Beyond Good Intentions – Bringing Strategy To Giving, Impact Investing, and Corporate Responsibility

By Olga Almqvist

Value-driven leaders and people with means have an array of options for giving back to society. But whether through philanthropy, impact-driven investments, or responsible business stewardship, forward-thinking leaders have a common approach – that is, they seek to achieve their goals strategically.

Even with a significant budget, your resources are not unlimited. Thus, a strategic approach to allocating them can make all the difference.

Philanthropy – understanding the value of time and people

The value of €1 today will not be its value five years from now. So, when, how, and to whom you give can change outcomes for social justice, tackling the climate crisis, and your community.

A key question to answer is whether you want committed money to enable long-term funding or to be spent down. The endowment model was designed to provide foundations with perpetual funding; a large sum is set aside for investment, and the returns finance operations. However, the urgency of crises such as climate change has led to an increase in spend-down philanthropy, the notion that the value of money to address these crises is greater now than in the future. The Bill and Melinda Gates Foundation, for example, has committed to spending all its resources within 20 years of the founders’ deaths.

Where you give is also important to strategic giving. While effective management sounds like a no-brainer, classic metrics for the non-profit sector – such as low overhead – do not always signal effectiveness. They may come at the expense of an organisation’s ability to attract, develop, and retain talent. Effective altruism, a newer trend in giving metrics, emphasises the impact of an intervention for the amount spent (e.g., the number of lives saved from malaria relative to the purchase price of a malaria net). While impact measurement is important, not all types of changes can be quantified and attributed to a given intervention. For example, when a dictator is toppled, you will be hard-pressed to attribute this to the work of a single human rights organisation. Does that mean that advocacy work does not make a difference? Certainly not.

Lasting change also means considering who has a seat at the table in decision-making processes. People with lived experience of the problem and diverse perspectives are essential to sustainable solutions. So, too, are philanthropists who can inspire others. For example, because of The Giving Pledge – a campaign started by Warren Buffett, Melinda French Gates, and Bill Gates – billionaires around the world have publicly committed to giving the majority of their wealth to philanthropy either during their lifetimes or after their deaths. As of this writing, there are 236 pledgers, with pledges estimated at $600 billion.

Impact investing – adding value as an investor

climate change

You may believe, like many others, that some social problems require entrepreneurial solutions (e.g., green technology to tackle climate change). Or you may be drawn to solutions that could become financially self-sustaining, if not highly profitable (e.g., social housing). Both solutions promise a financial return, alongside their environmental or social impact. This is often called “impact investing”. It is commonly done through private equity investments, fund- or impact-investing platforms, on the stock market, or through cooperatives. According to the Global Impact Investing Network (GIIN), in 2022 the worldwide impact investing market passed the $1 trillion mark.

The right approach to impact investing will depend on, among other things, the amount of money you commit, your liquidity and diversification needs, and whether you prefer to fund early-stage or mature ventures. Private equity investments require comparatively large sums that cannot be cashed out quickly; they are thus not accessible to all. Investments in listed companies, on the other hand, are highly liquid and do not require large sums. Investing through the stock market, however, limits your options to rather mature businesses.

Outdoor clothing company Patagonia recently announced a change in its ownership structure, declaring, “Earth is its only shareholder.”

Dedicated funds and investing platforms come in all varieties. Some platforms crowd-fund loans for individual social entrepreneurs, allowing investments as small as €25. For those willing to invest €2,000 or more, some platforms offer curated investments into listed or unlisted companies. Funds that collect growth capital for social businesses or climate tech start-ups typically need a six-digit investment.

If achieving a positive impact alongside a financial return is an important motivation for you, you might want to know your added value. Does your investment create an impact that would not have occurred otherwise? This is plausible under two scenarios. One, if you are investing in a business that would otherwise have difficulty raising capital, yet has the potential to deliver impact. That is more likely for smaller companies or when you invest in a social business that does not offer the prospect of market-rate financial returns. Two, when you are actively engaging with company management to drive desired environmental, social, and governance (ESG) outcomes. Indeed, some impact funds pursue active ownership strategies through, for example, shareholder proposals and proxy votes. A prominent example of shareholder activism is the investment firm Engine No. 1, which drove out ExxonMobil board members who were sluggish to address climate concerns.

Corporate responsibility – setting science-based targets and pathways

patagonia

In the past, corporate social responsibility (CSR) was viewed as an add-on activity – for example, a yearly charity drive – unrelated to the core business. This changed in 2019, when the Business Roundtable, an association of the CEOs of major US companies, announced a shift away from shareholder primacy. Today, leaders are increasingly expected to understand that long-term value can only be created by investing in employees, dealing ethically with suppliers, and protecting the environment through sustainable business practices. Whether intrinsic motivation, the licence to operate, a tactic to attract and retain talent, or an anticipation of business risk, integrating ESG aspects is a key component of modern leadership.

The urgency of crises such as climate change has led to an increase in spend-down philanthropy, the notion that the value of money to address these crises is greater now than in the future.

Regulatory developments will require companies to analyse and substantiate data on the impact of their business on the environment. This goes way beyond CO2 emission reduction targets. The EU corporate sustainability reporting directive (CSRD), coming into effect in January 2024, will require all large and listed companies (and, eventually, listed SMEs) to provide independently certified data on environmental rights, social rights, human rights, and governance aspects. On behalf of the EU Commission, the European Financial Reporting Advisory Group (EFRAG) has developed draft European Sustainability Reporting Standards (ESRS) to put this directive into practice, requiring reporting on the company’s impacts on biodiversity and, with a progressive phase-in, related reporting on its whole supply chain.

The days in which CSR was seen as a marketing fad with potential for greenwashing are thus over. Proactive leaders have recognised this, as evidenced by the more than 4,000 businesses and financial institutions engaging with the Science Based Targets initiative (SBTi) to reduce greenhouse gas emissions.

Conclusion

love the earth

Many corporate leaders can exert influence for social and environmental impact with multiple levers by setting targets and defining strategies for their businesses, through their investments, and by giving. Increasingly, they take a strategic approach across all three dimensions. Innovative leaders even come up with creative solutions that blur the boundaries between them. A particularly inspiring example is Yvon Chouinard, founder of the outdoor clothing company Patagonia. The company recently announced a change in its ownership structure, declaring, “Earth is its only shareholder.” The founder family has transferred all ownership to two new entities, one owning all voting stock of the company (2 per cent) to permanently preserve its values, and the other one owning all non-voting stock (98 per cent). Through the latter, profits that are not reinvested back into the firm are paid as dividends to protect the planet. Patagonia expects to pay out an annual dividend of roughly $100 million.

About the Author

Olga AlmqvistOlga Almqvist is the senior manager of the Societal Impact Financing Initiative (SciFi) at ESMT Berlin. SciFi is supported by the Bill & Melinda Gates Foundation, amongst others.

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