Conscious Capitalism Is Planting Its Roots In The Investment Market

by: Brady Fletcher


Modern investors want more returns than profits alone; they want their investments to benefit society.

Companies that do not actively participate in sustainable business practices are considered out of touch - and, in extreme cases, unethical.

One day, impact investing will no longer be a niche, but part of the global investment zeitgeist.

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It's been a tough year for social and environmental causes. President Trump's Congress has placed the responsibility for climate awareness on the private sector by reducing federal spending on initiatives including climate change, alternative energy, humanitarian aid, and domestic healthcare. The funding for NASA's Carbon Monitoring System, which measures carbon emissions and would have played a role in verifying the national emission cuts established in the Paris climate accord, was cut and then reinstated.

As the Trump administration pushes a profits-first agenda, you'd think that today's investors might not have social and environmental impact top of mind. But it appears the opposite result has occurred. Increasingly, modern investors want more returns than profits alone; they want their investments to benefit society - hence the rise of conscious capitalism. With Congress approving the Republican tax plan, that desire to do good will become even more necessary as charity donations dry up.

The Global Impact Investing Network (GIIN) reported that impact investing is on track to increase 17 percent from 2016 to 2017, with $25.9 billion in assets set aside. In Seattle alone, groups including the Bill & Melinda Gates Foundation have seen enough success in impact investing to contribute several billion dollars to socially conscious companies.

Though Americans currently give more than $50 billion annually to charitable foundations, that only represents around 6 to 7 percent of their financial capital. Changes to standard deductions and charitable contributions will remove the incentive for all but the wealthy elite to donate, creating a lost middle class with no tax reason to give to nonprofits - but with new opportunities to help directly through impact investing.

In the wake of the sweeping tax reform, this new breed of impact investors must pick up the slack or watch their preferred causes lose funding and momentum - to the tune of $13.1 billion, as reported by Carolyn Y. Johnson in an article titled "The GOP plan to simplify taxes could put charitable giving at risk" in The Washington Post.

To succeed in an environment where independent investments must make up for lost charity efficacy, conscious capitalists should look to the victories of the past. About a decade ago, new "green" companies were drowning in cash and enjoying massive valuations because investors recognized the need for environmentally conscious companies. In 2008 alone, approximately $155 billion was funneled into clean energy companies and initiatives - $117 billion of which went into projects ranging from geothermal and wind to solar and biofuels.

These investments created a domino effect, bringing general awareness to issues such as global energy consumption, pollution, and climate change while spurring non-green companies to change their profit-first philosophies. Thanks to this movement, sustainable business practices are no longer the exception, but the expectation. Companies that do not actively participate in sustainable business practices are considered out of touch - and in extreme cases, unethical.

Profits at the expense of society have become increasingly unacceptable in the public eye. Just look at Volkswagen (VLKAY), whose stock plummeted by 20 percent following the scandal that revealed its unconscionable emissions manipulation on certain car models. Bitcoin and blockchain technology, hot topics in tech today, are falling under scrutiny for their massive energy requirements to operate. One bitcoin transaction uses enough energy to power nine homes in the U.S. for a day, about 5,000 times more than a credit card transaction. The legal marijuana industry is under similar pressure as more studies flag the massive electricity demands of growing operations.

For investors looking toward profits without caveats, results like this don't make the cut. Companies appealing to impact investors cannot get by on surface-level efforts, though. Impact investors should focus on companies that provide sustainable reporting metrics, not anecdotal blog posts or one-off contributions. Candidates for investment must make commitments at the institutional level to deliver on a set of impact objectives.

For example, a company that claims to keep at-risk youth in schools should be able to demonstrate its efficacy through improved graduation rates in targeted areas. Establishing common metrics and transparency for impact investing will help shake up the existing ecosystem and keep businesses accountable.

How do investors set and measure these results? As with any investment, impact investments depend upon standardized measurements for investors to gauge performance.

Through its IRIS initiative, GIIN is helping to define the standard performance metrics for impact companies, but as the market grows, the definitions of what makes an impact company successful will grow with it. These advancements will lead to more boardroom discussions on how to quantify social impact and communicate that impact to investors and consumers. For now, investors should look to groups like IRIS when evaluating new opportunities.

Skeptics of impact investment wonder whether it's possible for investors to focus on positive impact above personal gain. After all, these are people who have made and kept vast fortunes by making profit-motivated decisions in the past.

Fortunately for the future of these investments, their attention to social issues beyond balance sheets hasn't hampered their ability to compete in the open market. Research from GIIN demonstrated that studied impact investments outperformed funds in comparative private investments. These results will eventually push investment communities to standardize their measurement criteria, but the current competitive assurance is good news.

With the green revolution's proof of conscious capitalism's viability and the market's preference for impact investments, new investors are ready to spur positive action - and their contemporaries are lighting the way.

Many investors who have been successful in public markets are helping new charities and impact-minded startups get off the ground. Their business expertise is invaluable to these growing companies and helps them develop their charitable efforts like businesses and quantify the impact they have on society. SVP Vancouver and the Radcliffe Foundation in Vancouver, Canada, for instance, help connect investors to companies and charities that benefit from their wisdom.

Investors have the money and the experience, and young companies have the spark to put that money to use. As investors have started to view social impact as a differentiator between startups, new startups motivated by values-driven missions are rising to compete for funding. One of these startups, bioLytical Laboratories, began with a 60-second AIDS test for Africa, bringing easy-to-use medical technology to underserved regions and helping the African medical community curtail the epidemic.

Startups in the tech community are vocal about the merits of impact investing, but companies outside Seattle and Silicon Valley are also doing great things. For instance, Goldcorp (NYSE:GG), Barrick Gold (NYSE:ABX), and Wheaton Precious Metals Corp. (NYSE:WPM) set up schools and fresh water supplies around their operations.

Although they share a dangerous association with mining, these companies are leading the charge to revitalize the communities they operate in. They recognize the need to put hundreds of people to work and keep them healthy, nourished, and hydrated.

Not every investment has to change the world at once. Coinciding with the increasing consumer demand to "think locally," telecom TELUS (NYSE:TU) and other organizations encourage companies to improve the communities closest to them. The Chan Zuckerberg Initiative (the impact investment LLC of Priscilla Chan and Mark Zuckerberg) has made a series of investments in education and disease research. It's also paid attention to local causes, such as the Terner Center for Housing Innovation at the University of California, Berkeley. Other companies are making moves in public sanitation, clean water, waste management, and food accessibility - all components of a healthy, thriving population and economy.

On the TSX Venture Exchange, where I am the managing director, a few companies have recently stood out in this area. Roxgold (OTC:ROGFF) funded apprenticeships in local villages in Burkina Faso for 20 young people to learn trade skills like welding and mechanical fitting. The company also trained 50 local candidates to act as security agents for its projects and provided development opportunities to 113 local teachers.

Asanko Gold (NYSEMKT:AKG), meanwhile, regularly gives back through infrastructure initiatives, including sanitation improvements and health solutions. In 2015, the company designed and financed a resettlement project in a host community, employing community members to build the 45-acre settlement, which included 88 houses, a school, water storage facilities, a community center, and a football field. In 2016, Asanko Gold invested $557,259 in the community and hosted 160 community meetings.

Similarly, Goldcorp partners with local communities to manage their overall environmental impact. In 2016, Peñasquito, one of Goldcorp's major revenue-driving operations in Mexico, sourced nearly 100 percent of its power from an "efficient, combined-cycle natural gas power plant" - ultimately saving, in combination with another operation, 99,000 tons of carbon dioxide equivalent. Overall in 2016, Goldcorp saved 175,000 tons of carbon dioxide equivalent and achieved about three-quarters of its goal to reduce yearly greenhouse gas emissions by 20 percent.

Investors excited to join these trailblazing conscious capitalists currently have three options to get involved: impact investing networks, such as Pacific Impact Investor Network, Toniic, and GIIN; crowdfunding; and social stock exchanges. As quantification metrics improve, investors will look for new ways to filter investment opportunities and find the ones that resonate with their values. For example, on the TSX Venture Exchange, Policy 4.7 allows for any new listing to donate options to a charity of their choice without them counting against the company's option plan. The Canadian Cancer Society, JDRF, and Centre for Addiction and Mental Health teamed up with the exchange to launch the Option to Give partnership last fall.

Recently, MaRS Discovery District, supported by TMX, launched SVX 2.0, the improved version of its Social Venture Connection (SVX) platform. Along with TSX Venture Exchange's Policy 4.4, which incentives the donation of company stock options to registered charities, the platform encourages investors to look to companies with clear impact objectives. Both SVX 2.0 and Policy 4.4 demonstrate a clear push on behalf of TMX to make impact investing a more attractive option and make it easier for companies to do so.

In this time of upheaval, investors must not be discouraged by a lack of available options; we're still in the early days of impact investing. Those who put their money in green companies during the mid-2000s would be delighted to see the progress made since then, and modern impact investors must understand what the last generation understood: This will take time. As IRIS and others refine reporting metrics, the path for impact investment will become clearer - but that's no reason to delay. For both global impact and personal profit, time in the market beats timing the market.

One day, impact investing will no longer be a niche, but part of the global investment zeitgeist. Until then, impact investors should evaluate their options and select the companies that demonstrate a commitment to sustainable long-term solutions, then get in on the ground floor. Investors who make their moves now will be in the right position to define a new market blend of financial success and social impact. After all, social returns do not have to be at the expense of financial returns - and as shown by GIIN, impact investing might actually have better returns.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.