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GreenMoney Journal - publishing since 1992
Fall 2010 issue
Socially Responsible Investing – Better Companies, Better Communities
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Creating Lasting Social and Environmental Change in the Public Markets
Chet Paulson
In order to achieve lasting success, social responsibility will need to be market driven, however,
getting more socially responsible companies to market is the challenge of the new generation of
activist - the investor.
The word activist has many negative connotations in the business
community. What was once violent and intimidating is now subtle, savvy and intelligent.
For many people, outwardly aggressive activism is no longer an appropriate or useful tool. As
awareness of social and environmental issues has increased and become more mainstream, activism has
evolved. In the past, corporations were thought of as the enemy. Activists rallied outside the
gates of automobile manufacturers or petroleum companies, while politicians spoke vaguely of
change. The public viewed large companies as faceless entities looking only to turn a quick profit
at the expense of the environment.
However, the image of corporate America is changing.
The primary focus of business is still making money. But today the consumer has a tool
stronger than a rally - their money. Now their investment choices are their demonstrations. As a
result, companies are paying more attention to consumers' interests. Not long ago, it took Congress
to improve companies' business practices. However, as the market has begun to embrace social
responsibility, so have businesses - they are initiating changes in order to satisfy consumer and
investor demands.
The Market Brings Change
Investors have
become progressively more aware of their global neighborhood; smart companies, recognizing this,
have realized that leadership in this area has become a smart business choice, leading to financial
benefits.
As a result of the emerging responsibility-driven market, many companies find
they have little choice but to participate. The biggest story is in the auto industry. Both Toyota
and Honda have proven that corporations can do the right thing while leading their industry and
outmaneuvering their competition. They were pioneers in gas/electric hybrid technology and are,
once again, leading the automobile industry in hydrogen fuel-cell technology. Both have garnered
tremendous benefits, both financial and political, from their groundbreaking efforts, and have
forced all other major auto manufacturers not only to take notice but also to compete on a new
playing field.
More consumers are likely to purchase one object over another because it
comes from a socially responsible company. This doesn't end with cars or packaged foods; it
includes mutual funds and individual stocks. In fact, it is here, on the stock exchange, that
social responsibility is being most critically redefined, as companies are being held accountable
for their business practices on every level.
Socially Responsible Investing
Thrives
Some opponents to socially responsible investing (SRI) believe the
practice benefits only the conscience and not the wallet. SRI has the same economic goals of
traditional investing - investors are concerned with capital gains and profit potential - but the
factors for choosing where to invest extend beyond monetary gains, and include ethical
considerations. Socially responsible investors identify and invest in companies whose business
practices are based on ethical values and respect for employees, communities and the environment.
The numbers show this movement is more than a trend. While the investment world
experienced a downturn over the past three years, SRI remained strong. According to the 2003
Report on Socially Responsible Investing Trends in the United States, socially responsible
portfolios grew seven percent, while broader investments fell four percent. Now, more than one out
of every nine dollars under professional management in the US is involved in SRI.
Socially
responsible investing is certainly a global movement. In the United Kingdom, everything from
pension funds to a variety of small-scale community investments are screened for socially
responsible companies. A range of socially responsible investment products is now available in more
than 21 countries. In the US, the value of SRI has grown from $1.2 trillion in 1997 to $2.2
trillion in 2003. A study by Yankelovic Partners found that investors are more aware of socially
responsible investment vehicles today than ever before - and are more likely to invest in them.
Investment banks taking note of these trends are more willing and eager to bring socially
responsible companies to market.
Though there is nothing new in this kind of investing, it
is gaining power as more people participate in the market. Sit-ins have become socially screened
investing. Now we are doing less to convince each other that threats like global warming are real
and doing more to counter them.
Bringing More Responsible Companies to
Market
This is an age of innovation. Most investors would like to increase the
number of socially responsible companies that we bring to market, not just for investment
opportunities, but as a way to get emerging technology and innovative business models more
recognition. Though a successful strategy, there are inherent challenges in bringing new companies
to market.
First and foremost, many companies that are seeking funding are with a limited
or niche following. For many businesses, the very reason that they are trying to raise capital is
the same reason that they are difficult to bring to market -they have a great, often revolutionary,
product without specific demand.
Furthermore, companies who follow the path of social
responsibility tend to be viewed as huge business risks simply because of their ideology. There
seems to be a prevalent idea that economic viability and social responsibility are incongruous.
This view is beginning to fade, but stereotypes are slow to change.
Even though there is
significant risk involved in bringing companies to market - especially with early stage companies -
there are certain criteria that most investment bankers will look at to measure the risk. First
there is management. Whose wealth does the management team seek to increase? A management team that
seeks to increase the wealth of investors is more likely to have the dedication needed to succeed.
Second is about money. Can it be raised? Lastly, there is the question of whether the products they
offer will be able to compete on the market. This is the hardest to answer, but if it looks like
the product will be competitive, and if it meets the previous criteria, then it may be a risk worth
taking.
So when these early-stage, small or regional companies begin to seek money, they
are looking for a firm that is willing to take risks for socially responsibility and who has a
clientele that value these investment options. It is always difficult for certain types of
companies to find funding. It is no different now. The secret is to find a nucleus of investors
that are committed to the launch of socially responsible companies and who are willing to take a
risk that may not yield measurable results for three years or more.
As the numbers of
socially responsible investors grow, their investments increase the global visibility of the
companies they invest in. The same market dynamics that drive the creation and adoption of any new
technology are critical to socially responsible innovation. These market forces also drive down the
price of expensive technologies and make responsibly created products and services available to a
wider audience.
It is on the stock market that the next big thing is realized but it is
the investors - whether investment bank or private investor - that introduce the next big thing to
that market.
This is the time of the investor.
The future is
responsibility and sustainability; it cannot be any other way. Instead of fighting it, smart
businesses are embracing it. There is money to be made by providing the products consumers want,
but not all companies are willing to change. For instance, Kodak, who has long been the undisputed
leader in consumer photography equipment, was slow to enter the digital camera market. This
hesitation on their part lost them valuable, and perhaps irreplaceable, market share. The coming
years will see many companies lose tremendous shares of their markets if they are slow to
acknowledge that investors are demanding responsible business practices.
The modern
activist researches companies and invests in the ones whose business practices most resemble their
beliefs. Where it was once avoiding the so-called sin stocks, investors now encourage social
responsibility by rewarding companies that best represent their social and environmental beliefs
with their investment money. Socially responsible mutual funds are still popular, but the new
activist is hungry for the next big thing. They tend to work closely with investment banks that are
known to fund socially responsible businesses or they invest in the investment bank themselves.
Like all investors, investment banks have to be on the lookout for the next big thing
--whether it is new fuel cell technology or a more efficient refrigerator. As the facilitator
between the company and the investor, the investment bank usually has to decide whether or not to
invest in a company long before there is significant data available on their products.
The problem with the next big thing is that it usually starts out as nothing more than the next
big risk. They are usually small businesses whose ideas may be innovative but have limited
recognition on a national or international level. Their new technologies might change the world but
only if they can supplant the established technology. This is another reason why investors tend to
develop strong relationships with their investment bank. The investment bank's first priority is to
increase the wealth of its investors. They have done their research. Experience has shown them
which business models, among other things, typically succeed, so that they do not take unnecessary
risks with their investor's money. Of course there is always risk, but if you are dealing with a
trusted bank then the risk will be from the market -- a risk factor we have grown accustomed to.
As we transition to the responsibility-driven market, the new generation of socially
responsible investors - whether investment banks or private investors - is helping to shape the
future of business. They understand that social and environmental issues cannot be isolated from
corporate growth and profitability but are in fact critical factors for the long-term
sustainability of the economy. They do not shy away from the hot stocks, but use all available
resources, including careful research as well as a global view, when looking for emerging-growth
companies to support. In the responsibility-driven market the future is in the hands of the
shareholders, and the new activist is the socially responsible investor.
Article written
exclusively for GreenMoney.com by Chet Paulson is chairman and CEO of Paulson Investment Company.
Headquartered in Portland, Ore., it is a national leader in public offerings of small and emerging
growth companies. For more information visit http://www.paulsoninvestment.com
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