Several years ago, we committed to aligning our entire portfolio with our mission. At the time, we thought that would mean investing in enterprises that provided family-sustaining jobs. But we quickly realized that some of the enterprises that provided good jobs might not be good, on the whole, for the people we wanted to help.
Over time, our general desire to invest first and foremost in enterprises that have a net positive impact on society (and only then layer on our specific mission) developed into the net contribution lens.
Table of Contents
What is net contribution?
How did we get here?
Why is the net contribution mindset important to Heron?
What is does our net contribution framework consist of?
What principles guide our net contribution lens?
How does Heron's net contribution practice currently function?
In good company as we look to the future
“Net contribution” is the aggregate effect of an enterprise on the world. Enterprises include for-profits, nonprofits, and government enterprises, and they can affect their communities in a variety of ways — some positive (like hiring people and paying taxes), and some negative (like polluting local rivers and exploiting local workers).
We ask whether, on net, the world is better off with or without any given enterprise based on its “net contribution” to people, place, and planet.
The concept of “net contribution” is designed to be flexible, translatable, and customizable. We ask investors to think about the net contribution of their investments, companies to think about the net contribution of their activities, and community leaders to think about the net contribution of local enterprises.
In this podcast, Senior Vice President Dana Bezerra discusses why assessing the aggregate effect of an enterprise matters for impact measurement.
Heron's "portfolio examination project"... was our attempt to... approach this investing 100% for impact [by understanding] what we already owned. As we started looking though the underlying positions, back to this notion of trade-offs, sometimes things looked really good until you got additional data, and then they didn't.
This nascent language started to emerge, honestly a little bit out of frustration, around, "Great. That's a great data point, but on net would we choose to own this company? Or on net would we choose to make this investment?" And in part that language evolved into this net contribution framework, where we tried to look really across the aggregate effect of an enterprise. So if you have a business doing what it does, we're not going to isolate and look at jobs. We're not going to just look at products and services, but try to ask the question across the totality of what an enterprise does, from employing people to potentially polluting or creating a product and service that may or may not be a great health outcome for example, would we want to own the company?
We had a lot of naïve assumptions over time that fell by the wayside... we thought the framework would help us have answers, and what we've learned is that the framework just really helps us ask better questions.
Dana K. Bezerra, Senior Vice President
Stubbing Our Toe on Corrections Corporation of America
In 2011, Heron committed to putting all of our capital to work for our mission. We started by examining what we already owned, with a specific focus on jobs that could help lift people from poverty. What we found was not always what we expected, as when a job-laden real estate investment trust turned out to be Corrections Corporation of America (CCA), the biggest private prison operator in the United States.
The private prison business model raises major concerns on a number of social, governance, and even environmental fronts. Heron also found that while CCA (now CoreCivic) did in fact employ thousands of people, their SEC filings did not specify how many prisoners were also doing work, what kind of pay they were receiving (if any), whether that work was within the prison system (e.g. cooks, janitorial staff) or for outside companies, and other information key to the business model from an investment perspective. (On looking further, we found that many Americans unwittingly owned private prisons through their pensions and 401(k) plans.)
Based on those risks, both social and financial, Heron decided to divest from CCA and began organically thinking about the overall impact of enterprises rather than just their jobs. Being focused too narrowly on the number of jobs provided would have led us to miss the larger impact of these enterprises on the people and communities about whom we care. In addition, we didn't want to simply screen out all private prisons, just as we don't screen out any industry in its entirety. Rather, our goal is to continuously improve the data informing our investment choices, so that we can screen out any company with this level of social and financial risk (such as an unknown quantity of the labor force being dependent on a law allowing sub-minimum wages).
Another more recent example started when we became aware of the potential social costs of a green-energy investment known as Property-Assessed Clean Energy (PACE) Bonds. PACE Bonds are attractive to environmentally conscious investors for both their contribution to energy retrofitting and their low-risk financial returns. However, of all the winners in this generally compelling investment, one stakeholder in residential PACE bonds — the homeowners — bear a disproportionate degree of risk:
The current sales practices bypass traditional underwriting procedures such as calculating debt-to-income assessments and similar ability-to-pay ratios. Skipping these investigations can lead to a big jump in the cost of homeownership—and potentially to the loss of the home. ...
For Heron, this again underscored the importance of looking not only at the intended impact — greener buildings — but at the outcomes for all stakeholders. While we don't expect that any enterprise will be perfect, or have wonderful outcomes for every stakeholder, we also couldn't in good conscience invest in a product where risk fell so disproportionately on a single stakeholder.
We use the net contribution lens to analyze the way in which enterprises absorb and produce four different types of capital: human capital, natural capital, civic capital and financial capital.
Human Capital comprises an enterprise’s interactions with individual people with whom they have a direct relationship, including but not limited to their employee base.
Natural Capital includes how an enterprise makes use of resources such as energy and raw materials, how they handle waste products, and their effects on the natural environment.
Civic Capital looks at an enterprise’s interactions with communities, including customers, neighbors, and governmental actors such as regulators. One such interaction might be how a company approaches their taxes. (Frequently there is a slight zone-of-control difference between human capital-related behaviors, in which the enterprise has direct and personal effects on individual people, and civic capital, in which there is a slightly less direct level of control.)
Financial Capital looks at an enterprise’s interactions with the economic and financial landscape in which they operate, including most directly their effects on capital providers through governance practices and capital outlay decisions.
Click through this prezi for a closer look:
Like many other practitioners, Heron has been searching for a simple, inexpensive, and intellectually honest way to monitor the social performance of our portfolio. We are currently working with a variety of data partners to do so, including CSRHub, B Lab, HIP Investor and Oekom.
Heron uses this data to track the social performance of each company in our portfolio. As an example, the below histogram represents the enterprises in one of our impact-screened public equities holdings as scored by CSRHub. The gray line indicates the dollar-weighted average social score of 73.5 percent. The enterprises at the far left of the graph represent a learning opportunity for us: How did they make it through our carefully-designed screen but end up ranked so poorly by CSRHub? It could represent differences in data reported, a time lag, the weighting of different values, or any of a wide variety of contributing factors.
What we learn from the histogram data helps us to identify outliers, monitor trends, and better understand the data available from each company. We continue to work with our data partners, managers, and others to learn from and improve this process.
While we at Heron found it helpful to begin our efforts toward designing a net contribution lens with a "blue sky" approach, we are not the only ones attempting to look at the net effect of an enterprise. We applaud and thank our colleagues in the space for helping push our thinking forward, and encourage others to check out approaches such as Bridges' Impact Measurement & Management Project, the Total Impact Measurement and Management (TIMM) framework developed by PWC, B Lab, and of course the work of The GIIN, home to the ongoing Impact Measurement and Management Leadership Initiative.