I hung up the phone. We both sighed with relief and gave each other a high five. A score of 116 out of a possible 200 meant we would likely make Best for the World in one or two categories again next year. Achieving the B-Corp certification alone requires significant effort and results in a sense of accomplishment. The additional Best for the World designation brings even greater satisfaction.
What does it all mean? For us, it is a double win. As a provider of sustainability management solutions to businesses, we can demonstrate that we “walk the talk” by providing a metric for our own sustainability. Being a B-Corp also enhances our brand. Over the long term though, it could also help us raise capital — a concept that would have been considered absurd five years ago. Whether it actually does help will depend somewhat on where investors shake out over social impact.
Challenges for Social Impact Entrepreneurs
Back in 2011, Sustrana was accepted into a social impact incubator in Philadelphia. Good Company Group (then Good Company Ventures) was a newly formed incubator focused on helping entrepreneurs to raise capital for new products or services that have a positive social impact. On the West Coast, such incubators have been around for a while. But out East, especially outside of New York City, they are a relatively new phenomenon.
One of the major challenges for companies with a social impact is to overcome a long-held bias in the investor community that having any sort of positive societal impact will eliminate some profit potential. This was so much the case when we started out that we had people advise us not to mention our certified B-Corp status, lest it be seen as a detractor for an investor. Good Company Group was focused on helping entrepreneurs overcome this barrier and present on par with more traditional entrepreneurs.
This perspective among investors is slowly starting to change. This is in part due to a growing realization that understanding the social and environmental impacts (including risks and opportunities) of an investment is now essential to assessing risk and return potential. It is also in part due to a growing desire on the part of individual investors to align their investments with their values. This sentiment is leading to a dramatic increase in assets managed in a socially responsible or sustainable manner.
According to a recent report by SFI, the total assets under management with a sustainable or responsible investment mandate is approximately 18 percent worldwide. This reflects a 929 percent increase since 1995. Investors are not only looking to eliminate negative impacts from their portfolio, such as was the case with traditional Socially Responsible Investing. They now want to make a positive impact with their dollars. This is leading a growing numbers of individuals and institutions to look for impact investment opportunities.
Where there is demand, there must be supply. So, investment managers and advisors are building their capabilities and resources for finding “sustainable” investments and social impact opportunities. This is great for companies like ours. Our business model is predicated on the fact that we can build exceptional business value from having a social impact. In fact, we would argue that those companies that don’t have some positive social impact will face increasing challenges in the future we are heading toward.
Challenges for Social Impact Investors
Despite this initial shift in interest toward investments with a positive impact, investors are still having difficulty putting their money where their mouths are. To be fair, this area harbors some fairly decent-sized challenges. In sustainable investing, there is a long-standing debate over how well sustainable investments truly perform. The difficulty in measuring is primarily due to the problem of defining what a “sustainable investment” really is. What is sustainable in the eyes of one person may not be for another. As a result, findings from studies that measure performance of sustainable investments have historically been all over the map. For social impact investments, the issue is similar. How does an investor know the company is having a positive impact? What are the measures?
This problem is a hot button for Laura Kind McKenna, Managing Trustee of the Patricia Kind Family Foundation. Laura is a vocal and demonstrative advocate for Mission Related Investing (MRI) — the concept of aligning a foundation’s investment practices with its mission. Despite the growing interest in social impact investing in the community, in Laura’s experience, many impact investors are still focused almost solely on financial impact and other traditional measures. These investors are not asking entrepreneurs to quantify their social impact. This is a mistake, says Laura. If we agree that these factors are important and we agree that we need to direct funds to solve social problems, impact measures are a critical element that must be a part of the equation.
Quantifying outcomes and establishing impact has long been a challenge for nonprofits, as has the evaluation of such factors by donors. It is no less so for the social entrepreneur and impact investor. B Lab (the organization behind B-Corp certification), among others, has been working on a solution to this problem. B Lab provides a rating for companies with a social impact that are seeking to raise capital. The Global Impact Investment Rating System (GIIRS) rating, which is based on the B Lab assessment, is one way that investors can benchmark the impact of one company against another. GIIRS ratings and other similar systems provide some quantification options.
Ultimately though, investors will need to become educated at a deeper level. They need to know the right questions to ask and learn how to appropriately evaluate the responses. And social entrepreneurs will need to develop better ways of measuring the social, environmental and economic capital they amass.
This piece was originally published on the Huffington Post.