Until recently, when companies looked at society, all they saw were costs and risks: regulations, taxes, lawsuits, complaints, grant requests. Activists protest and boycott companies to expose other “hidden” costs, such as globalization, discrimination, ozone depletion, animal testing, and human rights violations. Economists call these costs “externalities.” Policymakers develop regulations and taxes to force companies to internalize the costs of these externalities. And the market discounts or “prices” certain externalities into the value of a business. All of this reinforces the view that for business, society only shows up on one side of the balance sheet.

Although these costs aren’t going away (in fact, they’re probably getting even bigger, as the 2010 BP oil leak in the Gulf of Mexico vividly demonstrates), businesses are now beginning to see the “hidden” economic benefits of solving intractable problems facing society. The famed bottom of the pyramid is just the tip of the economic iceberg. Embracing the business potential of issues like the environment, education, health care, hunger relief, discrimination, and economic development could earn companies tens of billions of dollars, open up new markets, attract new customers, prompt new innovations, and dramatically lower costs. I refer to this unrealized market potential as “social arbitrage.” Indeed, the economic value of social change (by investors, employees, customers, and consumers) has given birth to an entirely new market: a social capital market.

To capitalize on this new market potential, companies will need to transcend the current mind-set around compliance and responsibility and focus on value creation. The following chapters set forth the context (and logic) for a fundamentally different approach to the business of social change.

Social issues always used to be an afterthought for corporations. Businesses focused first on making money; then, once bills were paid and profits booked, they looked for ways to “give back.” That’s because, as Milton Friedman always said, the business of business is business. And for most corporations, this will always be true. But the business of business is changing, in large part because issues previously considered “soft,” like the environment, education, health care, and global development, now have hard economic impacts. Indeed, when it comes to making key economic decisions, mainstream investors, consumers, CEOs, employees, the media, and Wall Street increasingly value social and environmental impacts. It said a lot when, in 2009, financial data giant Bloomberg decided to include environmental, social, and governance information (ESG) on 2,000-plus companies for clients using their 250,000 data terminals.

This new economic reality has completely transformed the role of business in society (and the role of society in business). Today, corporate success increasingly depends on social change. Think about it: companies across sectors cannot grow without tapping into underserved “social” markets like the uninsured, urban food deserts, or giant developing economies like India. Companies cannot take advantage of these new markets without developing “social” products and services. Companies cannot hire the talent they need, especially in developing countries, without improving educational opportunities for young people. And companies cannot build brand loyalty without a social or emotional bond to the customer. These are all characteristics of a new economy—a social capital market that attaches economic value to social change. To maximize growth and profits, companies have to understand the magnitude of this social capital market in which they operate, its drivers, and all its implications for them. Simply put, social change has become a valuable economic commodity: people are willing to pay for it, sacrifice for it, invest in it, and work for it. As a result, corporations are desperately trying to figure out how to produce it.

Does that mean companies have to sacrifice profits in order to do good? Quite the opposite. Because the market now values social impact, companies are no longer expected to be purely altruistic. In other words, it’s okay to use social change as a business strategy. Venture capitalists invest in renewable-energy companies mostly because they’re expecting outsized returns—that they’re good for the environment is more or less a bonus. Electronics giant Siemens AG earned 17 billion euros in 2007 (nearly 25 percent of its revenues) from environmental and climate-related products like wastewater reuse systems and CO₂ abatement products.² We as consumers are part of this trend too: we purchase hybrid cars not just to show solidarity for the environment, but also to protect our wallets when gas prices are high; we use websites like kiva.org to make microloans to poor entrepreneurs and get our money back (in some cases, even with interest). In each of these instances, corporations and people are driven by a compelling economic motive to make positive social change. Indeed, through creative market mechanisms like these, corporations, consumers, and investors are finding ways to value social change beyond mere tax incentives and psychic benefits.