We continue the discussion of our CLIMATE model, which is an acronym for getting people to act. This blog covers the “M” of the model, motivating people to act. Motivation contains several components, but in this blog I focus on how the market encourages people to take action. More specifically, I prescribe engaging in impact investing and the pricing of natural capital.
Impact investing is a high-potential approach to long-term societal, environmental, and financial value creation. Successful impact investing takes a unique understanding as compared to established investment theories and practices.
Impact investing fits into the larger universe of investment approaches that attempt to create social and environmental impact. See the Global Impact Investing Network for an overview of this approach.
The overarching term we will use is systems-level investing. Other investment approaches under this term include:
- Environmental, Social, and Governance (ESG) integration into investment decisions. See the United Nation’s Principles for Responsible Investment (UNPRI) and their 6 principles and the Sustainability Accounting Standards Board (SASB) that explain this approach. Generally speaking, this is a screen used to choose companies for investment based on their adherence to quality ESG standards; and
- Socially Responsible Investing which uses a negative, exclusionary screen. Negative screening is the conscious decision not to invest in companies that are inconsistent with the personal values of the investor such as firms that produce tobacco, oil, or firearms.
Impact investors seek to generate environmental and social impacts with financial returns. Investors have applied this emerging investment strategy across asset classes (mostly debt and private equity) and to critical issues such as resource management, community development, poverty alleviation, gender equality, social enterprises, health, and education.
SP3 is starting a fund to address four areas within the Charlotte region: (1) upward mobility, (2) affordable housing, (3) water-energy nexus, and (4) food insecurity. These four areas are important needs in the region. For example, in a 2013 study by Harvard University and UC Berkeley, Charlotte-Mecklenburg ranked 50 out of 50 in economic mobility among the largest U.S. cities. Meaning, the likelihood of a child born in the bottom income quintile rising up to the top income quintile as an adult is the lowest of all 50 cities.
Other statistics draw SP3’s attention to the regional needs as well. For example, 79 percent of children in the Charlotte region are eligible for free or reduced priced school lunches and 22 percent of the children in our region live in food insecure homes and do not know where their next meal will come from. For context, 18 percent of the overall population is labeled as food insecure. Additionally, approximately 527,000 people in the 19 county regions live at or below the poverty line.
So, how can we use impact investing to address these issues? Successful impact investing funds such as Acumen, Root Capital, and Bridges serve as excellent case studies. If we can move beyond the philanthropy treadmill and solve problems while simultaneously providing investors with returns, we will make more progress in addressing social and environmental issues.
Additionally, we support the UN’s Sustainable Development Goals by focusing on the following goals (primary focus highlighted): (2) Zero Hunger; (6) Clean Water and Sanitation; (7) Affordable and clean energy; (8) Decent work and economic growth; (10) Reduced inequalities (13) Climate Action. These goals match several challenges in Charlotte’s region.
Another way to motivate people to act is by providing pricing information so they can make smart investment decisions. Pricing information motivates people because they can use this information to create investment returns. In this case I am referring to pricing natural capital.
Analysis of how the natural environment impacts a firm’s strategy can be a highly effective way to understand its means of creating value. This analysis may call for new ideas and concepts. For example, consider the six types of capital:
- Human (in the form of labor, intelligence, culture, and organization)
- Financial (consisting of cash, investments, and monetary instruments)
- Manufactured (including infrastructure, machines, tools, and factories)
- Social (in the form of social networks and relationships)
- Intellectual (intellectual property rights, patents, and codified knowledge)
- Natural (resources, living systems, and ecosystem services).
Natural capital is all the familiar resources used by humankind such as water, minerals, oil, trees, fish, soil, and air. It also encompasses living systems such as grasslands, savannas, wetlands, estuaries, oceans, coral reefs, riparian corridors, tundra, and rainforests.
Ecosystems, which provide the resources necessary to our existence, are critical to our survival. Yet, they are often overlooked when organizations consider the risks and strategies of their operations. Nevertheless, the value of ecosystems becomes evident when considering available scientific evidence:
- Ecosystem services such as providing food, soil formation and recreation, are provided by natural ecosystems and are essential to civilization;
- Ecosystem services operate on such large scales and in such intricate and little-known ways that most cannot not be replicated by technology;
- Many of the human activities modifying or destroying natural ecosystems may cause deterioration of ecological services; the value of those services, in the long term, usually dwarfs any short-term economic benefits;
- Considered globally, large numbers of species and populations are required to sustain ecosystem services;
- Human activities are already impairing the flow of ecosystem services on a large scale;
- If current trends continue, humanity will dramatically alter nearly all of the planet’s remaining natural ecosystems within the next 50 years.
Given these trends, firms can enhance their competitiveness by taking steps to assess the value of ecosystems to their businesses. To grasp the value of these systems, consider how natural ecosystems perform countless services that, in many cases, could not easily be supplanted by technology (if at all) in a sustainable manner. Examples include: provisioning services such as water, timber, and fish; regulating services (e.g., mitigation of droughts, floods, and climate change); cultural services (e.g., aesthetic and recreational benefits); and supporting services (i.e., fundamental processes such as carbon cycling and photosynthesis).
Organizations could enhance their competitiveness by taking into account this natural capital by placing a value on them. Developing strategies for preserving natural systems is difficult and imprecise because many of the services we receive from living systems have no known substitutes (e.g., photosynthesis and water). Also, just as machines cannot provide substitutes for human intelligence, knowledge, wisdom, and organizational abilities, technology cannot always replace our planet’s life-supporting systems. The World Bank’s Wealth Index description makes this point as it describes the value of natural capital to the development of nation states. The introduction in a 2011 report states: “It is striking that natural capital constitutes a quarter of total wealth in low-income countries, greater than the share of produced capital.”
This quote suggests that better management of ecosystems and natural resources will be key to sustaining development while these countries build infrastructure as well as human and institutional capital. For example, cropland and pastureland comprise 70 percent of the natural wealth of poor countries; this argues for a strong focus on efforts to sustain soil quality. Yet, challenges abound. For example, salt water is increasingly penetrating Vietnam’s Mekong Delta which impacts rice fields, farms, and the quality of soil along the Delta.
This new approach to capital also provides a comprehensive measure of changes in wealth, which is a key indicator of sustainability. There are important examples of resource-dependent countries, such as Botswana, that have used their natural resources to underpin impressive rates of growth. In addition, research finds that the value of natural capital per person tends to rise with income when we look across countries. This contradicts the common wisdom that development entails the depletion of the environment.
Therefore, we must take into account these important sources of wealth, especially as we consider how to increase the value of companies. This focus demands we pay attention to the state of natural resources and their ecosystems in environments where firms operate. Firms do these analyses so these resources can be taken into account as we mount organizational strategies that are responsive to the environment and to the protection of resources. For more specific information on valuing nature, review my presentation on Valuing Natural Capital.
This post has been adapted from Chapter 1 in Daniel S. Fogel (2016). Strategic Sustainability: A Natural Environmental Lens on Organizations and Management. New York, New York: Routledge.