Category: October 2016 – Aligning for Impact: ESG, SRI & CSR

by John Hodges, managing director, Infrastructure and Finance, BSR

 

As Managing Director for Infrastructure and Finance at BSR (Business for Social Responsibility), one of the world’s leading nonprofit business networks and consultants dedicated to sustainability with over 250 member companies, I interact with the heads of corporate sustainability for Fortune 500 companies on a daily basis. What is fundamental to these conversations, as well as to my regular conversations with the responsible investing community, is the increasing desire for companies to better understand the broader environmental and social impacts they are having, both positive and negative.

What I mean by “broader” are those impacts that are outside a company’s own walls. Measuring and describing real world impacts is not easy – developmental and non-profit organizations still struggle with how to do it most effectively. Having spent most of my career as a development economist at the World Bank and at other sustainability-focused organizations, I know firsthand that analyzing sustainability impacts can be a mixture of art and science.

The process for evaluating impacts, however, is relatively the same whether from the perspective of a developmental organization, a non-profit, or a for-profit company. The basic approach is to understand the progression from inputs to outputs, to outcomes, and ultimately to impacts.

Companies spend a lot of time in their sustainability reports discussing inputs and outputs, and in some cases outcomes (e.g. my company’s recent shift to only purchasing certified sustainable wood which means more sustainably managed forests which means reduced deforestation). The place where companies are struggling most is to analyze how these outcomes can lead to real world impacts at scale (e.g. reduced deforestation creates a cleaner watershed and less waterborne disease).

The Global Reporting Initiative (GRI), the standard that the majority of the world’s companies follow in their sustainability reports ^[1], has four main principles for disclosing sustainability information: completeness, materiality, stakeholder inclusiveness, and sustainability context. The last one of these, sustainability context, is my personal favorite. I find understanding a company’s sustainability context to be fundamental to understanding its corporate sustainability impacts.

The concept of sustainability context is simply that companies should present sustainability efforts in the context of wider economic, environmental, and social conditions and trends at the local, regional, or global level ^[2]. It gives all stakeholders the scale and understanding of the sustainability challenge at hand and the efforts needed to make a real world difference.

The World Bank and other developmental organizations focus on sustainability context. For example, before making any investment, the World Bank evaluates the broader sustainability challenges of its client countries and then articulates how the investment will create positive or mitigate negative sustainability impacts within that context. In my opinion, for-profit companies can do a better job of similarly analyzing the big-picture sustainability context when making business decisions.

A key concern is that without a sustainability context stakeholders are simply left wondering if a company’s sustainability impacts are actually a big deal or not. For example, Coca-Cola Corporation uses approximately 300 billion liters of water a year to make their products. The company has sustainability goals, which they are meeting, to replenish water resources and reduce water waste directly related to their operations.

That seems like a big deal, especially as 300 billion is a large number, Coca-Cola products are found everywhere in the world (I can personally vouch for North Korea), and global water scarcity is an increasing challenge. Stakeholders, including responsible investors, would be interested in what large-scale effect Coca-Cola’s efforts will have on regional or even global water supply resources and sustainability. Furthermore, they would be interested in any efforts being made to collaborate with others beyond Coca-Cola’s own water footprint for even greater impact and scale.

I have found that most companies do want to answer these big picture global impact questions, but they have not had a universal framework to help them do so, until now. The development community first made an attempt at a universal “sustainability context” framework with the Millennium Development Goals (MDGs), established in 2000 by the United Nations and other developmental organizations. The private sector was mainly left out of this first MDG process, however.

The second iteration of global development goals, the 2015 Sustainable Development Goals (SDGs), was more inclusive of companies’ views and their roles in achieving global impacts. It explicitly calls for private sector companies to take leadership roles and for public-private partnerships.

As a result, many companies are beginning to align sustainability efforts and even frame them within the relevant SDGs, which in turn has provided a natural habitat for the companies to describe sustainability context. BSR has spent a good portion of the last year promoting the SDGs as an effective sustainability context framework for our member companies. Some of our findings are available in joint research we conducted with the Global Compact earlier this year, A First Look at How Companies Are Responding to the SDGs ^[3].

Surveys show that many companies are already making public statements in support of the SDGs and aligning goals around the SDGs. Regarding Coca-Cola, the company now discusses its water sustainability efforts in the great context of the SDGs, specifically using SDG Goal 6 (Clean Water and Sanitation) and its sub-targets ^[4]. Other examples include Kering, which has aligned its natural capital accounting methodology to SDG Goal 15 (Life on Land) and Novartis, which has launched “Novartis Access“ in alignment with SDG Goal 3 (Good Health and Well-Being).

I find that investors in particular have an important role to play in evaluating companies’ long-term potential vis-à-vis sustainability context. After all, the sustainability context of a company can also provide insight into the potential market for sustainability-focused products and services. The SDGs are a very good indication of how the world will develop over the next 15 years and provide insights into the market opportunities, which will come with that development.

Looking back, the success of Whole Foods Markets was not due to the market for high-quality natural and organic foods at the time the company was founded. Rather, the company experienced significant growth by positioning itself as part of the solution to the context of poor nutritional trends, depleting seafood stocks, and unjust labor practices in agriculture. Investors that understood Whole Foods’ sustainability context well would have recognized the obvious growth potential.

I am seeing an increasing understanding of investors that having a positive global sustainability impact is essential for a company’s overall business success. The United Nations Principles for Responsible Investment also recently announced that it will work with its 1,500 signatories, which represent approximately $60 trillion in assets, to build the investment case for the SDGs.

Building on some of the first-mover cases listed above, there is an opportunity for many more companies to frame their corporate sustainability goals and impacts within the larger sustainability context. With the launch of the SDGs last year, there are emerging resources available to help companies do so. The United Nations Global Compact’s SDG Industry Mix provides guidance on which SDGs are most relevant to specific industries and examples of company efforts. BSR has also developed our own SDG Navigator to help our member companies as well.

Recently my BSR colleagues and I have been increasingly advising heads of corporate sustainability to take a look at the SDGs when they have questions about the sustainability context of their company. The SDGs provide the best universal framework I have seen in my career to begin asking the really important questions about corporate purpose.

 

Article by John Hodges, Managing Director, Infrastructure and Finance, BSR

With more than 20 years of sustainable development experience, John leads BSR’s global infrastructure and financial services (www.bsr.org/en/industry-focus/financial-services) practices, advising companies on corporate sustainability strategy, responsible investing and project development, and environmental, social, and governance (ESG) risk management.

Before BSR (www.bsr.org), John was the founder and president of SunOne Solutions, a leading carbon project developer in North and South America. John worked as a staff member in the World Bank’s sustainable development group, where he managed global energy and transport infrastructure projects and the vice president for sustainable development’s front office, and served as the infrastructure advisor in the Thailand and Kosovo country offices. He has also held positions in the airline transport industry, with a private infrastructure project developer in Chile, and with an impact investing fund in the Balkans.

John holds an M.P.A. from Harvard University, an International M.B.A. from the University of South Carolina, and a B.S. in International Trade and Finance from Louisiana State University.

Article Notes:

[1] https://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Documents/kpmg-survey-of-corporate-responsibility-reporting-2015-O- 201511.pdf

[2] https://www.globalreporting.org/resourcelibrary/GRIG4-Part1-Reporting-Principles-and-Standard-Disclosures.pdf

[3] https://www.bsr.org/en/our-insights/blog-view/a-first-look-at-how-companies-are-responding-to-the-sdgs

[4] http://www.coca-colacompany.com/stories/water-stewardship-and-the-united-nations-sustainable-development-goal-6-ensure-access-to-water-and-sanitation-for-all

by Amy Domini, founder of Domini Social Investments and of The Sustainability Group

 

One of the most stubborn problems facing practitioners of responsible investing is the name game. Despite the fact that the practices of any one firm are almost universally accepted practices at all firms, we ourselves choose to confuse the public with a myriad of names. Business schools ‘teach’ nuances implied by the use of differing titles; our own sales literature emphasizes one language while attempting to position this as an advance over other phrases.

While the use of differing vocabulary may signal to the cognoscenti a subtle difference in target market, these subtleties are lost to the mainstream. As an example, Bloomberg Brief, available to Bloomberg subscribers, which virtually the entire mainstream is, offers a weekly Sustainable Finance Brief. This vocabulary, “Sustainable Finance” is one that they are comfortable with. The September 1, 2016 brief opens with a quote from Mathieu Elshout, director of real estate investments at the second-largest Dutch pension fund. “Our pension is worth more in the future in a liveable [sic] world than in a non-sustainable world.”

The stalwart of conventional investment standards, the CFA Institute, demonstrates that it does not differentiate. Our web search for articles on Corporate Social Responsibility (CSR) as it affects investment decision making finds 61 results, many of which contain headlines for Environmental, Social and Governance (ESG) articles or Socially Responsible Investing (SRI) articles, or even Impact Investing, indicating that they consider all to be a single concept. So why are there so many different titles for the approach? Has there been a progression? And should we support the splintering of names?

The current rather uninformed textbook story is that first came “socially responsible investing,” which was a simple divestment approach. Next came ESG investing, which looked for companies with stronger environmental or social stories, but was not actually making any difference in the world. Finally we have evolved to Impact Investing, which actually uses business to make the world a better place. I have absolutely no idea where this weird story line got its start. Those of us who were practitioners thirty years ago have had impact as our purpose throughout the period. We argued that only if investors allowed it, could companies be mindful of the double bottom line. Ergo, we must build an investor base that not only allowed focus on the complete scope of corporate activity but also insists upon it.

During my years with KLD Research & Analytics, we saw our mission as two-fold. Our job was to remove the barriers at the top and to build the demand at the grassroots. We therefore created an index of companies created with social and environmental standards. Though we did not use the ESG phrase, our inclusion of the investor as a stakeholder led us to consider all the issues that have more recently been mysteriously elevated to being deserving of a separate callout, Governance. (My personal preference is to stuff the investor back into the category of people and to stick with people and the planet as our core concerns.) That index did better than the S&P 500. In its new form, the MSCI/KLD 400, it still does better. The track record of the index did in fact move mountains; it undercut the performance-will-be-hurt argument. It made the approach legitimate and called into question the wisdom of Wall Street, too. How is it possible that removing companies from your universe can enhance your return? Is it possible that avoiding problem companies is a good way to make money?

In 1990, what was then called the Domini 400 Social Index was created to be a fixed number of companies (400), of which 250 (give or take) would also be members of the S&P 500. This explicit selection of the “better half” was a tactic to help define the better half. One hundred members of the index were non-S&P 500 companies chosen to increase exposure to industries that the responsible investor might invest in, but which were not amongst the better half of the S&P. For example, responsible investors might willingly own automobile companies, but the S&P automobile companies made weapons, so we sought other ways to gain exposure to that sector. The remaining 50 companies were chosen because they were arguably exemplars of corporate social responsibility. The construction of the index was largely completed during 1989. I can therefore say with certainty that everything ESG is now meant to convey was core to the SRI methodology. CSR, however, is not an investor strategy, but rather the outcome of what investors do. Wikipedia explains, “CSR strategies encourage the company to make a positive impact on the environment and stakeholders including consumers, employees, investors, communities, and others.” But should such strategies exist?

Economist Milton Friedman famously claimed, “a corporation’s responsibility is to make as much money for the stockholders as possible.” This is clearly an over-reach. Stockholders are ultimately human beings. Human beings have many needs and desires. We do not want the pursuit of profits for the person we are when we own a stock to damage the person we are when we breath the air. As investors, we push companies to deliver profits while also assuring that the air stays clean. Responsible corporations must not make money by damaging human life. Investors occupy a powerful position to assure this outcome; investors own the company. I contend that the impact of co-opting all corporations into responsible behavior is an impact of monumental scale, unimaginable without the socially responsible investor.

I return to the name game. What the responsible investment industry calls itself has become too much of a distraction. For all intents and purposes, Triple P (people, the planet, and profits) investing is ethical investing is ESG investing is Sustainable investing is SRI, etc. There are practitioners who ask clients to fill out a self-assessment on issue areas and attempt to tailor a portfolio to emphasize the individual disposition. I do not. My value proposition is this, “Do you believe that finance, that investments, have an important, even essential, role to play if corporations are to operate without destroying ecologies and crushing people?” If your answer to that question is yes, then you should invest with me.

 

Article by Amy L. Domini, CFA

Ms. Domini is widely recognized as the leading voice for socially responsible investing. Her passion for the field has led her to create three businesses and to write several books. She has been awarded acknowledgements of these efforts, including: Time magazine named her to the Time 100 list of the world’s most influential people in 2005. That year she also received a citation from President Bill Clinton for her work with the United Nations Foundation. In 2008, Ms. Domini was named to Directorship magazine’s Directorship 100, the magazine’s listing of the most influential people on corporate governance. In 2014, she was awarded the Founders Award by New Yorkers Against Gun Violence for her advertising campaign (which ran in The Nation), urging investors to divest guns from their portfolios.

She is the founder of Domini Social Investments (www.domini.com), a mutual fund company with $1.6 billion in assets under management. Ms. Domini is also founder of The Sustainability Group, which manages private client assets in Boston, MA. She has served on a number of boards, including the National Association of Community Development Loan Funds (now Opportunities Finance Network), an organization whose members work to create funds for grassroots economic development loans, and the Interfaith Center on Corporate Responsibility, the major coordinator of involved shareholders who file proxy resolutions.

She is a member of the Boston Security Analysts Society. Ms. Domini holds a B.A. in international and comparative studies from Boston University, and holds the Chartered Financial Analyst designation. In 2006, she was awarded an honorary Doctor of Business Administration degree from Northeastern University College of Law. Yale University’s Berkeley Divinity School presented Ms. Domini with an honorary doctorate in 2007.

Ms. Domini is the author of Socially Responsible Investing: Making a Difference and Making Money (Dearborn Trade, 2001) and The Challenges of Wealth (Dow Jones Irwin, 1988), and a coauthor of Investing for Good (Harper Collins, 1993), The Social Investment Almanac (Henry Holt, 1992), and Ethical Investing (Addison-Wesley, 1984). She contributes regularly to Optimist Magazine and the GreenMoney Journal. She lives in Cambridge, MA with her husband, Mike Thornton.

by Donna Katzin, executive director, Shared Interest

 

Twenty-two years ago, when apartheid fell, South Africa pointed the way from disinvesting to reinvesting in one of the landmark nonviolent social transformations of our time. A number of international investors decided then to put their money to work in building a more equitable South Africa. Today South Africa is the largest impact investment market on the African continent, with US $24 billion disbursed for impact investments by development financial institutions (DFIs), and US $4.9 billion by organizations other than DFIs.

Shared Interest, a non-profit investment fund established for this purpose in 1994, rode the wave of capital seeking to make a transformational impact in the new nation. We use our investors’ funds to partially guarantee loans to low-income black entrepreneurs and farmers by South and Southern African lenders who would otherwise consider them “unbankable.” Our impact has been significant, benefiting 2.3 million South Africans without losing a penny of our impact investors’ capital. In the process, we have found that as South Africa struggles with its unique history and challenges, it provides a wealth of lessons for impact investors world-wide about what works, what doesn’t, and what is possible. Here are a few.

Top image: Zanele Mkokeli, supervisor at the grape and citrus-growing worker cooperative, Rietkloof Farm

No Quick Fix

First, South Africa itself teaches the importance of long-term strategies, and the impossibility of a quick fix for severely distorted economies. The African National Congress was 82 years old by the time Nelson Mandela was elected President, and that was only the beginning of the country’s “long walk” to economic democracy – a process still in its infancy. Many of us have worked hard to help South Africa overcome its pariah status and become more like the rest of the world. Now it is. Ironically, this means that it is dogged not only by its own history, but also by the challenges of global markets and the rising inequality that all too often accompany the concentration of capital. The removal of deeply entrenched distortions that have historically barred black-owned businesses from the marketplace will require many years more. For impact investors, this means patient capital.

Multi-Pronged Approaches

It also means that economic transformation requires numerous complementary strategies, as did South Africa’s victory over apartheid. During the “struggle years” these included the initiatives of the country’s own liberation movements, civil society and domestic defiance campaign, as well as international boycotts, divestment, sanctions, shareholder resolutions and protests carried out around the world. Today, as then, profound change requires what we often describe as a new “ecosystem.” Reshaping what is still one of the world’s most unequal countries in terms of both income and wealth requires a variety of strategies and tools [1]. The goal is not simply launching X businesses or creating Y jobs, but reshaping an economy that will address the needs of all its people.

Shared Interest, for example, has found it essential to use a variety of strategies to ensure the success of its client enterprises and small farms, and move commercial lenders to serve them. While we use our impact investors’ funds to partially guarantee loans from local banks to black borrowers (typically) without collateral or credit histories, we ensure that the new entrepreneurs and farmers also receive technical assistance in launching, managing and scaling their businesses. Through our partners on the ground – notably the Thembani International Guarantee Fund – we provide support for commercial lenders in working with new clients – and creating products for markets they have historically sidelined.

Creative Collaborations

But the new “ecosystem” requires numerous other actors in the private and public sectors to create significant changes and opportunities – and fertile soil for impact investing. They are particularly necessary to jumpstart black-owned small and growing businesses and farms in South Africa, whose colonial structure was built on extractive industries and agribusiness – much of it on land forcibly taken from black South Africans. Moreover, blacks were legally barred from doing business in “white” areas – the most populous – under apartheid. Twenty years after Nelson Mandela was elected President, the Global Entrepreneurship Monitor (GEM) pegged South Africa’s entrepreneurial activity at 25 percent that of other Sub-Saharan African nations.

And so, to support the development of small and growing (and potentially investable) black-owned businesses, numerous enterprise incubators and accelerators have sprung up around the country. They include the University of Pretoria’s Gordon Institute of Business Science (GIBS), which prepares promising emerging enterprises to succeed and scale; and LifeCo, which assists and invests in social and environmental businesses. There is also a bumper crop of business development service (BDS) providers that support small enterprises, farms and cooperatives across the country.

Public Carrots and Sticks

The government is another key player. During the early days of majority rule, in the mid 1990’s, many expected the spirit of the new South Africa to move the private sector to play its part in transformation. But much more has been needed. It is still early days for government to establish a regulatory framework for impact investing, and organizations like the Aspen Network of Development Entrepreneurs (ANDE) are working to encourage such policies. Nonetheless, in agriculture, the state has implemented a number of strategies for change, such as its purchase of land from willing whites and giving it to black farmers – often in cooperatives. The authorities quickly discovered, however, that without technical support, many new farmers failed, and some ended up selling their land back to whites, defeating the purpose of the program. Moreover, without working capital, even the best-trained farmers cannot succeed. Shared Interest’s guarantees for working capital loans, together with technical support, have helped a number of cooperatives achieve excellent results.

Another government initiative has been the creation of codes of conduct for companies in different sectors to broaden the distribution of ownership and jobs, and to assist emerging black-owned enterprises. South Africa drew on its own history of corporate conduct codes encouraged by anti-apartheid advocates, and eventually by the companies themselves, through mechanisms like the Sullivan Principles. While motives behind the measures sparked debate, the codes did establish precedents.

Since 1994, the country has developed a complex system of sector charters and a system known as Broad-Based Black Economic Empowerment (B-BBEE). These codes use “scorecards” to evaluate measures that enhance benefits and opportunities for black shareholders, workers and suppliers. Government considers companies’ ratings when assigning contracts, using a preferential procurement strategy. The criteria now further apply to those companies which, in turn, sell to government suppliers. Companies are currently spending significant funds on this “carrot” for good behavior, according to Grant Thornton’s 2016 international business report. And the government is sharpening the provision’s “teeth” by establishing a B-BBEE Verification Regulator.

The measure is promising for the development of private sector collaborations that enhance companies’ strategies to purchase from and assist their small and growing suppliers and clients. Shared Interest’s client, One Vision, for example, benefits from its contract with one of the country’s largest retailers, Woolworth’s, which purchases all the vegetable chips One Vision produces. The contract, Shared Interest’s loan guarantee and Thembani’s technical support have helped the start-up company launch and create 63 jobs, making it one of the only employers in a rural community decimated by an earlier plant shut-down. Shared Interest is also working with the Omnia chemical company to bolster emerging farmers and their associations through a combination of guarantees, Omnia’s agricultural extension services, and additional mentoring. Thembani has helped structure a financial product that mitigates the risk of investors and the farmers themselves, who are developing their own self-insurance fund.

Addressing Problems at their Grassroots

In August, UN Women’s Executive Director (and South Africa’s former Deputy President) Phumzile Mlambo-Ngcuka provided a simple but profound insight: “If it doesn’t work for grassroots women, it probably doesn’t work.” Like effective development initiatives, impact investing will not help transform the ecosystem if it simply benefits large enterprises that do not better the lives and enhance the economic power of people at the bottom of the economic ladder – particularly women.

Numerous studies have found that investing in the creation of enterprises and opportunities for women provides the maximum benefit for low-income communities. The Small Enterprise Foundation, a typical high-functioning microfinance institution, has grown, with a combination of grant and guaranteed loans to benefit more than 140,000 black women and their families in deep rural areas of South Africa. A traditional rural community, Lambasi, is also achieving significant impact outcomes by using guaranteed loans and technical support to plant 1,000 hectares of maize and beans – benefiting a community of 8,000 members, in which the majority of the farmers are women.

A grape and citrus-growing worker cooperative on Rietkloof Farm, which has received the enterprise from the government, is using a guaranteed loan, as well as technical support from Thembani and a local BDS provider to expand the farm and make it profitable. Coop member Zanele Mkokeli described the significance of moving from day laborer to supervisor to cooperative member. Considering her economic security and options, she noted, “Now, for the first time, I can think about the future. I am one of the owners of this farm.”

Impactful International Partnerships for a New Time

Finally, as a virtual laboratory of international collaboration strategies for change, South Africa has important lessons to teach impact investors placing funds in other countries. Withdrawing investments to pressure a pariah state has been replaced by proactive investing. But the principle of using international capital to bolster the country’s own initiatives to improve its people’s lives remains the same. Those partnerships and investments that strengthen local stakeholders’ developmental initiatives create the greatest long-term impact. Shared Interest has opted for a model to move the country’s own commercial lenders to extend credit to emerging entrepreneurs and farmers. And it is working. Many other impact investors also ensure that their exits leave productive assets in the hands of people who have been excluded and exploited in the past. In the end, such catalytic and collaborative strategies produce the most profound and enduring impact. While approaches vary from community to community and country to country, South Africa’s powerful transformation mandate and international role are likely to provide an important mirror for impact investors for years to come.

 

Article by Donna Katzin, the founding executive director of Shared Interest (www.sharedinterest.org), a social investment fund that mobilizes the financial and human resources of South Africa’s lowest income communities of color. Since 1994, Shared Interest has helped to create more than 180,000 new small and micro-enterprises, 1.9 million jobs, and 120,000 affordable homes – benefiting 2.3 million economically marginalized South Africans – the majority of them women. The organization is now extending its work to other Southern African countries, including Swaziland, Mozambique and Zambia. Previously, she served as Director of South Africa and International Justice Programs for the Interfaith Center on Corporate Responsibility. She has been honored by the South-African-American Organization, received the North Star Fund’s Frederick Douglass Award, the South African Embassy’s Inaugural Friends of South Africa Siyabonga Award, the inaugural Ubuntu Award from Face2face Africa, and the SRI Service Award in 2015 at The SRI Conference on Sustainable, Responsible, Impact Investing.

In an unpaid capacity, she has also coordinated Tipitapa Partners, a people-to-people project that began 29 years ago with a sister city relationship between the Upper West Side of New York and Tipitapa, Nicaragua. Throughout this time the partnership has empowered local Nicaraguan women and their communities to uphold their children’s rights to food and education, and supported their efforts to sustain early childhood nutrition and education centers.

A board member of the Thembani International Guarantee Fund in South Africa, and the Center for Community Change in the U.S., Ms. Katzin holds a master’s degree in Community Organization and Planning, and a doctorate in Human Services Education and Development. She has written extensively about South Africa, community development and impact investing, and is also the author of With These Hands, a volume of poetry inspired by the birth of South Africa’s democracy.

Article Note:

[1] Anna Orthofer, “Wealth Inequality – Striking New Insights from Tax Data,” July 2016, www.Econ3x3.org