI marketplace, these initiatives sought to gather sector information, such as existed, into reports aimed at larger investors. The reports were designed to demonstrate that social investing is, in fact, a real market.  They presented their case in the language of the mainstream and included statistical data, graphs, tables and pie charts—the works. Everything about them was engineered to convince the heavy hitters that SRI investing was something they could engage in securely, responsibly and even profitably.

Several of the most important reports in this vein have been produced by the WEF as part of a series aimed at large institutional investors, including insurance firms and pension funds. The G8 Social Impact Investment Taskforce and its various working groups also produced material aimed at the largest investors including national governments thinking of entering the SRI market.

All this is a world away from the early literature on social investing, which emphasized its impact on social entrepreneurs and beneficiaries, often people in emerging economies and those at the bottom of the pyramid.

Yet the motives behind the mainstreaming push were good. They reflected the commitment of a few far-seeing financiers, like Sir Ronald Cohen, who realized the potential for scaling social and environmental benefit through using the powerful mechanisms of global finance. And, to judge from the buzz around ESG at Davos this year, the approach has been successful in getting mainstream finance to take SRI more seriously.

Aren’t we forgetting something?

This suggests that the shift of focus to markets and investors was needed to get bigger financial players to engage with social benefit. Yet in other ways the rush to mainstream may have been a distraction from some of the most important challenges still facing our sector.

These include fundamental questions about the role of business in society and the role capital plays in supporting the development of companies.

The mainstreaming of SRI investing, though it may be beneficial, doesn’t challenge the status quo behind the international capital markets. Rather, it works with the prevailing forces of global finance in an attempt to turn at least some of them in a more favorable direction. This approach is pragmatic—and its unthreatening nature partly accounts for its popularity at places like Davos—but for some in our sector it doesn’t go far enough toward bringing about a permanent change to the way we do business.

On a more down-to-earth level, the recent focus on investors and markets leaves out what many think is the most important element of all in this equation: Socially beneficial businesses.

We have a lot of experience in operating for-profit businesses and non-profit organizations that deliver social benefit, but socially beneficial businesses are still a relatively new kind of animal to us. Despite progress in the sector, we still have a lot to learn about how to operate companies that are financially sustainable and able to deliver extra-financial benefits at the same time.

What really matters

The commitment to pursue benefit alongside profit, when genuine, touches every aspect of a business. Leadership, governance, operations, compliance and reporting (among other things) are all affected and we need to understand much more about how this works in practice. The influence of investors, especially those that take an active role in governance, is yet another factor, still little studied or understood, in the development of social businesses.

With so much still to learn about how to “do” socially beneficial business, the recent emphasis on investors and mainstreaming markets can seem misplaced. However, it makes sense in one important way: Only by doing more socially beneficial business will we ever have a chance to find out what really works and develop effective models. And only by attracting sufficient capital will we have the opportunity to do more socially beneficial business.

Time to re-focus—again

So, should the story of our sector be one of global financial markets and canny investors, or should it be one of heroic social entrepreneurs and white-hat social businesses?

The answer is: It needs to be both.

But now that the larger markets and a more ample pool of investors are showing interest, it’s time for the sector to shift its focus back to actually making socially beneficial businesses work across a range of global contexts.

It’s emerging that one of the dangers of mainstreaming is that social businesses can find themselves forced back into the mold of regular companies with no social benefit goals. To avoid this, they need clearer roadmaps for how to manage and develop their companies, especially as they grow to scale. Investors and markets also need to find better ways to engage with socially beneficial businesses in order for the partnership to work successfully.

More research in both these areas is needed. The question is: Who will do this work and so help write the next chapter in the ongoing story of socially beneficial business? Could it be you?

Women Rule: Why the Future of Social, Sustainable and Impact Investing is in Female Hands

Group of female social investors

By Marta Maretich @maximpactdotcomMaximpact.com

In the early days of the social investing movement, women and girls were arguably seen more as program beneficiaries than financial movers and shakers.

Social lenders changed their view when they realized that focusing initiatives like microfinance lending on women turned out to be the most effective way to make whole communities more prosperous. This early insight quickly led to further programs targeting women, including special prizes and support networks for female entrepreneurs and the advent of gender lens investing—an approach to creating female-centred portfolios that puts capital behind women in a more systematic way.

Positive as all this was, things have moved on significantly in the world of social investing. No longer only the beneficiaries of social finance, today women are building a complete ecosystem of social investing that has female financial power at its heart.

Women are wealthy—and socially conscious

Global wealth demographics have their part to play in this trend. Women—or at least some women—are richer now than ever before. And they’re soon to get even richer.

Taking the US as one example, women now control almost half of the estates valued over $5 million and they stand to inherit some 70% of the $41 trillion to be inherited over the next four decades in the largest intergenerational transfer of wealth the world has ever seen. By 2030, roughly two-thirds of the private wealth in the US will be held by women.

This wave of wealth is set to land in the laps of female investors who have been shown to have a more positive attitudes toward social investing than their male counterparts. Half of wealthy women in a recent survey expressed an interest in social and environmental investing while only one-third of wealthy men did. 65% of women thought social, political and environmental impacts were important, as compared to just 52% of men.

Female advisors, step up!

Surveys show that financial firms are not currently meeting the needs of this growing pool of wealthy female clients and many are taking special measures to reach them. Part of the problem is that there are still so few female advisors out there: Only three in 10 advisors are women, according to a 2013 Insured Retirement Institute study, yet 70% of women seeking advisors say they would prefer to work with a woman.

The good news is that the female advisors now at work are already a positive force for social investing. A report by the Calvert Foundation showed female advisors to be more interested in using sustainable investing funds (59%) than their male counterparts (39%). They were more likely to know about alternative investing opportunities and more likely to offer them as options to their clients, too.

More female MBAs?

Boosting the number of women in financial advisory roles could, then, be a way of extending the reach of social investing to more women. But where will they come from?

In theory, a new generation of female advisors is currently learning its trade in business schools around the world. Yet due to what’s often condemned as a male-dominated culture, many MBA programs have poor track records of enrolling and retaining female students and this has the effect of limiting the number of female graduates.

That may now be changing with more business schools making concerted efforts to become more female-friendly in order to attract women students. Some, like Harvard, are actively reaching out to women in an effort to create a more balanced student body. Still others have succeeded and now boast student bodies where females outnumber males. It’s a positive move and, if their efforts pay off, we may see an increased number of female financial advisors starting to come through the system.

When they do, they may well be better prepared to advise on social investments than their predecessors. In a parallel trend, many MBA programs are now offering more training in social, responsible and impact investing to all students, including female ones. This means that more female business graduates will come out with degrees that prepare them to take up active roles in the social investment marketplace.

Women-run investment firms

At the same time, female financial expertise is taking the helm in more direct ways through a growing number of women-run venture capital firms and all-female investor networks. Firms like Cowboy Ventures, Aspect Ventures, Broadway Angels and Aligned Partners are run by women, for women investors.

Their presence in the start-up marketplace disproves the myth that women investors are risk averse. And, even when the firms don’t specifically target women-run businesses, they seem to be having a catalytic effect on female-founded companies: Women-run investment firms reported receiving more pitches from female entrepreneurs because of their networks. As a consequence, a greater percentage of their investments—up to 40% in some cases—have been in companies started by women.

Elsewhere, women are establishing venture funds specifically targeting female entrepreneurs and focusing on female markets. High Note, run by Genevieve Thiers, seeks to will invest in companies run by women who are solving problems for women.

Women in the boardroom — finally!

Female venture capital firms are a good thing for socially conscious female investors, and, from the looks of it, a good thing for female-run businesses, too. But there’s an even more significant advantage to them: they will put more women on the boards of more companies.

How does that work? Increasingly, venture capitalists claim voting seats on the boards of the companies they invest in. With more female VCs, more of those seats will be occupied by women, giving them more influence over the way businesses grow and develop.

There’s no guarantee that the presence of VC women on boards will have a positive effect for social investing — women, after all, can be just as profit-obsessed as men. Yet, given the interest shown by women in using their capital to back social and environmental good, it certainly could. It will also go some way toward correcting the woeful lack of women on corporate governing boards generally. (Other methods, including quotas, are being tried in some countries, including Germany and the UK.)

In social enterprises, the gender picture in the boardroom is slightly more female positive than the norm. Social Enterprise UK’s 2011 State of Social Enterprise Survey found that 86% of social enterprise leadership teams included at least one female director. By contrast, only 13% of the members of the Institute of Directors, a UK organization for corporate board members, are women.

Looking to the future

Capital, expertise and leadership: these are some of the things more female involvement promises to bring to the social investing sector. Female investors, working with female advisors and investment firms, will be able to do more for female social entrepreneurs as well as social businesses who serve the needs women.

This is a long way from women as beneficiaries and it’s all good. But it’s important to point out that it won’t only be women who benefit from women becoming more engaged social investors.

Changes to the gender balance in social investing are part of a wider expansion in the role of women in business and finance. With greater influence, more autonomy, increasing confidence and shedloads of wealth behind them, women are increasingly in a position to change the way the world invests—and do great things for the planet and its people.

Can’t wait to see what happens next.

Effective Two-Way Engagement: A New Gold Standard for SRI Investing

cartoon of men communicating across a chasmBy Marta Maretich @maximpactdotcom

At its most effective, communication is a two-way process. Developments in engagement practices between companies and social, responsible and impact (SRI) investors are showing us that this idea is now more applicable than ever.

New expectations and standards are growing up around investor/investee engagement in the SRI investing sector. These are driven by a number of factors including calls for more transparency and accountability, the rising power of investors in the boardroom and emerging evidence that attending to extra-financials, like sustainability, has positive effects on financial performance.

In practice, the pressure to engage—and the need to find effective ways to do this through communication—comes from several directions.

Investors want more extra-financial information

The need for engagement is impelled by a increase in socially concious investors, notably wealthy millennials and women, who are demanding detailed ESG performance information about the companies they invest in. Recent research reveals that investors (and their advisors) are relying more heavily on extra-financial disclosure when deciding where to place their capital. Poor performance in ESG areas, or a lack of disclosure about them, will make them say no to an investment.

Companies are responding to this increased scrutiny by improving communications around ESG extra-financials. This may include making performance information more freely available on websites and other media, or training company spokespeople to incorporate extra-financials into their communications.  It may also mean embracing integrated reporting, which delivers performance information in extra-financial areas and provides the content for communication in these areas.

In another trend, the corporate world is seeing increased demand for more up-to-the minute and on-demand performance information. Facilitated by web-based services, real-time financial performance information is already a reality for some companies and it could shortly become a necessity for all. If that happens, companies will need to create systems for delivering extra-financial information this way—and for receiving investor feedback.

Investors expect more influence over companies

Investors are becoming more active in their efforts to influence the companies they invest in.  In a trend for more investor engagement, industry leaders like Blackrock are declaring their intentions to engage with investees on governance matters, strategy and operations, with ESG issues a major focus. Evidence of increased engagement on extra-financials can be seen in the record number of proxy resolutions filed by investors seeking corporate disclosure and action on a range of environmental and social issues, seen here in the Sustainable Investment Institute’s Proxy Preview 2015.

To deal with increased pressure from investors, businesses are establishing direct engagement strategies, and communication is an important part of these. Direct engagement strategies identify investor concerns and priorities, then pro-actively seek to address them before they become an issue. Communications may involve a range of measures including targeted investor roadshows, making more information accessible online and one-to-one communication between investors and senior managers.

Companies need to know more about SRI investors

The burden of communication isn’t solely on the side of companies. Investors, too, need to communicate clearly for effective engagement, especially when they are SRI-focused.

With the increasing influence of investors in the boardroom, it’s more important than ever for companies to seek out investors who will support all parts of their strategy. This is particularly true when it comes to businesses aiming to produce both profit and benefit—blended value, impact and profit-with-purpose businesses—and those for whom ESG goals are a core part of their business model.

For these kinds of organizations, investors who might work against the overall strategy, for example pushing through an unfavorable exit or IPO, should be avoided. To make a good match, companies need adequate information about potential investors before they partner with them, including insight into their goals, priorities, values, governance stance and voting policies.

According to findings by the Conference Board, a US governance think tank, investors should communicate clearly and transparently with potential investees about themselves, providing information on their own engagement policies and track record when voting as members of the board. Information about their stance on extra-financial issues, such as governance and sustainability, should be easily accessible to investees and should form a point of discussion during negotiations. Triodos Bank is one SRI investor that makes such information freely avaliable to investees and the public.

Engagement services for the future

With engagement between investors and investees becoming more important, the question of how best to engage is now taking center stage in SRI investing.

In mainstream financial markets, Broadridge has risen to become “the most important firm on Wall Street that you’ve never heard of” by providing investor engagement services, including proxy and shareholder communications, to companies. However, it’s questionable whether Broadridge’s engagement methods will prove as effective for the SRI sector, where communicating ESG extra-financials and impact metrics will be as important communicating about the traditional bottom line.

This suggests an opportunity for service providers to step up to meet the needs of a growing marketplace of SRI investors and companies. By providing high quality, innovative engagement services that help investors and investees communicate about a broader range of performance criteria, an ESG- and impact-oriented engagement service company could fill the gap and become the next Broadridge in a vibrant new marketplace. Any takers out there?

Bare It All: ESG disclosure is the new obsession of investors and businesses alike

businessman opening shirt to reveal superhero costume with green energy theme

By Marta Maretich @maximpactdotcom

Here’s a riddle: Investors are demanding them. The global business community is boosting them. Companies large and small are trying to figure out how to produce them. What are they?

You guessed it: Extra-financial performance results—the environmental, social and governance (ESG) metrics that demonstrate that a company is acting responsibly as it conducts its business. In a major shift in global attitudes toward sustainability and the role of business in society, this fast-growing area is now a major focus for businesses and investors alike.

Not new, but moving fast

The movement behind making ESG criteria for investing has been gaining ground for four decades, with pioneers like Hazel Henderson and Joan Bavaria of Trillium leading the charge. But the pace of change has recently been accelerating across non-profit, public and business sectors alike leading more investors to look to ESG when making decisions.

Several factors are driving the shift. Increased concerns about the effects of climate change are leading citizens and governments to demand tougher environmental regulations for businesses (E). Social factors (S), such as human rights abuses, are now recognized as material risks. Poor governance is widely seen as a factor in the financial crash of 2008, sparking investor demands for more information about the G in ESG. Meanwhile, evidence is mounting that shows companies that pay attention to extra-financials actually perform better in the long term.

Extra-financial and ultra-influential

All these factors contributed to making 2014 a watershed year for investment decisions based on extra-financial factors. Fossil fuel divestment was one area where investors were seen to make decisions for reasons other than financial performance.

Investors controlling billions of dollars, such as the Rockefeller Brothers, The Wallace Fund and Ben and Jerry’s, all divested their holdings in fossil fuels in an effort to combat climate change. More of this is coming. Major institutions such as museums, universities, city governments and pension funds are all feeling the pressure to divest.

Private investors are an important part of the trend with some 70% now expressing an interest in investing with a conscience. As a result, asset managers in many parts of the industry are climbing on board and looking to expand their expertise in what is a strong growth area of the market.

Changing attitudes to ESG in business

These trends are putting new ESG-related obligations on companies and investors alike.

For companies, there is increased pressure to track and report ESG performance, an activity that costs organizational resources and must be carefully managed for good results. Luckily, attitudes toward ESG are changing across the business world. Top executives no longer see it as mainly a reputational or branding exercise. Rather, ESG-competence is emerging as good business practice that can foster innovation, lead companies to identify efficiencies and help manage risks. Embracing ESG reporting provides greater access to capital, too. It’s a necessity in a climate where investors will turn down deals with companies that don’t disclose well enough or don’t disclose at all.

Across the world, companies are racing to incorporate ESG into their monitoring and reporting frameworks. To help them, the Global Reporting Initiative (GRI) provides a range of resources, including this one for absolute beginners. GRI starter kit. Other groups, like the EVCA, a European group of private equity investors, have developed their own framework to help businesses disclose ESG performance.

Investors incorporate ESG in decision-making

The EVCA framework—for businesses but developed by investors—is one example of how seriously investors are now taking ESG. And there is further evidence that the investing sector is taking positive steps to get better at incorporating extra-financials into decision-making processes.

The UN-sponsored Principles for Responsible Investing (PRI) initiative has been around since 2005 and today has 1,371 signatories around the world. The PRI provides a framework for incorporating ESG concerns into investment practice as well as reporting. It now includes a climate change pledge for asset owners.

Global investors are banding together around ESG, joining groups like the Global Sustainable Investor’s (GSI) Alliance. The Alliance supports progress in sustainable investing by identifying trends and acting as a network for national groups. It has attracted important national members including Europe’s Eurosif, British UKSIF, American US SIF, Canadian RIA and the Asian region ASrIA.

Standards are also being developed to help investors compare ESG performance across companies. The CDP amasses disclosure data on climate change issues and works with investors and companies to improve performance and reporting. Today its membership includes more than 822 institutional investors representing in excess of US$95 trillion in assets. In 2014 the CDP scored over 4700 companies on climate-related performance.

Meanwhile, the Sustainability Accounting Standards Board (SASB) is establishing the materiality of sustainability issues, applying an accountancy approach to determining their value. Operating as a non-profit, SASB makes its standards in areas like healthcare, infrastructure and renewable resources available online to investors and businesses alike. Like the CDP and the EVCA, SASB offers paid consultancy services to help clients embed ESG into their reporting and decision-making processes. (Note that this kind of service provision around ESG disclosure looks set to be a growth area for the sector.)

Burdens and opportunities

Extra-financial disclosure presents both a burden and an opportunity for companies and investors. On the burden side, it takes time, resources and in some cases a profound change of attitude for companies and those who capitalize them to embrace ESG and make it part of normal business practice. On the opportunity side, the link between non-financial performance and long-term organizational health and profitability is becoming clearer. That of course leaves aside the core argument for ESG reporting: that it is a powerful tool for reigning in the damage business can do and turning its efforts to benefit in the larger sense. This is something both companies and investors should get behind.