From the GreenMoney Journal Spring 2011 Newsletter
By R. Paul Herman CEO and Founder of HIP (Human Impact + Profit) Inc.
), an investment advisor and portfolio manager focused on quantifiable sustainability, including the HIP Indexes.
You feel it – your portfolio can be a tool for good. But how do you measure it?
How can you quantify the human, social and environmental impacts of your portfolio – cash, fixed income, equities, venture investing, commodities – and allocate more dollars to sustainable investments? Are positive impacts and attractive financial returns possible at the same time?
Yes, positive human impact and profit are possible and emerging as the “new fundamentals” of investing, starting with investment policy.
Quantifiable Impact Added to Investment Policy Statements
Leading investors (and advisors) are incorporating a new factor – impact – into their investment policy statements alongside risk, return and liquidity. These investors – entrepreneurs, families and foundations, pension funds – seek specific measures of how their portfolios are “doing good” and how that can drive “making money.”
While Warren Buffett and Bill Gates are asking the wealthy to donate at least half of their fortunes to charity in the Giving Pledge, sustainably oriented investors are targeting all their investments to work for positive impact. Some are publicly stating their Investing Pledge, committing to “100 percent sustainably invested portfolios by 2020.” To see who’s committing, or to join go to www.investingpledge.com
Quantifying “human impact + profit” is possible. Being “HIP” (for its acronym) demonstrates that leading indicators of profit include human, social and environmental performance.
How Can Impact Drive Profit? “People Are Our Most Important Asset”
“People are our organization’s most important asset.” How many times have you heard a CEO espouse this?
Yet, where are people accounted for on the company’s financial statements? On income statements, people are expenses, and not portrayed as revenue generators, the human source of that innovation. People-related costs are mainly characterized on the balance sheet as “liabilities” for future pension and health-care obligations. While people create products, our accounting systems and analysts do not normally classify them as assets (which can appreciate), but as costs. There is a systemic “gap” in GAAP (generally accepted accounting principles).
Infosys, the global technology company based in India, has pioneered reporting people as assets. Infosys’s “human resource valuation” counts each employee according to how they add value (e.g. technologists, customer service) and assigns revenue generation to each role, leading to a truer return-on-assets ratio. While spreading in India, financial reports from Europe or US-based firms lack this approach. Forward-looking investors evaluate this core driver of value and how it can benefit their portfolio.
Professor Alex Edmans of the Wharton School has shown that from 1998 to 2009 a portfolio of Fortune magazine’s “Best Companies to Work for” (e.g. higher employee satisfaction and staff diversity) tends to have higher financial returns than the overall stock market.
While traditional investors and analysts ignore core factors that drive financial results – including human, social and environmental performance metrics, HIP Investor’s methodology systematically tracks these factors and incorporates them in the HIP 100 Index (see the latest performance at www.hipinvestor.com
Measuring Results, Not Policies, of Your Portfolio
Impact investing embraces these fundamentals: value comes from cultivating top talent to innovate; resiliency results from engaging diverse stakeholders to manage risk and tap new ideas; and natural-resource efficiency uses less energy and water while de-materializing the products and operations of the business. Sustainability results can be measured quantitatively.
The HIP Scorecard analyzes 30 metrics across five categories inspired by Maslow’s hierarchy of needs: Health, Wealth, Earth, Equality and Trust. Each category maps to a specific business result, from innovative products to inspired people to (potentially) increased profits and a more improved planet. More details on these metrics can be found in my recent book, The HIP Investor: Make Bigger Profits by Building a Better World (Wiley, 2010).
While companies are increasingly reporting a range of sustainability results, from staff diversity to water usage, investors can source data from the government (OSHA, EPA), nonprofits (opensecrets.org, CDProject.net) and academia (the ACSI.com).
Version 1.0 of socially responsible investing looked at policy manuals, but companies like BP excelled at words rather than actions. While BP was a solar-power leader in the 1990s, the Gulf of Mexico oil-gusher in 2010 was a result of terrible safety performance (860 violations over 3 years), which ultimately led to lax operational discipline and an environmental disaster that killed 11 people and seriously injured another seven.
Version 2.0, frequently called “sustainable” or “impact” investing, systematically tracks measurable results and how they can drive bottom-line value. Executives and Boards at companies who value people, engage stakeholders, and address their environmental impact incorporate these factors into a comprehensive, long-term, life-cycle approach and management discipline. HIP’s methodology also rates how companies integrate five dimensions – vision, metrics, financial alignment, accountability and decision-making – into strategic direction, capital allocation, and staff performance reviews.
The HIP Scorecard also quantifies revenue generated from positive-impact products. One example is Campbell’s Soup numerically categorizing its revenue by “milligrams of sodium per serving” per product. For fiscal year 2010, Campbell’s targeted 30 percent of its revenue from “lower sodium” products (480 mg/serving or less). As of the 2009/10 Sustainability Report, “wellness” and “heart healthy” products earned 26.8 percent of revenue. VP of Sustainability Dave Stangis works closely with CEO Doug Conant and Investor Relations to ensure that financial analysts understand how this benefits society and the financials.
These three categories – Products and Services; Operating Metrics; and Management Practices – are blended together into a company HIP Score. A firm’s score fluctuates yearly based on its sustainability results. HIP then can weight investor portfolios according to HIP Scores, including our HIP 100 Index, which has outperformed the benchmark since its inception on 7/30/2009 through 12/31/2010 (see www.hipinvestor.com
for details and disclosures). Future HIP indexes, such as an international equities version, are forthcoming.
Article by R. Paul Herman, CEO and Founder of HIP (Human Impact + Profit) Inc.
), an investment advisor and portfolio manager focused on quantifiable sustainability, including the HIP Indexes. Herman is author of the Inc. magazine business book bestseller,
The HIP Investor: Make Bigger Profits by Building a Better World (John Wiley & Sons, 2010); Before HIP, Herman was an investment strategist for eBay founder Pierre Omidyar’s Network, chief development officer at Ashoka.org, and in the McKinsey & Co. energy practice. Herman earned his finance degree at the Wharton School and teaches MBAs at the Presidio School (San Francisco) and Thammasat Business School in Bangkok. Herman is an advocate of the Investing Pledge
Disclosure and Disclaimer: R. Paul Herman is CEO and a registered representative of HIP Investor Inc., an investment advisory firm registered in California, Washington State and Illinois. This is not an offer of securities. All investing risks loss of principal, and past performance is not indicative of future results. All information here is for education and information purposes and NOT investment recommendations.