Part I
THE NEW ECONOMICS OF SOCIAL CHANGE
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 âhiddenâ costs, such as globalization, discrimination, ozone depletion, animal testing, and human rights violations. Economists call these costs âexternalities.â Policymakers develop regulations and taxes to force companies to internalize the costs of these externalities. And the market discounts or âpricesâ 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 arenât going away (in fact, theyâre probably getting even bigger, as the 2010 BP oil leak in the Gulf of Mexico vividly demonstrates), businesses are now beginning to see the âhiddenâ 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 âsocial arbitrage.â 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.
Chapter 1
THE RISE OF THE SOCIAL CAPITAL MARKET
The current economic crisis does not represent just
another economic cycle; it represents a fundamental
reset ⌠an emotional, social, economic reset.1
âJeffrey Immelt, CEO of General Electric
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 âgive back.â Thatâs 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 âsoft,â 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 âsocialâ markets like the uninsured, urban food deserts, or giant developing economies like India. Companies cannot take advantage of these new markets without developing âsocialâ 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 economyâa 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, itâs okay to use social change as a business strategy. Venture capitalists invest in renewable-energy companies mostly because theyâre expecting outsized returnsâthat theyâre 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.
Size of the Social Capital Market
Indicators of the social capital marketâs size are everywhere you lookâand many places you may not. Consumers are putting unprecedented numbers of hybrids and other fuel-saving cars on the road. The number of articles in major magazines and newspapers about biofuels, solar power, or any kind of up-and-coming alternative energy is soaring. Overall, U.S. consumers are estimated to spend over $220 billion annually on goods and services related to health, the environment, social justice, and sustainable living; this market comprises sixty-three million consumers, or 30 percent of the U.S. market.3
Itâs no surprise that companies are investing heavily to capture a piece of the social capital market, spending a combined $32 billion annually on environmental sustainability, governance, risk, compliance, social responsibility, and philanthropy.4 The social capital market is also driving increasingly significant profits with products that promote positive social and environmental change: as mentioned earlier, Siemens AG derives almost 25 percent of its revenues from environment-related products, and GEâs ecomagination strategy generated more than $17 billion in 2008 from eco-innovations in wind turbines, water desalination, and other areas.5
The social and environmental dimension of the investment industry is booming. There are 260 socially screened mutual fund products in the United States, with assets of $201.8 billion. A total of $2.71 trillion in the United States (and about $6.8 trillion globally6) is invested more broadly in various funds, pensions, trusts, and other vehicles that use one or more of the three core socially responsible investing (SRI) strategiesâscreening, shareholder advocacy, and community investing.7 What is most interesting, though, is that the fastest-growing area of SRI is community investing. Over the past decade, community investingâputting money into underserved communities as an investment strategyâhas grown an astounding 540 percent, from $4 billion to $25.8 billion in assets.8 The investments earn competitive returns, but also produce an attractive social return by giving lower-income people access to capital, credit, and training in communities that lack affordable housing, child care, health care, and jobs that pay a living wage.9
Where is all this money coming from, and why? According to the European Social Investment Forum, there are four key drivers: an increasing demand from institutional investors, for which responsible investment becomes a matter of risk management, particularly around the area of climate change; a further mainstreaming of environmental, social, and governance (ESG) considerations into traditional financial services; external pressure from nonprofits and the media; and a growing interest from individuals, particularly the wealthy.10
The Dow Jones Industrial Average now has its own socially responsible twin, the Dow Jones Sustainability World Index (DJSWI), which comprises several different indices based on the top 10 percent of companies driving sustainability worldwide. The DJSWI grew over 36 percent in 2009.11 Not to be outdone, Goldman Sachs, still one of the most venerated Wall Street firms and a survivor of the recent financial services collapse, has developed its own index, called GS SUSTAIN, which outperformed the market by 25 percent by incorporating ESG data.12 Late 2009 saw the formation of the Global Impacting Investing Network (GIIN), a public-private partnership supported by J.P. Morgan, Citigroup, the United States Agency for International Development (USAID), and the Rockefeller Foundation, among others. The GIINâs charter is to develop a better industry infrastructure, along with enhanced metrics and reporting standards, for socially responsible investing. Itâs another clear indicator of the growing social capital market.13
Itâs hard to say just how big the social capital market is, given its broad contours and dynamism. By several estimates, it represents a many-trillion-dollar business opportunity, with just the purchasing power of the bottom of the pyramid (that is, the worldâs poorest populations) alone estimated at $5 trillion; such realities are motivating corporate giants like Microsoft and a host of others to view âinequity as a business problem as well as something to be addressed through philanthropy.â14 Thus for todayâs companies, itâs not a question of whether to engage in this market, but how. To answer that, we have to understand the primary drivers behind the social capital market, or what weâll call the âSCMâ in this book.