There’s no denying that sustainable investing is one of the most powerful trends in global finance as investors seek some measure of the environmental and social impact of their investments.
But what if the current approaches to green investing, which weigh environmental, social and governance (ESG) factors in portfolio selection, are seriously flawed?
That’s the provocative question that Harvard Business School thinkers Michael Porter, George Serafeim, and Mark Kramer set forth in a valuable essay in Institutional Investor titled, “Where ESG Fails.”
They introduce a concept called shared-value investing, which they contend better aligns the aims of the green investor and corporate management and strives to deliver both enhanced economic performance and positive social goals.
It also offers a more calibrated way, they argue, for investors to measure return, both in terms of profits and societal impact.
The current approaches to socially responsible investing, which has grown by 34% to $30.7 trillion worldwide over the past two years, according to data compiled by the Global Sustainable Investment Alliance, are off the mark, the Harvard Business luminaries argue.
One is negative screening, in which financial professionals identify issues such as pollution, animal cruelty, tobacco and plastics production they don’t want their investors’ money associated with and invest accordingly.
Another approach is called ESG integration. Practitioners analyze corporate reports, filings and other sources to size up a company’s strategic goals and operational issues and their impact on the environment and society. Companies are then often scored on a check-list of metrics, which may or may not be relevant to their strategies.
Negative screening and ESG scoring are rather blunt instruments, the Harvard experts suggest, that fail to accurately zero in on individual corporate strategies and focus on where a company has potentially the greatest social impact.
A smarter approach they argue is to look at how positive social goals interplay with two key features of economic performance: offering better value to consumers and achieving cost savings versus rivals.
Or as Porter, Serafeim, and Kramer put it:
“Shared value can affect strategy at three mutually reinforcing levels: (1) creating new products that address emerging social needs or open currently unserved customer segments; (2) enhancing productivity in the value chain, whether by finding new efficiencies or increasing the productivity of employees and suppliers; and (3) investing to improve the business environment or industry cluster in the regions where the company operates.”
According to the authors, when shared value is integrated at all three levels, companies can both improve their competitiveness and contribute to the greater social good.
If you’d like to learn more about how companies can unlock value by identifying and tracking the interplay between social and business results, check out this site on shared-value measurement compiled by Harvard’s Business School’s Institute for Strategy & Competitiveness.
You can find a useful step-by-step approach to evaluating corporate performance employing the shared-value investing framework.
In our view, socially responsible investing is no passing fad. Greater investor awareness about environmental problems, climate change and income inequality are propelling big changes in investing priorities and the way financial firms structure their products. And this trend will shape decisions involving trillions of dollars of future investment.
Yet realizing dreams of a more enlightened brand of capitalism that both creates wealth and also addresses social ills will take some careful thinking. Shared-value investing may turn out to be an important contribution to the evolution of green investing.
Photo Credit: Hannes Flo via Flickr Creative Commons