Merchants of Death. The MOD Squad in Thank You for Smoking has long been the abstract idea of the types of companies that some investors avoid. Portfolio managers will circumvent businesses which attract negative marketplace sentiment in fear of the potential backlash from investors. Recent negativity towards weapons manufacturers, health and alternative medicine groups and even oil and gas companies have pressured private equity managers to avoid – or even remove – those profitable businesses from portfolio holdings.
This new perspective towards fiduciary responsibility has triggered some investment pivoting across the private equity community. What we now consider to be “impact investing” has led to the creation of thematic portfolios by private equity groups. These portfolios are focused on connecting investors to high-potential and high-impact companies.
The ideas of philanthropy and investing, or social-oriented ideology and investing, have been viewed by many as separate financial decisions. This thinking as evolved as individuals every dollar they “spend” as an opportunity to invest both for a reasonable ROI and to have an impact on an issue, industry, community, or broader ideal that is important to them.
Providing better impact investment options for people who care about where their money goes and what it supports is a consciousness that is growing. Organizations like Swell invest in growth companies that offer innovative solutions to some of the world’s biggest challenges – like renewable energy and clean water. United Nations officials and senior business leaders implemented the Global Sustainability Index Institute (UNGSII) to rank companies and countries based on their sustainability practices.
“In order to change the world, we have to change the way the world does business, where sustainability impact is measured transparently and is the driver of investment.”
– Michael Møller, Director General of the United Nations Office at Geneva
Harvard Business School Professor Robert Eccles found that only 30-60 percent of a company’s value is reflected in the financial performance numbers disclosed in annual reports. There is no consistent framework or analytical standard that allows investors to understand and compare non-financial performance. This has led to poor investment decisions that have repeatedly resulted in financial losses because 40-70 percent of information vital to making sound decisions is missing.
Does your private equity organization have a clear understanding of the impact that the fund is having across industries and communities at large? If not – you’re not alone. Working alongside private equity funds of all sizes, I’ve observed that the communication as to “why the investment matters” is sometimes lost inside the message of ROI. Private equity organizations need to provide guidance and benchmarking to investors who are encouraged by businesses that strive for corporate impact and social responsibility. To do so effectively, PE groups must embrace consumer perception and sentiment data since marketplace information is a leading indicator of financial performance.
When measuring for marketplace information, it is most effective to calculate an overall impact score based on the voice-of-the-consumer (VOC) sentiment data collected from news and conversations across the entire digital media spectrum. This calculated score can then be monitored for changing perception trends and benchmarked against competitors to determine marketplace advantages and gaps for any product or service. It can also be used to help portfolio managers articulate to investors the impact their holdings are having in the marketplace both directly and in the context of “competitors” also serving/supporting the same market space.
How do you measure and communicate the overall impact of your portfolio to your investors beyond ROI?