The Success of the Socially Responsible Business and Investment Movements
© 2005 Gordon Davidson
I moved into the socially responsible investment area in the late 1980’s and became the Executive Director of the Social Investment Forum (SIF), the national association for social investment professionals, when it was a tiny little organization with a very small amount of money committed to socially responsible investing. We began with people who were concerned about being invested in weapons production or tobacco or activities that were destructive to the environment. SIF gradually grew during that period because of South African apartheid, as major funds and investors were beginning to divest from companies engaged in South Africa. This divestment movement was actually encouraged by the African National Congress and Nelson Mandela, and we really did play a role in the ultimate liberation of people in that country.
It was a very interesting process because I was the person who was interfacing with The Wall Street Journal and The New York Times and the mainstream point of view. They warned, “If you limit your universe of investments, if you don’t invest in whatever is available and looks good, then you’re going to limit your return and you’re going to lose.” But we didn’t believe this. We were sure that if you invested in good companies with good practices and good products and policies, you’d see a better investment return.
This was a hotly debated issue, but finally it was resolved around 1990-91, when two of the three top performing mutual funds in the country were socially responsible funds. This raised eyebrows and people began to realize that in fact these kinds of investments can be more profitable than traditional investing. The most recent information I have, according to the Domini 400, an index of socially responsible companies, is that it outperformed the S&P 500 during a ten year period ending in December 31, 2001, showing a gain of 13.77% versus 12.9% for the S&P 500. This is clear evidence that these companies give a better return on your investment.
No we see many Wall Street companies have their own funds, and socially responsible investing has become a very mainstream trend. According to the Social Investment Forum, there is now $1.2 trillion invested with some kind of social or value-oriented criteria. This is a huge shift which has only taken about twenty years, and that’s only in the securities area There is also a lot being done with community development loan funds, which are funds where people agree to take a smaller return on their investment; 0% interest or 1 or 2% interest, or whatever they determine. This money is then loaned to individuals and groups in local communities for rehabilitating housing; buying housing and land trusts with fixed rents so there is low income housing available in perpetuity at low rates.
The most strikingly successful example of this is Shore Bank of Chicago, which has been working for over twenty years and has rehabilitated most of the south side of Chicago. It has taken what were run down neighborhoods and completely rebuilt them. Not only have they transformed the neighborhoods, but they have also trained the people who live there, mostly an African-American community, in how to rehabilitate the housing themselves, how to manage the properties, and how to become successful entrepreneurs. There is now a huge and very successful community in South Chicago. Shore Bank is a stable, successful bank and it is doing extremely well in terms of its profitability.
A recent study by a University of Chicago professor published in Management Accounting found that companies which have a defined corporate commitment to ethical principles do better financially than companies that do not make ethics a key component. Companies that increase their community involvement were more likely to show an improved financial picture over a two year time period, as reported in The Futurist. In 1995, a study by Vanderbilt University found that eight of ten cases of low-polluting companies financially outperformed their dirtier competitors. Unethical behavior by firms, which is discovered and publicized, has a negative impact on shareholders by lowering the value of their stock for an appreciable amount of time according to a study in Journal of Business Ethics.
So why do socially responsible businesses do better? Consumer loyalty tied to companies with a corporate social responsibility is a worldwide trend. Public pressure will play a broader role and increase in significance in the coming years. Ninety percent of respondents want companies to focus on more than just profitability. Sixty percent focus on corporate citizenship ahead of brand reputation or financial factors. Forty percent said they responded negatively to or talked negatively about companies they perceived as not being socially responsible. Seventeen percent reported that they avoided buying products from such companies. Seventy-six percent of consumers also report that they would likely switch brands if a company is associated with a good cause when price and quality are equal. Eighty-three percent of consumers say they have a more positive image of a company that supports a cause they care about. (1999 Millennium poll of 25,000 citizens in over 23 countries)
Nike discovered much to its dismay that bad publicity can have a huge impact, when they were exposed for using sweatshops for manufacturing their running shoes in Asian countries. College students started an anti-Nike campaign and exposed the conditions of the workers in those factories. Nike’s stock plummeted 25 percent. They lost sales and were forced to make major policy changes in how they conduct their relationships with employees. They now tout their socially oriented employee policies. It is becoming clear that these kinds of perceptions of a company have a significant impact on the bottom line. That’s important because business is about the bottom line; if you can show that this makes sense from that point of view, businesses are going to pay attention.
Clearly this perception issue is important. Another study by the Performance Group, a consortium of seven European companies which include Volvo, Unilever, Monsanto, Imperial Chemical Industries, Deutsch Bank, Electrolux and others, concluded that improving environmental compliance and developing environmentally friendly products can enhance company earnings per share, increase profitability, and help win contracts or investment approval in emerging markets.
Dow Chemical and NRDC (National Resource Defense Council) partnered on a three year project to reduce production of twenty-six toxic chemicals at one of Dow’s plants. Dow’s $3.1 million dollar investment is saving the company $5.4 million a year. Another key trend is learning how to make toxic effluent a resource in another production process, so there is zero output of pollution. By learning how to use what used to be toxic waste and breaking it down and changing how the streams are blended together, you can turn it into useful resources that can be used for other manufacturing processes. It’s a major trend in manufacturing because the costs of disposing of toxic waste are so high and increasing, that it’s creating an incentive to decrease or eliminate toxic waste altogether through recycling and reuse.
A 1999 survey of more than four hundred public companies found that those who have the greatest number of employee-friendly practices such as flex hours, good training and collegial, interpersonal relations, had an average five year return to shareholders of 133%. Those with the fewest employee-friendly practices had an average of 53%. (Watson-Wyatt Worldwide Survey.)
All of these studies indicate that well managed, socially responsible, good companies are bound to do better. Bain and Company found that companies with the highest employee retention also have the highest customer retention. A study of business performance found that 39% of the variability in corporate performance is attributable to the personal satisfaction of the staff. For those of us who work in companies, this is not news, but when you can quantify it and put it in a bottom line format, it starts to have an impact.
My experience is when you have a vision of trying to do the right thing in starting a new socially responsible company, and you work to bring it into the current business world, there are a huge number of difficult challenges that you face. You have to have a very deep commitment to your vision and purpose to be able to bring a socially responsible approach to it. Saying you’re a triple bottom line company automatically rules out seventy to eighty percent of venture capital investors. They’re not going to be interested because it does not fit their mental models. My fundamental point is that a socially responsible business can be successful, but it requires tremendous commitment, perseverance and skill in business.
© 2005 Gordon Davidson
I moved into the socially responsible investment area in the late 1980’s and became the Executive Director of the Social Investment Forum (SIF), the national association for social investment professionals, when it was a tiny little organization with a very small amount of money committed to socially responsible investing. We began with people who were concerned about being invested in weapons production or tobacco or activities that were destructive to the environment. SIF gradually grew during that period because of South African apartheid, as major funds and investors were beginning to divest from companies engaged in South Africa. This divestment movement was actually encouraged by the African National Congress and Nelson Mandela, and we really did play a role in the ultimate liberation of people in that country.
It was a very interesting process because I was the person who was interfacing with The Wall Street Journal and The New York Times and the mainstream point of view. They warned, “If you limit your universe of investments, if you don’t invest in whatever is available and looks good, then you’re going to limit your return and you’re going to lose.” But we didn’t believe this. We were sure that if you invested in good companies with good practices and good products and policies, you’d see a better investment return.
This was a hotly debated issue, but finally it was resolved around 1990-91, when two of the three top performing mutual funds in the country were socially responsible funds. This raised eyebrows and people began to realize that in fact these kinds of investments can be more profitable than traditional investing. The most recent information I have, according to the Domini 400, an index of socially responsible companies, is that it outperformed the S&P 500 during a ten year period ending in December 31, 2001, showing a gain of 13.77% versus 12.9% for the S&P 500. This is clear evidence that these companies give a better return on your investment.
No we see many Wall Street companies have their own funds, and socially responsible investing has become a very mainstream trend. According to the Social Investment Forum, there is now $1.2 trillion invested with some kind of social or value-oriented criteria. This is a huge shift which has only taken about twenty years, and that’s only in the securities area There is also a lot being done with community development loan funds, which are funds where people agree to take a smaller return on their investment; 0% interest or 1 or 2% interest, or whatever they determine. This money is then loaned to individuals and groups in local communities for rehabilitating housing; buying housing and land trusts with fixed rents so there is low income housing available in perpetuity at low rates.
The most strikingly successful example of this is Shore Bank of Chicago, which has been working for over twenty years and has rehabilitated most of the south side of Chicago. It has taken what were run down neighborhoods and completely rebuilt them. Not only have they transformed the neighborhoods, but they have also trained the people who live there, mostly an African-American community, in how to rehabilitate the housing themselves, how to manage the properties, and how to become successful entrepreneurs. There is now a huge and very successful community in South Chicago. Shore Bank is a stable, successful bank and it is doing extremely well in terms of its profitability.
A recent study by a University of Chicago professor published in Management Accounting found that companies which have a defined corporate commitment to ethical principles do better financially than companies that do not make ethics a key component. Companies that increase their community involvement were more likely to show an improved financial picture over a two year time period, as reported in The Futurist. In 1995, a study by Vanderbilt University found that eight of ten cases of low-polluting companies financially outperformed their dirtier competitors. Unethical behavior by firms, which is discovered and publicized, has a negative impact on shareholders by lowering the value of their stock for an appreciable amount of time according to a study in Journal of Business Ethics.
So why do socially responsible businesses do better? Consumer loyalty tied to companies with a corporate social responsibility is a worldwide trend. Public pressure will play a broader role and increase in significance in the coming years. Ninety percent of respondents want companies to focus on more than just profitability. Sixty percent focus on corporate citizenship ahead of brand reputation or financial factors. Forty percent said they responded negatively to or talked negatively about companies they perceived as not being socially responsible. Seventeen percent reported that they avoided buying products from such companies. Seventy-six percent of consumers also report that they would likely switch brands if a company is associated with a good cause when price and quality are equal. Eighty-three percent of consumers say they have a more positive image of a company that supports a cause they care about. (1999 Millennium poll of 25,000 citizens in over 23 countries)
Nike discovered much to its dismay that bad publicity can have a huge impact, when they were exposed for using sweatshops for manufacturing their running shoes in Asian countries. College students started an anti-Nike campaign and exposed the conditions of the workers in those factories. Nike’s stock plummeted 25 percent. They lost sales and were forced to make major policy changes in how they conduct their relationships with employees. They now tout their socially oriented employee policies. It is becoming clear that these kinds of perceptions of a company have a significant impact on the bottom line. That’s important because business is about the bottom line; if you can show that this makes sense from that point of view, businesses are going to pay attention.
Clearly this perception issue is important. Another study by the Performance Group, a consortium of seven European companies which include Volvo, Unilever, Monsanto, Imperial Chemical Industries, Deutsch Bank, Electrolux and others, concluded that improving environmental compliance and developing environmentally friendly products can enhance company earnings per share, increase profitability, and help win contracts or investment approval in emerging markets.
Dow Chemical and NRDC (National Resource Defense Council) partnered on a three year project to reduce production of twenty-six toxic chemicals at one of Dow’s plants. Dow’s $3.1 million dollar investment is saving the company $5.4 million a year. Another key trend is learning how to make toxic effluent a resource in another production process, so there is zero output of pollution. By learning how to use what used to be toxic waste and breaking it down and changing how the streams are blended together, you can turn it into useful resources that can be used for other manufacturing processes. It’s a major trend in manufacturing because the costs of disposing of toxic waste are so high and increasing, that it’s creating an incentive to decrease or eliminate toxic waste altogether through recycling and reuse.
A 1999 survey of more than four hundred public companies found that those who have the greatest number of employee-friendly practices such as flex hours, good training and collegial, interpersonal relations, had an average five year return to shareholders of 133%. Those with the fewest employee-friendly practices had an average of 53%. (Watson-Wyatt Worldwide Survey.)
All of these studies indicate that well managed, socially responsible, good companies are bound to do better. Bain and Company found that companies with the highest employee retention also have the highest customer retention. A study of business performance found that 39% of the variability in corporate performance is attributable to the personal satisfaction of the staff. For those of us who work in companies, this is not news, but when you can quantify it and put it in a bottom line format, it starts to have an impact.
My experience is when you have a vision of trying to do the right thing in starting a new socially responsible company, and you work to bring it into the current business world, there are a huge number of difficult challenges that you face. You have to have a very deep commitment to your vision and purpose to be able to bring a socially responsible approach to it. Saying you’re a triple bottom line company automatically rules out seventy to eighty percent of venture capital investors. They’re not going to be interested because it does not fit their mental models. My fundamental point is that a socially responsible business can be successful, but it requires tremendous commitment, perseverance and skill in business.
