We write a fair amount about allocating capital to companies that are already acting in a socially responsible manner. We write about how placing our investment dollars with these companies sends a message to the markets that there is shareholder demand for companies that are doing good and doing well. This is a great thing for investors to be doing – and we will call it SRI 1.0.
So what then does SRI 2.0 look like? It looks like seeking companies and industries the are in need of some changes because their business is creating a negative impact for stakeholders and working to create organizational or industry-wide impact and using investing as the tool. We call this IMPACT INVESTING. Impact investing takes SRI to the next step by seeking to use investment dollars to make positive changes in companies, industries, and the world. In my previous post: The Arm Chair Activist Investor, we looked at how SRI managers put pressure on companies, in that case Amazon, to make socially responsible changes through corporate governance resolutions. But what would it look like if SRI investors targeted an entire industry, not just a company?
If you talk to folks that are tuned in to global environmental impact they will tell you that fossil fuels get all the attention for environmental degradation, but agri-business is the more pernicious issue. If you started to research the agri-business issue you cannot look long without the palm oil industry coming up.
Purveyors of global news may remember a controversy a few years back that broke out in France regarding palm oil and Nutella. France’s Environmental Minister, Segolene Royal, urged citizens to stop eating the hazelnut/chocolate spread because it contained palm oil; French senators also proposed a 300% tax on palm oil. The measure was defeated – soundly – which makes sense if you have ever been to France, they like their Nutella. Palm oil is the most widely used vegetable oil on the planet. It is an ingredient in all kinds of products – edible and not (think cosmetics). The concern centers around deforestation in Southeast Asia where rainforests are burned and clear cut to make room for the ever-burgeoning global demand for palm oil. Of interest to note with the French Nutella Controversy is that there was not a political solution. Attempting to manipulate demand by artificially inflating prices makes people angry. It is difficult to legislate away market forces. But can those market forces be guided along more responsible lines?
Green Century Funds thought so and recently spent two years in a monumental effort culminating in deforestation agreements with 95% of the global palm oil trade (cue the applause!). They did it by targeting both supply and demand:
1) They leveraged their shares in companies that use palm oil to pressure these companies to adopt sustainable palm oil policies thus creating market demand, and
2) set their sights on Wilmar, the world’s largest supplier of palm oil, and with a grass-roots-like letter writing campaign persuaded the commodity giant to agree to sustainable farming policies. There was immediate opposition from other palm oil producers, Green Century helped rally institutional investors representing $600 billion in assets under management to encourage four additional major supplies to change their ways.
With five dominoes toppled the rest of the industry moved into alignment in order to stay competitive resulting in 95% of the palm oil industry covered by deforestation agreements. And that is investing with an impact.