For a number of reasons, not all companies at the top of Environmental, Social and Governance (ESG) rankings are affecting as much positive impact in the world as one might expect, nor are all bottom-line focused companies bad actors with regards to their environmental, social or governance behaviors. However, industry screens for these factors have led us to believe that the two worlds are mutually exclusive. This in turn has given rise to the misconception that impact-oriented strategies must have an inherent disadvantage relative to those seeking profits and that ultimately only profit-driven firms are in a position to deliver the best shareholder returns.
Recent research by three Harvard Business School professors suggests that there is a third group of companies – those who focus on profit-driven social impact, or “shared value” – which are experiencing higher growth, profitability and competitive advantage specifically because they are integrating social and environmental issues into their core strategic efforts. These companies capture significant drivers of economic value from their social impact focus that do improve shareholder returns. This approach to Impact investing dovetails with our own experience with ESG Integration in portfolio construction. “Shared-value,” profit-driven social impact, ESG integration all refer to the process of taking social factors into account in investment decisions when they have a direct influence on a company’s future economic performance. This is why we end up with certain strategies in Impact portfolios that from their names alone, seem to have little to do with the category – names like RBC Global Opportunities or Sonen Global Equity. They don’t necessarily prioritize being at the top of the latest ESG ranking, but rather use ESG factors as part of their fundamental financial analysis to drive better returns. It can also help investors differentiate between investment firms whose Impact approach is baked in to their financial diligence from those whose approach is simply bolted on as an afterthought.