3 Questions Impact Investors Ask to Identify "High Impact" Companies
For the next few months, our friends and Net Impact members at HIP Investor will be contributing posts to help you break into the field of impact investing, learn how to measure impact across all types of investments, and find great places to work.
Intelligent investors know impact is a driver of potential profit and lower risk. That means impact investors are intelligent investors. Impact investors show their intelligence by analyzing and including knowable but largely ignored information in their decisions of company performance outside of traditional analysis, which typically measures only financial performance. Every company, public or private, has a societal as well as a financial impact. In public company markets, a number of different indicators determine environmental and social impact and help to demonstrate a net benefit to society. Very simply, three of the top questions we consider when evaluating a company are:
- How do companies value employees?
- How is sustainability integrated into decision-making?
- How efficiently are companies using natural resources?
Other indicators help determine if companies operate with transparency and accountability. Financial fundamentals are important for impact investors as an indicator of a company’s value creation, but impact investors also understand financials are largely influenced by other quantifiable impacts.
Companies that demonstrate an integration of sustainability principles and practices into operating metrics are considered to be high impact to both individual and institutional investors. Any firm can achieve this in a number of different ways. One such way is by categorizing employees as assets on a company’s balance sheet, as opposed to liabilities. An example of this comes from InfoSys (NYSE: INFY) and its model of Human Resource Valuation, documented in the company’s Annual Reports. Here, InfoSys acknowledges that human capital is mostly ignored by accountants and, instead, calculates its “human resources value” in addition to the value of its physical assets. Thus, return on assets includes people as an asset.
When companies build sustainability into the vision of the business, including performance metrics and decision-making processes, then corporate Boards and decision-makers within the company keep accountability high for delivering on sustainable results. An example of this is Paul Polman, CEO of Unilever (NYSE: UN), admitting publicly in May 2014 that embedding sustainability drives greater profitability and, subsequently, Unilever became more accountable to long-term stakeholders and intelligent investors. Innovative examples include Wal-Mart’s (NYSE: WMT) Supplier Scorecard, which seeks to deliver more sustainable results throughout the company’s value chain or Coca-Cola’s (NYSE: KO) ambitious goals for water efficiency. These knowable, public indicators provide information that allows both impact investors and conscious consumers to know that sustainability is part of the whole company, not just a sum of its parts.
Some companies take this concept a step further by reinvesting in employees to optimize their talents and potential. The Employee Scholar Program at United Technologies (NYSE: UTX) pays for tuition, books and other fees at approved institutions with the goal of achieving the “best-educated workforce on the planet.” These initiatives and management practices allow firms to acknowledge that innovation comes from people, not machines. This also expands their competitive advantage by becoming more attractive to talented applicants, in turn further enhancing asset value of the firm. Impact investors (including the investors we work with at HIP), have found that when these sustainable principles are part of a company’s day-to-day operations, staff are generally more productive, and the company’s financials show lower expense and less risk to investors, allowing for a company to be more innovative and pursue the fundamental goals of business – to solve human needs.
HIP (Human Impact + Profit) Investor is an expert in rating investments (4,500 companies and 4,000 governments and nonprofits), applying those ratings to portfolios, and managing money for investors. In addition to measuring impact, HIP’s Ratings are leading indicators of future risk and return potential. HIP's Ratings measure quantifiable results, such as human capital value and carbon efficiency. HIP serves investors, advisors, fund managers, and 401(k) plans seeking to manage future risk, return, and impact.
