Profiting with a Purpose in the 21st Century

By Manomet President John Hagan

 

In 2014, U.S. foundations awarded $54 billion in grants to make the world a better place.[1]  Most of this wealth was generated by investments—the interest earned on principal.

 

Prevailing wisdom has been that individual philanthropists and foundation endowments should seek to maximize their profit so they can give even more to societal causes.  Here’s a simple, but sobering question:  What if these investments degrade the world more than the philanthropy improves the world?  That would be like investing in bailing on a sinking Titanic.  Maybe investing in companies that can repair the breach, instead of the bucket industry, should be the first goal?

 

Fortunately, more and more philanthropists are asking this question of themselves. “What is the net impact of my wealth on the world?”  In the U.S. alone, the pool of assets in socially-responsible investing (SRI) grew from $2.2 trillion to $6.5 trillion between 2005 and 2014 (300%).[2]  

 

SRI fund managers put an environmental and/or social “filter” on their managed assets. These filters differ by fund manager.  A fund manager might build a portfolio of companies that has a low-carbon footprint (a positive filter), or a portfolio that excludes fossil fuel companies (a negative filter).  Philanthropists can choose the filter (and therefore the fund manager) that best represents their particular values.

 

For a long time, it has been assumed that socially-responsible investing would yield lower returns than non-SRI investing.  You had to forgo revenue (i.e., pay a price for satisfying your conscience).  But that is starting to change.  SRI fund managers are beginning to show that they can deliver returns in line with, or even exceed, traditional non-SRI fund managers.

 

In 1970, the noted economist of the late 20th century, Milton Friedman, argued in a New York Times editorial that the “social purpose of business is to increase its profits.”[3]  Friedman argued that the mixing of social responsibility and what was squarely government’s responsibility (that’s why we pay taxes) in corporate operations was a “fundamentally subversive doctrine.”

 

But surely, Friedman would be “OK” with SRI if it led to greater profits.  Ethics aside, he might say it was even a fiduciary obligation.

 

What is causing this growing trend in SRI?  It’s clear there is a developing market of individual investors who want to do “good,” however they choose to define “good.”  Smart people are starting to understand that the earth’s resources are finite.  And they don’t want to be party to undermining the conditions that support life on earth.

 

Just imagine—what if free-market capitalism could solve the social and environmental problems it has helped create?  The global pool of manageable financial assets is $143 trillion,[4] which is no trivial sum that could be leveraged for a better world.  I might be so bold as to propose there is no other current-day solution than to bring this massive force to bear on solving the huge societal issues of our century.  In the long-run, we’ll all win.

 

 

 

 

 To discuss this topic further, please join Sustainable Economies Program Director Andrew Whitman and me for our March 30 & 31 Brown Bags, Profiting with a Purpose: Investing in the 21st Century. 

 

We will have a conversation about the game-changing potential of incorporating sustainability into institutional investing. Learn more here.