B Corporations Feeding Millennial Appetite For Social Responsibility
There has never been a watertight separation between business activities and the ethical concerns of those who run businesses and those who invest in them. Over the past several decades, however, there has been a growing interest on the part of many investors and entrepreneurs in an explicit incorporation of non-financial elements into business strategy and investment decisions — resulting in the rise of fields analyzing businesses’ “sustainability,” “social responsibility,” “values-based investing,” “social impact,” ESG [environmental, social, and governance] characteristics, and so on. Many popular entrepreneurial spokespeople, such as Whole Foods’ John Mackey, Virgin’s Sir Richard Branson, Ben & Jerry’s Ben Cohen and Jerry Greenfield, and Wharton professor Jeremy Rifkin have spearheaded the push to encourage the adoption of a “triple bottom line” (“people, planet, and profits”). This methodology evaluates businesses’ impact not just on financial returns for shareholders, but their impacts on other stakeholders as well, including employees, the broader human community in which companies operate, and the environment.
As a business serving many clients with ethical convictions which they wish to see reflected in their investment strategies, and as a business with a strong commitment to impeccable fiduciary behavior, Guild Investment Management has taken such considerations into account in portfolio construction since the firm’s inception. Provided that ESG considerations don’t cloud a clear-eyed and realistic financial analysis of an investment’s risk and return profile, we applaud an appetite on the part of investors and an ambition on the part of entrepreneurs to create a better world. (Indeed, we think that the desire to create a better world has usually fueled the ambitions of great entrepreneurs, innovators, and investors.)
Recently, though, there has been some skepticism on the part of ESG activists that the ESG efforts — especially of large corporate entities — amount to anything more than cosmetic attempts to assuage critics. This perceived manipulation of ESG for public relations gain has been given the pejorative description of “greenwashing.” Indeed, our own review of many ESG metrics, and of many ESG-focused funds and investment strategies, suggests that these funds end up differing relatively little in composition from a big-cap index of developed-world equities, and that the largest companies are the most capable of adapting to ESG requirements so that their scoring comes out high. Many idealistic investors are ending up holding “ESG” portfolios whose contents might surprise them, and which don’t differ greatly from a typical big-cap growth fund.
As a consequence, advocates and activists are now pushing the explicit adoption of more stringent and explicit corporate structures and certifications for companies that want to commit to an incorporation of ESG criteria into their business and governance models. 37 U.S. states have created frameworks for the incorporation of businesses as “benefit corporations” — that is, for-profit enterprises whose governing documents are amended to require the consideration of non-financial stakeholder interests in business decisions. Most states require that the benefit corporation provide a “general public benefit” defined by a “material positive impact.” Benefit corporations are required to self-report their performance on a set of key impact metrics and provide the results to the public. (Note, however, that in the case of benefit corporations, there are no disqualifying performance levels on these metrics, and the assessment and reporting is conducted by the company itself.)
A more stringent structure is that of “certified B corporations.” Here, a third-party certification — similar to a LEED, organic, or fair trade certification — is provided to a company after a rigorous “B impact assessment” by a certifier. The assessment must reach a certain threshold on the relevant ESG metrics; company governance documents must be amended; and the company must submit to regular reviews and re-certifications to evaluate performance and compliance.
Source: Yale Center for Business and the Environment
There is significant overlap between these categories; in states that have benefit corporation laws, companies sometimes opt for third-party certification as well. Currently, there are about 4,750 benefit corporations, and 2,400 certified B corporations worldwide. Most of them are small- to mid-sized businesses; some are smaller subsidiaries of larger, publicly traded companies. Often, companies which opt for these formal classification and certification processes are small firms who resent the perceived “public relations” character of ESG efforts by their larger, public peers, and want to underline their more genuine and stringent accountability and adherence to ESG standards. Consequently, the opportunity for retail investors to invest in such companies is still quite limited.
Investment implications: We note the rise of these concerns and these new corporate structures because we believe that a generational shift is underway that will accelerate as Millennials continue to take leadership roles in business and government and as Gen Z voters rise in the workforce and in political and economic influence. To some extent, the idealism of these youthful generations will moderate as they age — an eventuality which history suggests is inevitable. However, there may well be a more enduring shift in these generations’ financial and entrepreneurial values and expectations. For that reason, we think that B corp structures, and other structures like them, will become more common in the future, and investors would be well-served to watch how these structures develop, and how B corps perform against all their objectives — for profit, as well as for positive social and environmental impacts.
