The Impact Generation Has Arrived

Forbes
June 26, 2014

By Nancy Pfund, Eitan Hochster, and Yonatan Landau

Imag­ine for a minute that you can invest in one of two companies:

Both pro­vide lunch to schools. Com­pany A is very large and oper­ates to min­i­mize costs: it uses cheap ingre­di­ents and serves processed food that doesn’t spoil. It clas­si­fies many of its reg­u­lar work­ers as part-​​time to avoid pay­ing benefits.

Com­pany B pro­vides healthy food with fresh ingre­di­ents. Its reg­u­lar work­ers get full employee ben­e­fits includ­ing health care, stock options and oppor­tu­nity for advance­ment. It also pro­vides nutri­tion edu­ca­tion pro­grams to school dis­tricts to tackle child­hood obesity.

In the past, the first com­pany would have per­haps been the obvi­ous choice for investors read­ing Forbes. Its bal­ance sheet allows the com­pany to charge lower prices in selec­tive com­pet­i­tive sit­u­a­tions, and thus one might expect it to main­tain its mar­ket share. And yet, Rev­o­lu­tion Foods, a com­pany that pro­vides healthy food for school­child­ren and ben­e­fits for its reg­u­lar work­ers, is rapidly tak­ing mar­ket share from estab­lished tra­di­tional food providers. In doing so, it is pro­vid­ing one mil­lion healthy, afford­able and fresh meals a week for a pop­u­la­tion that is two-​​thirds low-​​income households.

This is not a unique story, but one that is indica­tive of one the most sig­nif­i­cant devel­op­ments in busi­ness today. Accord­ing to a recent study by Deloitte of 5,000 mil­len­ni­als in 18 coun­tries, respon­dents ranked “to improve soci­ety” as the pri­mary pur­pose of busi­ness.  This shift in beliefs is com­pelling busi­nesses to con­sider not only prof­itabil­ity but also social impact. A busi­ness that chooses to oper­ate like Rev­o­lu­tion Foods will often out-​​compete its com­peti­tors thanks to a new gen­er­a­tion of con­sumers, employ­ees, and investors.

Cus­tomers

The trend of con­sci­en­tious con­sump­tion is not new, but has been reach­ing the main­stream over the past sev­eral years. Accord­ing to a Nielsen study, two-​​thirds of con­sumers pre­fer brands that give back to soci­ety. TOMS Shoes and Warby Parker have built strong con­sumer brands with devoted cus­tomers thanks to their buy one-​​give one oper­a­tions. Con­sumers not only want brands that do good they also care about the con­di­tions under which the prod­ucts are made. Of the 250 largest com­pa­nies in the world, 93 per­cent pub­lish cor­po­rate sus­tain­abil­ity reports. These con­sumer trends are not on the mar­gins and they are only grow­ing in breadth and depth.

Employ­ees

Just as sig­nif­i­cantly, skilled labor is flock­ing to jobs that are imbued with mean­ing. At SolarCity, the prize for the top sales­man is not the stan­dard trip to Hawaii, but the oppor­tu­nity to work on Give­Power, SolarCity’s non­profit bring­ing renew­able energy to the devel­op­ing world. A recent study by Net Impact showed that 58 per­cent of grad­u­at­ing stu­dents were will­ing to take a 15 per­cent pay cut to work in an orga­ni­za­tion that shared their val­ues. Busi­nesses that pro­vide ful­fill­ing work­places for employ­ees will be able to attract top talent.

Investors

We are liv­ing in an age of account­able busi­ness. Investors, big and small, are now tak­ing own­er­ship not only of cor­po­rate prof­its but also of their social and envi­ron­men­tal foot­prints. And finan­cial insti­tu­tions are respond­ing to this mar­ket demand. Black­rock has launched a fossil-​​free ETF and Mor­gan Stan­ley has put a bil­lion dol­lars into sus­tain­able invest­ments. Small investors have invested over $6M through Mosaic, a solar crowd­fund­ing plat­form. These prod­ucts are not only the result of bud­ding investor respon­si­bil­ity, but also their desire for returns. A meta-​​study done by Deutsche Bank showed that com­pa­nies with high cor­po­rate respon­si­bil­ity or envi­ron­men­tal and social gov­er­nance (ESG) rat­ings have lower cost of cap­i­tal than their peers, indi­cat­ing that lenders view them as less risky. The results of most stud­ies sug­gest that a high ESG score sig­nals a more prof­itable firm.

Despite these trends, impact invest­ing—as this move­ment is often called—is con­sis­tently under attack. The resis­tance to impact invest­ing is per­plex­ing. Many of the loud­est objec­tions come from the very peo­ple with the great­est faith in the power of lais­sez faire economies. Should we not look to the power of the free mar­ket for help solv­ing our prob­lems like pub­lic health and cli­mate change? Over the next decade, soci­ety will demand that the busi­ness com­mu­nity address, or at least respond, to these issues, and the busi­nesses that do so will reap the great­est returns. They will do it through bet­ter cus­tomer loy­alty, a higher-​​skilled and more moti­vated work­force, and a lower cost of cap­i­tal. For investors, that is a win­ning com­bi­na­tion that spells impact.

Nancy Pfund is Founder and Man­ag­ing Part­ner of DBL Part­ners and Lec­turer in the Prac­tice of Man­age­ment at the Yale School of Man­age­ment. Eitan Hochster and Yonatan Lan­dau were recently stu­dents in Ms. Pfund’s Yale course on Impact Invest­ing at the School of Man­age­ment. Dis­clo­sure: DBL Part­ners is an investor in Rev­o­lu­tion Foods and Solar City.

View the full arti­cle on Forbes​.com.