CREDIT: Ars Electronica (CC)

This is the final episode in a three-part series on conscious capitalism. Click here for part one and here for part two.

JULIA TAYLOR KENNEDY: In our final episode on conscious capitalism, we're examining conscious investment. Over several years reporting on business ethics, I can't count the number of times I've heard the line "Public companies can't just be about the long-term—after all, they have to answer to their shareholders next quarter." So what about those times when investors themselves act as a force for more social consciousness? It's something that's happening more and more. One study shows sustainable, responsible, and impact investment assets increased 76 percent between 2012 and 2014, rising to $6.6 trillion.

There are a few ways investors use their capital to encourage social change. One is by backing "impact investment funds," which support slower-growth businesses that will help alleviate poverty or achieve another social good in developing markets. Another tool investors use is socially responsible investing, putting money in public companies that meet certain requirements when it comes to sustainability, gender, safety—whatever issue is a priority for the investor. Both of these approaches have exploded in popularity in recent years despite a soft economy.

We'll explore why—and hear from experts about how much impact investors really can have on the companies they're backing.

JULIE FOX GORTE: My name is Julie Fox Gorte and I am senior vice president for sustainable investing at Pax World Management.

One of the things that I'd always done with government and non-profits in the years I worked for them was to do what I call, "save the world." I realize that sounds really corny but that really was what I was all about. I wanted to do something that would make the world a better place.

Then a headhunter called me and said, "I want to get you into the private sector." My first response was, "You must be kidding. What would they want with me?" He said, "Look, you can do what you do in the private sector, only you can do it with money." He sent me this job description and I went, "Huh. Who knew?"

JULIA TAYLOR KENNEDY: Gorte has a doctorate in economics and felt allergic to the idea of going into investment banking.

JULIE FOX GORTE: It was, "I don't really know anything about finance. It's different than economics. I hate it. I'm never going to do that."

What I found out was that finance and economics fill in each others' gaps. Both are fascinating, deep-dive kind of subjects. While economics is about what kind of value do things have and why, finances are about how to get the value out and into my hands. When I put them together it was much more powerful than either one alone.

JULIA TAYLOR KENNEDY: Today at Pax World, Gorte oversees funds that invest in companies meeting the organization's standards for sustainable environmental, social, and governance behavior. Pax World is very choosy about who they include in their funds. At any given time, the funds invest in 600 to 1,000 companies.

JULIE FOX GORTE: To stand out for inclusion a company has to think in terms of sustainability being more than just obeying the law. We can look at a thousand different companies' code of ethics and the typical code of ethics basically says, "We will, in this case, obey the law." Saying that you'll obey the law is not a code of ethics, that's what's required. I've never seen a code of ethics that actually says, "We will not eat our competitors," but cannibalism is against the law too. Why not just have those in your code of ethics?

A company stands out by saying, "We want to be more sustainable and the law is a floor. We can be above the floor. We can pay a living wage; we can make our operations carbon neutral." Whatever your deep impact is, you can do a little bit better than the minimum that's required by law and you can do that globally. So, the really good companies are the ones that say, "Here's what we aspire to do everywhere." Those are the ones that start to distinguish themselves.

Also the way a company distinguishes itself is to go through what we call a "materiality analysis," to say, "Where are the places where our footprints are deepest? Is it in safety? Is it in greenhouse gas emissions? Is it in cyber security? What is it that the stakeholders care about most and how can we protect them best? How is that going to contribute to our business?" So, that's another way to distinguish yourself as a company, to think through what your impact is beyond just creating jobs and economic activity and then say, "How can we use that to build our business?"

JULIA TAYLOR KENNEDY: Gorte also has her list of "no-nos" that mean a company isn't fit to be included in Pax World's funds. That's why the number of companies on her list fluctuates so much.

JULIE FOX GORTE: We have a lot of quantitative data available to us so we can look at a trend, for example, in patterns of safety violations and make them quantitative by saying, "Okay, we'll add up the dollar amounts of your fines, and the severity if there is a severity level from the agency that gives them. " Then we'll have a decay function for how many years ago it happened so you don't get penalized the same for something that happened eight years ago as you do for something that happened yesterday." That's essentially the way we do it.

BP had only had the one big thing, the Macondo well blowout. That was a significantly big thing and it wasn't an accident. BP had a horrible safety record. It ended up being an environmental problem but it was a safety problem that made it happen in the first place. They had a lot of warning.

So sometimes it's one big thing that you can trace back to company culpability and sometimes it's a whole long trend or a pattern of things that indicate, "Okay, if you have a policy it's not working." Or, "If you don't have a policy, you need one." It's a judgment call but it can also be very quantitative and in finance that's a big deal.

JULIA TAYLOR KENNEDY: Before kicking a company out of the Pax World funds, Gorte has a few interventions up her sleeve. The first: to contact a company directly.

JULIE FOX GORTE: If you've had a major safety problem or a pattern of safety problems we'll write and say, "This particular facility looks like something where there's a safety problem. Can you enlighten us on what you're doing to ensure this isn't repeated?" Sometimes companies don't get back to us, in which case we assume that they're not paying attention. Sometimes they do and sometimes they do what we want or we might compromise with them. It's an engagement, it's a dialogue.

JULIA TAYLOR KENNEDY: If a letter or call doesn't work, Pax World can file something called a shareholder proposal. It's a recommendation or requirement that the company take action on a given issue. This has to be filed a few months before a company's annual shareholder meeting.

JULIA FOX GORTE: If the company doesn't get back and reach a compromise with you or says, "Okay, we'll do what you want," or if it's not excluded by the SEC (Securities and Exchange Comission), that proposal will end up on the company's annual proxy ballot and all shareholders will vote on it.

JULIA TAYLOR KENNEDY: Then a third intervention is through a sort of multi-investor initiative.

JULIE FOX GORTE: For example, there's a group that's been around since about 2002 called the Carbon Disclosure Project, CDP. Originally I think it was just a handful of investors that got together and wrote to the 500 largest companies in the world and said, "We really think climate is a big risk and you should report on your greenhouse gas emissions and your climate related risks and opportunities." I think the first year the response rate was less than 50 percent. Now CDP, I think, is like—$40 trillion worth of investors are signatories to CDP and they write to several hundred companies, maybe even several thousand companies every year asking for greater disclosure of climate risks and opportunities. The response rate is about 75 or 80 percent now and it varies by continent.

That's another way for investors to band together to get the attention of companies to an area that we feel merits their attention en masse.

JULIA TAYLOR KENNEDY: Which begs the question: Who are these masses who are getting involved in sustainable investing?

JULIE FOX GORTE: You're going to find the scales start tilting towards two groups: women and millennials.

Millennials, it was funny; I have a fairly extensive relationship with our local university. My daughter goes to school there, we've hired interns from there, and I've given a couple of guest lectures at UNH, being the University of New Hampshire. I've heard the students put it in various ways but one of them I remember said, "No offense but your generation kind of screwed up the world." A lot of millennials basically feel that way. They feel as though they were handed something that used to be better and they now have to fix it and they want to start doing that earlier. The millennials really feel that way much more strongly than previous generations and they're starting to save earlier partly, I think, because this may be the first generation in America in a long time that hasn't grown up feeling like they're just going to be better off than their parents.

Women, similarly, tend to be more interested in sustainable investing. I think when their husbands die—women tend to outlive their husbands and the first thing many of them do is fire their financial advisor and get one who will help them in sustainable investing.

JULIA TAYLOR KENNEDY: Gorte says that one reason budget-conscious millennials and women are interested in sustainable investing—the funds actually perform quite well. Experts say positive returns is really what's driving the popularity of these socially conscious investors.

JASON BARON: What I am building at U.S. Trust are portfolios made up of sound, well-run, fundamentally attractive, strong balance sheet, socially acceptable companies that are not only not violating common practices but that are positioning themselves in a way to take advantage of what I consider to be some long-term mega trends, where there's a huge upside on the social piece, but there's also financial return.

This is Jason Baron. I am the managing director and senior portfolio manager for the socially innovative investing suite of strategies at U.S. Trust.

[Editor's note: At time of publication, Jason Baron was no longer working with U.S. Trust.]

JULIA TAYLOR KENNEDY: U.S. Trust is owned by Bank of America (BofA), which, like most of the big investment banks, is getting into the socially conscious investment space. BofA has over $9 billion in social investing strategies. About $1 billion of that is handled by Baron's social innovation investment team.

JASON BARON: It's a function of client demand. It was out of necessity. They realized that they need to have a product offering in this space or they were going to potentially be losing clients. The reason I also think that the space itself has become more advanced and more mainstream in the last five years is the availability of data, the technical expertise and what I would call the opportunity to build sophisticated portfolios that didn't exist 10 years ago.

JULIA TAYLOR KENNEDY: With this explosion of offerings for socially conscious investors, organizations are cropping up to help investors make sense of it all—and to help new entrants to the market learn best practices.

AMIT BOURI: Nothing will get organizations to move faster than client demand, so as the banks have heard more demand from their clients, they're now trying to develop products and opportunities that will service that demand. We're at the beginning of a big shift in the way that people are thinking about their investments, and the way that the financial services industry rises to that challenge.

Amit Bouri, chief executive officer of the Global Impact Investing Network.

JULIA TAYLOR KENNEDY: The Global Impact Investing Network connects organizations of many different kinds, who are all interested in creating a positive impact in the world through investing in the right companies and enterprises.

Something I learned through these interviews is that "impact investing" can have a lot of different definitions. But the most commonly accepted one seems to be a little different from what Gorte and Baron are focused on. Instead of helping investors find better public companies and maintain a high rate of return, many impact investment organizations help investors find opportunities where their money will have a big impact on a social issue like economic development or gender equity, often in the developing world.

AMIT BOURI: What impact investors do is that they try to directly capitalize businesses that are having an impact through their work, and help to scale them. As the companies grow, that means the impact grows, so that's really critical, to think about the role that they play, which is fueling the entrepreneurs who have these innovative solutions and these tremendous businesses, whether it's addressing sustainable agriculture, or if its building affordable housing projects, or creating access to education resources in poor communities. There's so much innovation happening around the world, and impact investors support the impact of those companies through financing their growth and development.

JULIA TAYLOR KENNEDY: With impact investment, rates of return usually aren't the top priority.

AMIT BOURI: There's a range of business models that they can invest in. Some of those can produce competitive rates of return, and others may not produce rates of return that you'd typically see in investment, but they're still sustainable, so they can still provide the investors with the return of their capital plus a more modest return.

JULIA TAYLOR KENNEDY: Surprisingly, Bouri says even though rates of return in impact investment aren't always high, his organization took off during and after the financial crisis.

AMIT BOURI: In many ways, it created an openness among some investors to think differently about their investments, and I think in many ways, it created a space from which people to explore different strategies for how they think about the role of their money.

What also has complemented this is an increase in awareness of inequality and the significant environmental challenges we face around the world. We're really seeing impact investing taking off in a way that's absolutely unprecedented. When we were first launched, we had 23 members in 2009, and we were thrilled to have 23 members, I should say, but it's almost grown by 10-fold, and we're now in 32 countries and we think that there's significant untapped opportunity to engage more investors in this movement.

JULIA TAYLOR KENNEDY: Primarily, his organization educates investors and impact investment organizations on how best to measure impact, beyond financial return, what outcomes demonstrate success.

AMIT BOURI: What are the objectives of the company and what is the way in which impact is built into the business model? So, are they producing a product that helps provide access to healthy foods for poor people? Are they providing a kind of a technology product that helps poor people access financial services?

So if there's that alignment in a business model, where impact is part of what the business is designed to achieve, then they can think about the best way to measure and monitor that performance.

JULIA TAYLOR KENNEDY: Bouri thinks that those companies out to achieve a social good need impact investors who are aligned with their goals—instead of pushing against them to only encourage profitability.

AMIT BOURI: Those companies that have a strong social or environmental mission, they are looking for investors where this is a source of alignment, as opposed to being a source of divergence and tension in the relationship. So, in many ways, impact investors serve an enabling function in helping to finance these companies that are trying, pursuing a mission, and want investors who are supportive of that mission promoting it and helping them as a partner in thinking about how they advance it.

JULIA TAYLOR KENNEDY: When he thinks about the ideal alignment between investor and company, Bouri thinks of a Kenyan solar company called M-KOPA.

AMIT BOURI: What this company does is that it creates access to home solar kits for people who are living off the electrical grid. So these are people living in more remote towns and villages who want the benefits of having an electrified home.

JULIA TAYLOR KENNEDY: Imagine the impact a solar panel kit could have on the economic development of a family who has never before had access to electricity.

AMIT BOURI: They essentially lease these systems, which put solar panels on the roof, give them the wiring to allow them to plug in their appliances, light their homes, and use safer ways of generating energy, so there's less pollution from burning fossil fuels, there's less health risks as a result, and it's much more environmentally sustainable.

JULIA TAYLOR KENNEDY: So these solar panel systems create quality of life, they're environmentally friendly, they improve health . . . some great outcomes of the investment in this company.

AMIT BOURI: Now, one of the things that happened is that many of our investors went in at a very early stage, and this company started to expand; so some of the investors involved were Gray Ghost Ventures, and the Gates Foundation actually made an investment in them as well. That company has continued to grow, to the point that they recently received a $20 million investment from another one of our members, Generation Investment Management. So what it's done is that it went from kind of a seed idea, led by some really dynamic entrepreneurs who are committed to making a difference in these communities that were far from the urban centers in Kenya. Then it's continued to grow as a company where it's now servicing thousands of families, with a much more sustainable, healthy, and safer way of having access to electricity in their homes.

JULIA TAYLOR KENNEDY: It's a very different investment prospect from the ones Bank of America is putting together. And you could ask, what effect could it possibly have on the entire global economy, that some investors are choosing to put their dollars into solar panels in Kenya, and others are backing funds that screen for social responsibility?

AMIT BOURI: There's a broader signaling effect this has, too, to corporations that may not have this type of a focus, which is now there is a constituency of investors who care about impact, and are both supporting it but also holding companies accountable to it.

That changes the way in which investors are starting to think about their investments and it also changes the way in which companies, management teams, are starting to think about the considerations that they have when they're setting strategy. Are we thinking about our impact on the communities? Are we thinking about our impact on the environment? So even those that are not impact investments, I think, will also be responding to this shift, which is almost a tectonic shift in the way we think about the role between investing and impact, which I think will have profound signaling effects well beyond the impact investing community itself.

JULIA TAYLOR KENNEDY: Profit is a really strong motive. For centuries, supporters and critics of capitalism alike have said that companies cannot be moral actors. Their purpose is instead to produce capital in the form of profits and goods, which in turn can provide livelihoods and improve the living conditions of those around them. A company's purpose is not to promote human rights or social responsibility.

But I think that with this series, we're documenting another possibility. Maybe there's hope that corporations, too, can yield to the pressures from conscious consumers, from idealistic executives, and impact investors, to behave as better citizens. Maybe there's hope that companies can find ways to act on social consciousness and, in that way, attract consumers, investors, and business leaders. Maybe businesses can be moral actors—and make a good bit of money at the same time.

Thanks for listening to Impact from the Carnegie Council. A special thanks to our production team, Amber Kiwan, Terence Hurley, Deborah Carroll, Alex Woodson, Matthew Sacco, and Tariq Kenney-Shawa.

I'm Julia Taylor Kennedy. You can find out more about this podcast at You can also find us on iTunes, or wherever you download your podcasts.

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