“What I think an awakening really involves is a re-examination of our common sense.” – Alan Watts
A responsible company
Given that intangible assets, like brands, now make up a large part of the value of a company, companies spend big money on creating the appearance of being good corporate citizens, to protect the status of their brand. This can make it more difficult for investors and consumers to differentiate between branding and genuine corporate social responsibility.
For me, a responsible company is one that explicitly considers the long-term impact of their decisions on all stakeholders, including the environment. Therefore, the focus of capital allocators should be on the company’s business model and how they are delivering a net positive impact on society.
The global financial crisis provides the most obvious example of the failure of companies to act responsibly but every year we are provided with examples of corporate fraud, malpractice and blatant disregard for stakeholders. Many of the implicated companies talk a good game when it comes to corporate social responsibility, but the reality is very different.
Impact investing has provided hope of a fresh approach to how investors think about the impact of the underlying companies they invest in. The concept emerged from the philanthropic space in 2007 with the Rockefeller Foundation laying claim to the coining of the term. The basic idea started with the application of business principles to philanthropic money in order to better measure its impact.
Since then, mainstream investors have taken more control of the direction of the sector, such that the definition has expanded to “traditional impact investing” and “mainstream impact investing”.
My immersion into impact investing began in Guatemala in 2017, working with an impact investment firm in Quetzaltenango. One of the things that surprised me most was the vagueness of the sector, which has allowed all sorts of firms to declare themselves impact investors.
Having said that, we are in the early stages of the self-proclaimed revolution so we will see how it unfolds. The sceptic in me would consider it slightly concerning when venture capital and private equity firms from the US and other developed countries are moving aggressively across Latin America and other continents under the flag of impact investing.
While impact investing evolves, the stewards of capital – investment managers, consultants, trustees and ordinary investors – still have to incorporate impact into their decision-making process and hold companies to account. The focus must be on responsible companies delivering a net positive impact on society, within the context of assessing the impact across all stakeholders.
Driven by their own moral compass, defined in the investment process, capital allocators can decide where to invest across the spectrum of impact e.g.
- from companies focused on implementing an impact business model,
- to companies who offer products and services that transform society,
- to companies that directly target the challenges our society faces.
The ESG framework and the 2030 Sustainable Development Goals, if applied in the right way, can be a core part of measuring impact in a consistent way.
After more than two and a half years of being immersed in responsible investment – research, writing and refining my own ideas on practically applying a responsible investment philosophy – a lot of it really comes back to acting with common sense and respect for our planet and its inhabitants.
Many people just need to re-examine their common sense.
Vincent McCarthy, CFA
ESG Ireland™| Empowering Responsible Investment
(Follow @ESGIreland or Subscribe: Insights@ESG.ie)