He says in his recent article that conscious investors are almost as cognitively constrained as traditional investors by allowing old-fashioned thinking on tax codes and professional school “fiscal truths” to limit innovation. He argues that enterprises across tax status have more similarities than differences and “suggests an alternative approach for assessing the holistic societal value of all enterprises, untethered from corporate identity or tax status.” Read his conclusions below:
Setting the Table for a World We Want
Each of our enterprises contributes or depletes the capital in society’s inventory in multiple ways. For example, a major packaged food company credits its creation of “shared value” with respect to community nutrition, clean water, and rural development—systemic and intellectual capital—for its recognition as one of a major accounting firm’s top corporate reporters of corporate social responsibility. Others accuse the company of “greenwashing,” and maintain that the company’s ingredients sourcing and bottled water business deplete natural capital in developing countries, and that its products compromise the health of youthful consumers, and thereby the supply of human capital.
A major urban art museum may also generate a surplus, or financial capital, which it “reinvests” in its collection, physical plant or exhibitions, and staff capacity. Beyond finance, this nonprofit enterprise contributes significantly to the city’s civic, human, and intellectual capital through its training and public education programs as well as its public meeting places and prominence in the cityscape.
A big box retailer offers middle- and lowerincome consumers an immense variety of products—from groceries to firearms—at consistently low prices. It pursues state-of-the-art product sourcing, transport, inventory, and other operating-cost-control methodologies. These policies have generated considerable financial capital, and put the company at the top of the low-carbon-footprint league table. While it may score high with respect tonatural capital, the company does less well on indicators of human capital development, and quite poorly with respect to fraying the economic fabric of its communities— their civic capital.
A registered B Corp and self-described social enterprise sources and distributes ten million healthy and affordable meals to primarily lowincome students each year, helping to build healthy bodies, lifelong nutritional habits, and human capital. The jury is out, however, with respect to the company’s net contributions to society’s capital. Thus far, the company is unprofitable and depleting its financial capital reserves. Further, it has caused the dismantling of traditional food delivery—a form of systemic capital—and there is no certainty its own tenuous economics will allow it to offer a long-term alternative.
While these examples may produce more drama than we’d find typically, all enterprises make multiple contributions to the capital of their communities—through their ingredients sourcing, programs, employment and operating practices, creativity, and participation in other activities that strengthen the fabric of society.
In this very real sense, any investment in or grant to any enterprise is an impact investment. But because we don’t examine most of our investments through this lens, we usually don’t know whether we are abetting net positive or negative impacts when we invest or grant our funds. We are setting the table for a world we may or may not want, yet we continue to let short-term edicts of a misplaced canon of best practice prevent us from thinking clearly, broadly, and long term.
For most of us who are used to mathematical “clarity,” precise modeling, and the convenience of the canon, taking that first serious look through a new, less precise contribution to society’s capital lens will be challenging. Indeed, it may prove more challenging than using other tools that promise to assess enterprise impacts holistically, such as B Corp and impact reporting and investment standards (IRIS), which use lists of questions and standards intended to elicit discrete, usually measurable or binary responses by participating enterprises. When looking through the contribution to society’s capital lens, the conscious investor will observe that each enterprise contributes to the components of society’s capital in different, often surprising ways, and that much of the important evidence regarding contributions to society’s capital will not be measurable. Instead, it will be hypothetical, not comparable among enterprises, and without an attributable causative impact.
Further, when we go to aggregate or reconcile this disparate body of evidence in order to estimate an enterprise’s net contribution to society’s capital, we will find ourselves weighing the importance of each variable—such as whether formation of financial capital outweighs natural capital degradation, or whether a high score on natural capital outweighs erosion of a formally vital downtown’s merchant base and civic capital. Such judgments will necessarily require the application of the investor’s personal values.
Generating the information necessary to support this decision framework will require a new level of diligence on the part of investors and intermediaries as well as cooperation and transparency on the part of enterprises. It will be especially challenging to overcome the entrenched quality and analytical elegance of the canon of best practices. The sophistication of the processes required to assess enterprise contributions to societies will grow through time and analytical experience.
My hope would be that in eschewing the simplicity and false precision of the canon and traditional categorizations of enterprises, conscious investors will begin to think broadly, holistically, and positively about what our enterprises really mean for the long-term success of our communities and society; that we will develop new methods that allow us to build satisfying portfolios of the enterprises that are generating the forms of capital that we, ourselves, believe are critical for our society’s future; and that we will change the fundamental factor in our decisions from a discounted estimation of future earnings to a values-driven estimation of the holistic contributions of our enterprises well into the undiscounted future. In doing so, we would send meaningful signals that would encourage the most contributory practices in all of our enterprises.
Make sure to check out the full article on NPQ, and as always, we welcome your comments, dissent and questions here on our website or at @HeronFdn. Also, take a look at the rebuttal Oishei Foundation's Paul Hogan offers against the concept that all enterprises are social, and contribute your thoughts on the topic.
Click here for more quick reads featuring interesting articles on philanthropy and impact investing. **Editor's Note: Schmidt's piece originally appeared in May 2014.