Quantification Matters How to Mobilize Finance for Social Impact

WBCSD Leadership Program 2016

Executive Summary

1. Introduction

2. Demystifyingfinancingforsocialimpact

3. Theinvestorperspective:Socialimpactisseenasavaluebutneeds tobequantifiedtomobilizefinance

4. Thecorporateperspective:Howsocialimpactneedsbusiness stringencytoexcel

CaseStudy:Statoil’sapproachtosocialimpact

CaseStudy:Total’seffortsasapartnerfordevelopmenttomitigate risksandobtainalicensetooperate

CaseStudy:ABBandInternationalCommitteeoftheRedCross microgridpilotproject

CaseStudy:LafargeHolcim’sAffordableHousingprogram

5. Conclusions&recommendations

Acknowledgments

Authors

Disclaimer

Endnotes

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Contents

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Executive summary

Theprivatesectorisincreasinglyperceivedasapowerfulactorwitharesponsibilitytodrivesocialprogress.1Onereasonforthisisthat,unlikeotheractors,theprivatesectorhastheabilitytotransformsocialneedsintobusinessopportunities.Theneedforactionishugeastheworldfacesmultiplesocialproblems,forexample,poverty,hunger,violence,lackofeducationoraccesstohealthcare.The“systemtransformation”2 the17UNSustainableDevelopmentGoals(SDGs)callforisanindicatorofthesheermagnitudeofthesesocialproblemsandhintsatthesignificantbusinessopportunitiesthatlieinaddressingthem.And49%oftheworld’sCEOsbelievethatbusinesswillbethesinglemostimportantactorindeliveringonreachingtheSDGs.3

However,despitethislarge-scaleopportunity,theprivatesectorappearstobestrugglingtoact.Thereareanumberofreasonsforthis,rangingfromalackofawarenessandunderstandingofthevalueofsociallyresponsibleproductsandservicestoalackofskillsandhumancapitaltodrivesocialimpact.Oneofthemostfrequentlycitedreasons,however,isthelackofinvestmentforsocialimpact.

Yet, it is possible to mobilize mainstream finance for positive social impact4 —as thisreport’sfindingssuggest:

1. Mainstream finance mechanisms are more powerful in creating social impact at scale than a separate asset class (for example, social impact bonds):

• Itisamyththatsocialimpactbondsareapanacea—theirrisk/returnprofilemakesthemunviablefortraditionalinvestors.

• Thesheersizeofmainstreamfinancialassetsindicatesthatmainstreamfinanceisthemorepowerfullevertocreatepositiveimpactatscale.

• Toachieveviableandscalablesocialimpact,companiesneedtomobilizesupportfrominstitutionalinvestors.

“Thisreportimpressivelydemonstrateshowimpactandfinancialvaluegohandinhand.Theprivatesectorcanbeacentralactorforpositivesocialimpact,transformingglobalproblemsintoopportunities.Moreclearlycommunicatingthebusinesscaseoftheseopportunitiesisthekeytomobilizefinance.”

Peter Lacy, GlobalManagingDirector,AccentureStrategy,Growth&Sustainability

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2. The shareholder value maximization ideology used in isolation is a barrier to mobilizing mainstream finance for social impact, in particular, short-termism. Yet, this ideology could be overcome:

• Thelegalobligationofcompaniestomaximizeshareholdervalueisamyth.Companiesarefreetoactforallstakeholders,notjustshareholdersandinvestors,solongasitisinthebestlong-terminterestofthecompany.

• Only17%ofinvestorssurveyedbelievedthatrunningacompanysolelyinthebestinterestsofshareholdersisinthebestlong-terminterestofallstakeholdersandthecompany.

• Inordertofueltheflowofcapitalintoprojectsthatcreatesocialvalue,companiesneedtoovercomethebarrierthathasbeencreatedbyshort-termincentivesinstalledinmanagementboardsoverthelastdecadesandtherelatedhabits.

3. Creating positive social impact can present a good business case for creating value and reducing risk:

• Pioneeringcompaniesarereportinghighergrowthratesforproductswithdedicatedsocialbenefitsincomparisontotherestoftheproductportfolio.

• Themajorityofinvestorssurveyedbelievethatthemainbenefitofinvestinginsocialimpactingeneralistomitigaterisksandobtainalicensetooperate,butalsofeelitcancreatevalue.

• Companiesshouldstarttomanagesocialimpactliketherestofthebusiness,forexamplebyintroducingasustainability/socialimpactkeyperformanceindicatorforallproducts,managedwiththesamerigorandstringencylikefinancialKPIs.

4. There is a social impact business case communication gap: investors, both institutional and corporate, do not (yet) perceive that social impact delivers financial value:

• AstheUnitedNationsGlobalCompact—AccentureStrategyCEOStudypointsout,57%ofbusinessleadersfeelthattheycandetailtheirstrategytoseizesustainabilityopportunities;butwheninvestorswhereaskedthesamequestionaboutthecompaniestheywereinvestingin,only8%ofinvestorsbelievethistobethecase.

• Only17%ofinvestorsoftenoralwaysknowaboutsocialimpactinitiativesatthecompaniestheyinvestedin.5

• Companiesshouldengageregularlyandactivelywithinvestorsontheirsocialimpactinitiatives.Suchcommunicationshouldbeasstringentasfinancialcommunicationandfocusonhowsocialimpactinitiativesreducerisks,increasethevalueofthecompanyorreducecosts.

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5. The social impact business case needs to be communicated more clearly and quantitatively in order to raise capital for social impact and create social value:

• Two-thirdsofinvestorssaythatarticulationandquantificationofthebusinesscasewouldincreasethelikelihoodthattheywouldfinancesocialimpactinitiatives.6

• Quantificationdoesnotnecessarilyneedtobemonetary.Companiescansatisfyinvestorexpectationsusingexistingtools,suchascost-benefitanalysis,quantificationofrisk,anddemonstratingsuccessfulinternalpilotprojects.

• However,manycompaniesarestillstrugglingtoquantifythesocialimpactbusinesscase.7

• Companiescanpartnerwithleadingnon-governmentalorganizations(NGOs),internationalorganizationsanddevelopmentbankstofinancetheearlystagesoftheirsocialimpactprojectsuntiltheyareabletodocumenttheproofofconceptandprepareabusinesscasetoscaletheseprojects.8

Overallcorporatemanagersandinvestorsneedtomakeafundamentalchangefrom“shareholder”to“stakeholder”valuemaximizationintheirheadsandeverydaypractices.Oneofthebiggestleverstodrivesocialimpactisamindsetshiftfromsocialimpactasphilanthropytowardssocialimpactasbusinessopportunity.

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Socialproblemsplaguetheworld—poverty,hunger,lackofaccesstoeducationandhealthcare,lackofhousingandsanitation,economicinequality,violenceandcriminalactivity—tonameafew.TheUnitedNation’sSustainableDevelopmentGoals(SDGs),signedby193statesin2015,aimfortotaltransformation:nopoverty,nohunger,universaleducation,universalhealthcoverage,andpeace.9

Theprivatesectorisincreasinglyseenasapowerfulactorwitharesponsibilitytocontributetosolvingsocialproblems.10And49%oftheworld’sCEOsbelievethatbusinesswillbethesinglemostimportantactorindeliveringtheSDGs.11

Therearealsoindicationsthatcreatingsocialgoodmakesgoodbusinesssense.Evidencesuggeststhatconsumerscare,andthathavingagoodsocialbalancesheethelpstosecureacompany’slicensetooperateandtocreatefinancialvalue.However,despitethisopportunity,theprivatesectorappearstobestrugglingtoact.Thereareanumberofpossiblereasonsforthis,rangingfromalackofawarenessoruncertaintyofthevalueofsociallyresponsibleproductsandoperationsthroughtoalackofskills,capabilitiesortherightpeople.

Oneofthemostfrequentlycitedreasonsisthestruggletomobilizefinanceforsocialimpactand,inparticular,thedifficultyingettingmainstreaminvestors,asopposedtoangelinvestorsorimpactinvestors,onboard.

Obtainingcapitalflow,however,couldbeapowerfulcatalysttosolvesocialproblems.Thesizeoftheproblemsimplieshugebusinessopportunities,yetthereislittlemainstreaminvestmentflowingintothispurposeandlittleunderstandingofhowtostartmobilizingit.

The core question is:

How can mainstream finance be mobilized to invest in positive social impact?

Toanswerthisquestion,wedevelopedasetofhypotheses—ourthinkingonwhat’scurrentlystoppingfinanceandwhatcouldmobilizeit:

1. Mainstreamfinancemechanismsaremorepowerfulincreatingsocialimpactatscalethanaseparateassetclass(forexample,socialimpactbonds).

2. Theshareholdervaluemaximizationideologyisabarriertomobilizingmainstreamfinance;inparticular,short-termismhinderssocialimpactfinancing.

3. Positivesocialimpactcanbeagoodbusinesscaseforcreatingvalueandreducingrisk.

4. Thereisasocialimpactbusinesscasecommunicationgap:investors,bothinstitutionalandcorporate,donotperceivethatsocialimpactdeliversfinancialvalue.

5. Thesocialimpactbusinesscaseneedstobecommunicatedmoreclearlyandquantitativelyinordertoraisecapitalforsocialimpactandcreatesocialvalue.

1. Introduction

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Tobettershapeourunderstandingoftheproblem,weconductedaliteraturereview,synthesizingwhatweknowaboutthedevelopmentsandstatusoffinancingsocialimpact,andinparticulartheinvolvementofmainstreaminvestorsandthevalidityofourhypotheses.Seechapter2forabriefoverview.Wethenconfirmedtheseperspectivesand sought to hear the voice of investors through a surveyof24ofthem.Thisisoutlinedinchapter3.Toanalyzethecorporateperspective,weconductedfourin-depthcasestudiesonleadingglobalbusinesses.Presentedinchapter4,theyhighlighttherangeofsocialimpactinitiativesandhowthesehavebeenfinanced.Todrawaholisticpicture,weexaminedeachcasefromtwokeyperspectives:thecompany’sandtheinvestor’s.Finally,wesynthesizedourfindingsandprovidesomerecommendationsonhowtobridgethegapbetweentheneedforsocialimpactfinanceandtheactualmobilizationoffinance(chapter5).

“Theprivatesectorhastheabilitytotransformproblemsintoopportunities.Thesocialproblemsarehuge,soaretheopportunities.“The authors of this report

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1. Mainstream finance mechanisms are more powerful in creating social impact at scale than a separate asset class (for example, social impact bonds).

AccordingtotheWorldFederationofExchanges(WFE),theworldbankingsectormanagesUS$140trillioninassets,institutionalinvestors(e.g.pensionfunds,universityendowments,etc.)manageoverUS$100trillioninassets,andcapitalmarkets,includingbondsandequities,exceedUS$100trillionandUS$73trillionrespectively.Whileitisdifficulttoprovideexactfigures,theremaybeuptoUS$413trillioninassetsundermanagementglobally.

Inrecentyears,theworldhasseenagrowingpoolofassetsorcapitaldedicatedtotryingtodeliverbothfinancialreturnsandapositiveimpactonsocietyand/ortheenvironment.However,theobjectives

2. Demystifying financing for social impact

anddefinitionsofwhatconstitutespositiveimpactdifferfrominvestmenttoinvestment.Asaresult,itisdifficulttoknowtheexactsizeoftheimpactinvestmentmarket.OnedefinitionisassetsthatfallundertheUNPrinciplesforResponsibleInvestment(PRI),whichhassome1,500signatoriesandholdsaboutUS$62trillioninassets.12Arecentsurveyestimated125impactinvestorsmanagesomeUS$60billion.13However,thisnumberisforbothsocialandenvironmentalimpact,soitisunclearhowmuchofittargetssocialissues.

Toputthisinperspective,thisisaround0.0001%ofglobalassets(asillustratedinfigure1).Thisisapproximatelythesamevolumethatasinglecompanycanraiseinoneday(forexample,in2013,Verizon,aUS-basedtelecommunicationscompany,raisedUS$49billioninoneafternooninordertopurchaseVerizonWirelessfromVodafone).

Figure1:Overviewofassetsundermanagement:global,UNPRIandimpactinvestments

0

50

100

150

200

250

300

350

400

450

Estimated global assets UN PRI assets Impact investment assets

≈ 0.0001 % of estimated global assets

≈ 0.0004% of bonds and equities on capital markets

≈ The amount of capital Verizon managed to raise in one day

Numberpossiblylowerduetoariskofdoublecounting.However,min.overUS$173trillioninbondsandequitiesoncapitalmarkets

Indicative

Ass

ets

und

er m

anag

emen

t (U

S$

trill

ion)

413

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0,06

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Ourinterestisinwhatitwouldtaketogetassetsatscalechanneledtowardscreatingsocialimpact.Therearetwooptions:A-introducenewproducts,forexample,anewassetclasslikesocialimpactbonds;orB-mobilizefinancewithexistingmechanisms(seefigure2).

OptionBseemsmorepromisingthanoptionA,notjustbecauseofthedrasticdifferencesincurrentcapitalvolumes.

Forexample,separatesocialimpactassetclasses,suchassocialimpactbonds(SIBs),havebeenheraldedasonepotentialwaytoclearlyframe,understandandfundsocialimpactandengagemainstream investors. This funding mechanism has receivedwidespreadrecognitionaspotentially,themosteffectiveinstrumenttofinancesocialimpact.

Socialimpactbonds,however,talktoaveryspecificfundingmechanismthathasrestrictionsonwhenandhowitcanbeused.Theyaredifferenttowhatisusuallyunderstoodasabond,theyhavehigherrisks,andtheyarelimitedintermsofvolume(seeboxonthemythofsocialimpactbonds).14

Giventheselimitations,SIBscan’trealizethepotentialofmainstreamfinance.

Figure2:Howtomobilizefinanceforsocial impact

How to mobilize finance for social impact?

A) Introduce dedicated social impact “products”

B) Mobilize finance with existing mechanisms

Less promising for the size of impact needed

More promising for the size of impact needed

Option Our assumption

The myth of social impact bonds Socialimpactbonds(SIBs)mixriskandreturnbetweeninvestorandgovernmenttofundsocialimpactinitiatives.BeforetheemergenceofSIBs,itwasmainlythegovernment’sresponsibilitytoidentifysocialproblems,findsolutionsandfinancetheprojects,andsolelybeartheriskoffailure.SIBsmakeuseofprivatefinancingchannelstofundtheprojectsandareonlyrepaid(withaprofit)ifsuccessful—transferringtheriskoffailurefromgovernmentstoprivateinvestors.Therearecurrently60socialimpactbondswhichhaveraisedjustover$200millioninfunding.

WhileSIBsarecalledbonds,theirstructureandrisk/returnprofileiscompletelydifferentfromthatofatraditionalbond.Atypicalbondinvestorlendsmoneytoanentityinreturnforapre-definedstreamoffixedcouponpaymentsandthereturnoftheinitialprincipleborrowed.Intheeventoffailureordefault,theyalsogetapriorityclaimonanyassets.ThisisinstarkcontrasttothevariablenatureofboththecouponpaymentsandtheprinciplewheninvestinginanSIB.

Thissimpleyetcriticaldifferencefundamentallychangestherisk/returnprofileandthereforetheviabilityofSIBsforthetraditionalinvestorbase,leavingasignificantnumberofinvestorseitherunableorunwillingtoinvest.ThegrowthofSIBsisalsoboundbytheamounttowhichgovernmentsareultimatelywillingtofundprojects.ThismeansthatthereislikelytobeacaponhowmanySIBscanbedeployedandacaponwhoislikelytoinvestinthem.

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2. The shareholder value maximization ideology is a barrier to mobilizing mainstream finance for social impact; in particular, short-termism hinders social impact investing

Theconceptofmaximizingshareholdervalueshapesnotonlytheinvestorbutalsotheentirecorporateworld.

Fromaninstitutionalinvestor’sperspective(thosepeoplewhoinvestonbehalfofclients)theimperativetomaximizeshareholdervaluestemsfromthedirectivegiventothembytheirunderlyingclient.Onthewhole,institutionalinvestorsaregivenamandatetomaximizereturnswithinagivenriskframeworkandtendtobemorefocusedontheshort-tomedium-term,largelyduetoquarterlyandannualreportingcycles.Therefore,itisintheinterestofboththeinvestorandtheunderlyingclient/investortoallocatecapitaltocompaniesthatareperceivedasfocusingprimarilyonmaximizingearnings.

Fromthecompany’sperspective,ithasbecomeincreasinglypopulartoalignshareholdersandmanagementbygivingmanagersastakeinthebusinessinordertoensurethatmanagementactsinthebestinterestofshareholders.Overthepastdecades,companyexecutiveshavebeenincreasinglyremuneratedinsharesandstockoptionsandhadearningsincreasinglytiedtofinancialprofittargets.Thisensuresthatmaximizationofshareholdervalue,andtherelatedshort-termmotive,sitsatthetopofthecorporateagenda.

Puttingshort-termshareholderreturnattheforefrontofmanagementthinkingoftenincentivizescompaniestosacrificesocial,environmentalandotherlongertermvalue:“80%offinanceofficerswouldcutexpenseslikemarketingorproductdevelopmenttomaketheirquarterlyearningstargeteveniftheyknewthiswouldhurtlong-termcorporateperformance.”16 This reductive strategy diminishesthecompany’sabilitytobesustainableinthelongterm.Itreducesinvestmentsinfutureproductsorservicesandindevelopingahealthysocietythatcansupportbusiness.Thelogicbehindthecurrentsystemleadstoadownwardspiralforeconomicandsocialdevelopment.

“Thebiggestissuewehaveasinvestorsisshort-termism;andeverythinggovernmentsandregulatorshavedonedrivestowardsmoreshort-termism.”15

Andreas Utermann, CIO,AllianzGlobal

The myth of a legal obligation for short-term shareholder value maximizationThereisnocaseorlegislationthatdeterminesthatexecutivesandboardsmustoperatecompaniesforthesolepurposeofmaximizingshareholderreturns.Infact,theoppositeistrue;courtsintheUnitedStatesofAmericausethebusinessjudgementrule,whichstates:“Solongastheboardofdirectorsisnottaintedbypersonalconflictsofinterestandmakesareasonableefforttobecomeinformed,courtswillnotsecond-guessboarddecisionsaboutthebestinterestsofthecompanyevenwhenshareholderinterestsarenotfirstinline.”Companyexecutiveshaveadutytooperateinthebestlong-terminterestsofacompanyandarefreetotakeintoaccountallstakeholderswhendefiningcorporatestrategyandnotjustprioritiseshareholders.

Source:Stout,L.(2012).TheShareholderValueMyth:HowPuttingShareholdersFirstHarmsInvestors, Corporations,andthePublic.

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Manypeopledismisstheseproblemswiththecurrentsystemwiththeviewthatmaximizingshareholderreturnisthelegalobligationofmanagement.However,thisissimplynotthecaseasexplainedbyL.StoutinherbookTheShareholderValueMyth:HowPuttingShareholdersFirstHarmsInvestors,Corporations,andthePublic.17(Seeboxonpage10).Furthermore,“97%ofshareholdersalsoagreethatcorporatemanagersshouldtakesomeaccountofnon-shareholderinterestinrunningfirms.”18Additionally,therearesomereasonswhyinvestinginsocialimpactmayconflictwithshareholderinterestsbutonthecontrarysupportvaluecreation,includingfinancially.

3. Creating positive social impact can present a good business case for creating value and reducing risk

ArecentWBCSDstudyfoundthatbusinessescreatesocialimpactinitiativesandventuresalongtheirvaluechainforanumberofreasons.Theserangefromcostandriskreduction(forexample,byobtainingalicensetooperateandimprovingthebusinessenablingenvironment)tocapturingopportunities(forexample,bydrivinginvestmentsinnewproductsandbusinessmodels).19

AccordingtotheUNGlobalCompact(UNGC)—AccentureStrategyCEOStudy2016,80%ofglobalCEOsbelievethatdemonstratingcommitmenttosocietalpurposeisadifferentiatorintheirindustry.20 TheemergenceandgrowthofsociallymindedbusinesslikePatagoniaorTomsShoespointtoconsumersincreasinglyrewardingimpactfulproducts,servicesandbusinesses:72%ofindividualswouldchose“brandswithpurpose”21 and 73%ofconsumerswouldactivelyswitchtoabrandthathadasocialpurpose.22Thisismoreimportantforyoungerbuyers.23

Thereisevidencethatsocialimpactventurescancreate strong revenue streams.24BASFidentifiesproductswithasustainabilitycontributionandhasfoundthattheseproductsgenerate23%ofthecompany’ssales,and,importantly,outgrowtheirmarketsby2-10%anddelivermarginsmorethan10%abovetheaverage.25Unileverfindsthattheirsociallyresponsiblebrandsgrow“attwicetherateoftherestofthebusiness”.26Arecentstudyoftheworld’sleadingtelephonecompaniessuggeststhat

“Globally,forward-lookingcompaniesarealreadyfindingwaystoaddressthebiggestissuesfacingsocietythroughbusiness-ledventuresthatareimpactful,scalable,measurable,replicable,andthatgobeyondtraditionalbusinessasusual.”

Deloitte Touche TohmatsuLimited&WBCSD

digitalsolutionsthatcontributetotheachievementoftheSustainableDevelopmentGoalscouldgenerateUS$2.1trillioninadditionalrevenueperyearin2030,a60%increasecomparedtocurrentinformationandcommunicationstechnologysectorrevenues.27

However,nearlyallCEOspinpointthepivotalroleoffinanceinmakingsocialprogresshappen,as88%believethat“greaterintegrationofsustainabilityissueswithinfinancialmarketswillbeessentialtomakingprogress”.However,only10%feelpressurefrominvestorsasoneofthetopthreefactorsdrivingthemtotakeactiononsustainability.28

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4. There is a social impact business case communication gap: investors, both institutional and corporate, do not (yet) perceive that social impact delivers financial value & 5. The social impact business case needs to be communicated more clearly and quantitatively in order to raise capital for social impact and create social value

There are indications that communication on the businesscasemightbetheissue.Investorsmaynotseenorbemadeawareofsocialimpactinitiativesoropportunities.AstheUNGlobalCompact—AccentureStrategyCEOStudypointsout,57%ofbusinessleadersfeltthattheycoulddetailtheirstrategytoseizesustainabilityopportunities;butwheninvestorswhereaskedthesamequestionaboutthecompaniestheywereinvestingin,only8%ofinvestorsbelievethistobethecase.29

Key learnings from the literature review

Basedonourliteraturereview,weconcludethat:

• Mainstreamfinancemechanismshavemorepotentialtocreatesocialimpactatscalethandedicatedsocialimpactmechanisms.

• Focusingsolelyonshort-termshareholdervaluemaximizationseemstobeanideologyratherthanalegalobligation.

• Longertermsocialimpactcouldbeintheinterestofshareholders,investors,companiesandbroaderstakeholdersalike,atleastintheory.

• Creatingpositivesocialimpactcanpresentanattractivecommercialbusinesscase.

• Fewinvestorscurrentlyperceivethesocialimpactbusinesscase.

Evidencefrompractitionerspointstoasocialimpactbusinesscasecommunicationgapbetweencompaniesandinvestors.Couldthesolutiontomobilizingfinancebeinhavingasoundbusinesscaseandformulatingandframingthisbetterforinvestors?Whatdoinvestorsneedtoinvestmoreinsocialimpact?Toanswerthesequestions,wesurveyedandspoketomainstreaminstitutionalinvestorsdirectlytofindoutwhatwouldmaketheminvestinsocialimpact.

“Byidentifyingcleartargetsandputtingmetricsinplace,companiescanbetterengageinvestorsonthecommercialpotentialofsustainability[incl.socialimpact].Theycansharpenthelinksbetweencommercialandnon-financialgoals,andalsodriveinternalchangebyincreasingclarityaboutthebusinesscase.”Accenture Strategy30

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3. The investor perspective: Social impact is seen as a value but needs to be quantified to mobilize finance

Tochallengeandvalidateourhypothesesonwhycompaniesandsocietiesstruggletomobilizefinanceforsocialimpact,weconductedasurveywithmainstreaminvestors.Basedontheliteraturereviewandourownexperiencesinworkingwithsustainability-drivenbusinesscases,wedesigned14questionsaroundthefollowingthemes:

• Howdoinvestorsperceivethevalueofsocialimpact?

• Whichleverswouldincreaseinvestmentsinsocialimpact?

• Ifcommunicatingthebusinesscaseisonemajorlever,aswesuggest,howshoulditbeframed?

Wereceivedresponsestooursurveyfrom24investors,mostlyrepresentingmainstreamEuropeaninvestmentfirmsandwith70%basedintheUK.31 Withonlytwodozenanswers,thisisnotstatisticallyrobust.However,wedothinkthattheanswersenrichourinquirywithhighlyvaluablefirsthandinsights,inanindicativeway.

Findings from the survey

Social value matters to investors

Surprisingly—giventhattwo-thirdsofrespondentsarefrommainstreaminvestmentbackgrounds—socialissues,forexample,povertyandhumanrights,areconsideredimportantinmakinginvestmentdecisions.Whenaskedfortherelevanceofsocialissuesintheirinvestmentdecisions,63%ofinvestorsgivethemhighorveryhighimportance,whileonly12%seelowornoimportance.

Figure3:Importanceofsocialissuestomainstreaminvestorsurveyrespondents,in%ofrespondents

4% 8% 25% 38% 25%

How important are social issues, e.g., poverty and human rights to your investment decisions? (in % of respondents)

Not important Low importance Neutral Moderately important Very important

n=24

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Mainstream investors do not subscribe to the shareholder value myth.32

Themajorityofrespondents(74%)disagreedorstronglydisagreedwiththesentence“Ibelievethatrunningacompanysolelyinthebestinterestsofshareholdersisinthebestlong-terminterestofallstakeholdersandthelong-terminterestsofthecompany”.

Equally,whengivenconcreteexamplesrelatedtosocialimpact,suchasincreasingfairwages,increasingCSRprojectsthatdirectlyrelatetocoreproductoffering,orlongertermcorporatesocialimpactventures,investorsreflectedawillingnesstoinvestinsocialimpact-relatedactivities:asignificantmajorityofbetween67%and83%ofinvestors(dependingonthecase)answeredthatthesecaseswouldcreatevalueforthecompany.Onlybetween4%and26%believethatthesecaseswouldbeaninefficientuseofcapital/cash.33

26% 47% 9% 13% 4%

“I believe that running a company solely in the best interests of shareholders is in the best long term interest of all stakeholders

and the long term interests of the company.” (in % of respondents)

Strongly disagree Disagree Neutral Agree Strongly agree

Figure4:Investorviewonfocusinginvestmentdecisionssolelyonshareholdervaluemaximization

Investors think companies have several reasons to undertake social impact activities related to the company’s bottom line but sometimes are skeptical about the honesty of social impact communication.

Investorssawseveralreasonswhyabusinessmayundertakesocialimpactactivities,themostpopularbeingriskreduction(selectedby61%ofinvestors)andhavingalicensetooperate(selectedby52%ofinvestors).

Theleastcitedreason,butstillselectedbymorethanathirdoftherespondents,wastodirectlycreatevalueforthebusiness.Therewasalsoarelativelyhighshareofrespondents(43%)whofelttalkofsocialimpactmightbe“greenwash”.Thismayhighlightthegapbetweenthepromisethatsocialimpactinitiativesmakeintermsofgeneratingrevenueandhowinvestorsexperienceitontheground.Itmayalsoalludetothefactthattherearefewersocialimpactinitiativesthatarecommerciallyviable(andnotjustCSRorphilanthropy).

n=24

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Investors see little corporate communication about social impact

Wefoundevidenceofacommunicationgapbetweencompaniesandinvestors.Mostly,investorsindicatedthattheyhadvisibilityofsocialimpactonly“sometimes”.Also,mostrespondentsfeltthatinvestordocumentsonlysometimescontainsocialimpactdescriptions.Amere17%oftenoralwaysknewaboutsocialimpactinitiativesatthecompaniestheyinvestedinandonly26%oftensawinvestordocumentstalkingaboutsocialimpactinitiatives.

Figure5:Investorviewoncompanymotivestoundertakesocialimpactactivities

Figure6:Investorviewontherelevanceofdescriptionofthebusinesscaseforsocialimpact

0%

39%

43%

43%

52%

52%

61%

I don't know

To create value

Greenwash

To feel good or personal reasons

To do good

To have the licence to operate

To reduce their risk

Why do you think companies undertake social impactactivities? (in % of respondents, multiple answers possible)

n=23

Investors need to see the business case in order support social impact

Ourresultssuggestthataclearerarticulationofthebusinesscasecouldhelpinvestorsmobilizeforsocialimpact.Two-thirdsoftheinvestorsindicatedthatarticulationandquantificationofthebusinesscasewouldincreasethelikelihoodthattheywouldfinancesocialimpactinitiatives.However,weareuncertainastowhy33%ofinvestorssurveyedwouldremainunconvinceddespiteaclearbusinesscase.

4% 29% 67%

If there was better description of the business case, do youbelieve that investors would support companies to invest in

creating social impact? (in % of respondents)

No Not sure Yes

16

32%

41%

45%

59%

59%

73%

77%

Value of social impactis articulated inmonetary terms

Mandate from senior leadership

Business case showingpayback/breakeven

in 5 years

Successful results from internally financed pilot

Quantification of risks addressed

Value of social impactis articulated in

quantitative terms

Cost-benefit analysis

What would you need to happen to want to invest in a company, product/ service or venture that creates socialimpact? (in % of respondents, multiple answers possible)

n=24

Figure7:Rankingoftherelevanceofleversthatwouldmakeinvestorswanttoinvestinsocialimpact

Whenaskedtoassesswhatcouldinduceinvestorstoinvestinsocialimpact,therewasarangeofresponses:77%ofinvestorsfindthatagoodcost-benefitanalysiswouldincreasetheirappetitetoinvestinsocialimpact;73%wouldwantthevalueofsocialimpacttobearticulatedinquantitativeterms;and59%wouldfindaquantificationofrisksaddressedhelpful.Respondentsfeltthatamandatefromseniorleadershipandthearticulationofsocialimpactinmonetarytermsweretheleasteffectivedevices.

Investors need to see quantitative evidence for the business case for social impact

Atleasttwo-thirdsofinvestorswouldliketobetterunderstandthebusinesscaseforsocialimpact,andthemorequantitativeitis,thebetteritwouldbe.Methodssuchascostbenefitanalysis(77%

indicatedthiswouldhelp),quantificationofsocialimpact(73%),quantificationofrisksaddressedandasuccessfulinternalpilotproject(59%)wouldalsodrasticallyhelpinvestorsinvestinsocialimpact(seefigure9).Whilequantitativeevidenceisperceivedtobeveryhelpfulforcommunication,socialvaluedoesnotnecessarilyneedtobemonetized—only32%indicatethathavingsocialvalueshouldbearticulatedinmonetaryterms.

Whenaskedwhichvaluedriversneededtobequantified,amajorityofinvestorsfoundallthreeoptions(riskreduction,revenuegenerationandcostreduction)tobeveryhelpful.Therewasamarginallyhigherappreciationofriskreduction/protectedrevenuestomakeacompellingbusinesscase.

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Figure8:Investorviewontherelevanceofquantitativevaluedriversforthesocialimpactbusinesscase

Thepreferredtimehorizonforcommunicatingthesocialimpactbusinesscaseisthelastfiscalyear;yetforward-lookingbusinesscaseestimateswerealsodeemedrelevant.Seeinghistoricaldatawasslightlypreferredoverforecasts,with79%ofrespondentsfindingreportingforthelastyear“very”or“mostlyrelevant”.Whenforecastingthesocialimpactbusinesscase,a2-3yearrangewaspreferred,with67%ofrespondentsfindingit“very”or“mostlyrelevant”.

WealsoaskedwhethertheSDGscouldeasecommunicationwithinvestors.While87%ofCEOsbelievetheSDGsrepresentanessentialopportunitytorethinkapproachestosustainabilityandsocialimpact,only46%thinktheSDGsareanadequateframeworktoimprovecommunicationonsocialimpact.While25%ofinvestorsarenotawareoftheSDGs,and13%disagreethattheSDGsareagoodframeworkforinvestorcommunication.

Key learnings from the investor surveyInvestorsarehappytosupportbusinessactivityaslongastheyaremakingareturn—andthisholdsforonesthatgeneratesocialimpact.However,amoredetailedpicturecanbedrawn:themajorityofrespondentsperceivesocialimpactandlongertermvaluetobeinterestingandarenotfocusedonshort-termshareholdervaluemaximizationalone.Thisfindingindicatesthattheshareholdervaluemaximizationideologyisabarriernotnecessarilytomobilizingmainstreamfinance.

5%

0%

5%

24%

19%

5%

62%

71%

65%

10%

10%

25%

Cost saving

Revenue creation

Risk reduction / value protection

What information would be most helpful for you to integrate socialoutcomes into your investment decisions?

(in % of respondents)

Not helpful at all Slightly helpful Somewhat helpful Very helpful Extremely helpfuln=21

Wealsofoundthatsocialvaluecanmattertoinvestorsandthattheyseeitasacontributiontovaluecreationforacompany,butthatsometimestheyareskepticalaboutthehonestyofhowseriouslybusinesstalksaboutsocialimpact.

Theresultsconfirmthatthecommunicationgapisanissue,withinvestorsseeinglittlecorporatecommunicationaboutsocialimpact.

Anditwasclearthatinvestorsneedtoseeasocialimpactbusinesscaseinordertoinvest.Thesurveyfindingsconfirmedthatinvestorsneedtoseequantitativeevidence.

Theseresultsindicatethatinvestorsfavorclassichistoricalbusinesscaseevidencetoevaluateinvestmentdecisions,includingonthosethatdrivesocialimpact.Clearerandmorequantitativecorporatecommunicationonthevalueofsocialimpactwouldhelp.Thebusinesscasecanbeformulatedintermsofquantifiedriskreduction,valuecreationorriskreduction,preferablyforthelastfiscalyear,butmanyinvestorsalsowantforecasts.

However,docorporationsjustneedtocommunicatemore?Ormighttheyactuallystruggletofindthesehigh-impactyetcommerciallyviableventures,productsorservices?Inthenextchapter,wepresentcasestudiesonhowcorporationssetupsocialimpactprojects,howtheyhaveframedandcreatedcommercialvalue,theroleofthebusinesscase,andif/howtheygainedaccesstofinance.

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Investorsareopentofinancingsocialimpactifthevalueisclearlycommunicated.Howdocorporationsdealwithsocialimpact?Howhavebusinessessuccessfullyframedtheirbusinesscasesandgainedaccess to funding?

Asillustratedthroughthefourcasespresentedinthischapter,thekeystakeholders,thesourcesoffinancingandthechallengesaredifferentforeachcompany.However,bytakinganin-depthlookathowdifferentcompanieshavefinancedsocialimpactinitiatives,wecanobservesomecommonthemesandpresentsomerecommendationstomobilizefinanceforsocialimpact.

AllfourcompaniesfeaturedhereareWBCSDmembercompanies.Thecasestudieswerepreparedbasedoninterviewsconductedwithseveralstakeholderswithineachcompany.Eachcaseincludesadescriptionoftheinitiative,ananalysisofitssocialandcommercialvalue,theinvestorperspective,asperceivedbythecompaniesandkeychallengesandlearnings.

4. The corporate perspective: How social impact needs business stringency to excel

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Case Study: Statoil’s approach to social impact34

OneofStatoil’sthreesustainabilityambitionsisto“createlastinglocalvalueforcommunities”.Inadditiontothevaluegeneratedthroughthecreationofrevenueandlocaljobs,thepaymentoftaxestosocietyandsoon,Statoilmakesseveralsocialinvestments.Throughtheseinvestments,Statoilseekstostrengthenlocalcapacities,addresssocialandenvironmentalriskfactors,andpromotetransparencyandrespectforhumanrights.35

Social value: Statoil’ssocialinvestmentshelpdeveloplocalcommunitiesbyimprovingeducation,buildinglocalbusinesses,reducingthelevelofcorruptionandensuringrespectforhuman rights.

Commercial value:Investmentsinsocialresponsibilityareseenasimportantandnecessarytosecurealicensetooperateandensureacompetentworkforceandacompetitivevaluechain.However,Statoilhasyettofullyevaluateandquantifythevalueoftheopportunitiescapturedorrisksmitigatedthroughtheseinvestments.AllStatoil’sactivitiesmustbeinlinewiththecompany’svaluesandambitions.Ingeneral,thelevelofinvestmentrelatedtosocialresponsibilityisbasedonwhatisrequiredandexpectedbygovernmentsorregardedassufficientbyinvestorsandotherstakeholders.However,asStatoilhasyettoquantifythevalueofsocialimpact,theincentivestomakeadditionalinvestmentsareweak.

Investor view (as perceived by the company): Communicationsaroundinvestmentsinsocialresponsibilityaresomewhatlimited.Theseinitiativesareoutlinedontheirwebsiteandintheirannualsustainabilityreport,butthereislimitedactivecommunicationforinvestors.Duringthecompany’sCapitalMarketsDay,themostsignificantannualinvestoroutreach,

only1-2%ofthematerialpresentedrelatestosustainability.Furthermore,only50-60%oftheinvestorsseemtobefamiliarwiththecompany’sSustainabilityReportanditscontents.Therearelimitedquestionsrelatedtosocialimpactfromconventionalinvestors,whilethereissignificantinterestandscrutinybysociallyresponsibleinvestors(SRI).Allinvestorsseemtobeinterestedinthetopic,butwithdifferentstandardsforwhatqualifiesasasufficienteffort.WhilesocialinvestmentsarenotnecessarilyreflectedinStatoil’sdirectvaluation,theycouldresultinthecompanybeingtakenonoroffinvestors’listsifdeemedinsufficientornotwithintheinvestors’guidelines.

Challenges & learnings:Itiswidelyacceptedthatsocialinvestmentsarenecessaryandthattosomeextenttheyincreasethevalueofthecompany.However,oneofStatoil’schallengesishowtoshiftinvestorsfromfocusingonmeetingexpectationstoreframingthisworktodriverealvalue.Statoilbelievesthatbettervaluationofsocialinvestments,whiledifficult,willresonatemorewithinvestorsandleadtoadditionalinvestments.However,thecompanyassumesthatsocialinvestmentvaluationdoesnotnecessarilyhavetobequantifiedinfinancialtermsaslongastherisksandopportunitiesareexploredanddescribedindetail.Thisapproachissimilartotheoneusedforenvironment,healthandsafety(ESH)initiatives,whichhavebeensuccessfullyliftedtothetopoftheagendawithoutbeingfinanciallyquantified.TheprimarychallengeforStatoilistocreatethestoryaroundsocialinvestmentsandcommunicatethevalueinameaningfulway,sothattheconventionalinvestors,andnotjustsocialresponsibilityinvestors,seethevalueofsocialimpact.

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Case Study: Total’s efforts as a partner for development to mitigate risks and obtain a license to operate36

Totalistheonlysupermajor37withnodomesticproduction.Therefore,thesustainabilityofTotal’sactivitiesisinherentlybasedonshareddevelopment.Total’sgoalistoactandberecognizedasapartnerinthelong-termeconomicandsocialdevelopmentofthecommunitiesandregionsinwhichthegroupoperates.In2015,€384millionwasspenton3,063socialprojects(85%innon-OrganisationforEconomicCo-operationandDevelopment(OECD)countries).

Social value: InMyanmar,Totalhasoperatedasystemicdevelopmentprojectinfavorof25communities(35,000inhabitants)inthepipelineareasince1995.Theprojecthasadedicatedstaffof96,including12doctors,2vetsand20microcreditprofessionals.Asaresultofthisproject,mortalityfromthreepredominantdiseases(malaria,food/water-borneinfections,respiratoryinfections)hasbeenreducedtwenty-fold,200infrastructureprojects(roads,bridges,schools)havebeencompleted,andthelocaleconomyhasbeenboostedthroughfarming,trainingandmicrofinancesupporttoentrepreneurship.Inparallel,TotalMyanmar’ssecurityishandledby65unarmedlocalvillagersandthesubsidiaryhasn’texperiencedanymajorincidentsordamage.

InBolivia,achancearchaeologicaldiscovery(bones,ceramicfragments,etc.)madeduringconstructionworkwasmanagedincollaborationwiththeBolivianauthoritiesandthelocalGuaranícommunities.AttherequestoftheGuaranícommunities,Totalchangedthearchitectureofitsconstructionprojectandagreedtoreburytheremainsinthesameplacewheretheywerefoundandensurecommunitiesretainedaccesstothissacredplace.

Commercial value:Contributingtothesocialandeconomicdevelopmentofhostcountriesisaprerequisiteofsomelocalgovernments.IncountrieslikeNigeriaandtheRepublicoftheCongo,certainexpensesarerequirementsintenderbidsandaremanageddirectlybythehostcountries.Theeconomicvalueofsuchexpensesisstraightforward—companiesmustfinanceandsupportlocaldevelopment,inassociationwithlocalauthoritiesandNGOs,ortheycannotdevelopnewprojects.

Furthermore,asdemonstratedbythecasefromMyanmar,gainingacceptanceandbuildingtrust

withlocalcommunitiesprovidesa“sociallicensetooperate”,whichisthekeytosustainingoperations.IntheBoliviancase,nottakingintoconsiderationlocaldemandscouldhaveledtohostilityfromthecommunityandcostlydisruptionsinoperations.

TheconsequencesofnotobtainingasociallicensetooperatewereseeninYemen,whereTotalleadsaliquefiednaturalgas(LNG)plantsuppliedbynaturalgasthroughapipeline.Some25communityliaisonofficersmaintainedadialoguebetweenthesubsidiaryandthe19localcommunitiesimpactedbythepipeline.However,atribeblockedtheprojectforawholeweek,leadingtoacostoverrunofmillionsofdollars.Thisisbecause,inthiscase,Totaldid not invest enough time and human resources in buildingtrustwiththecommunities.

Investor view (as perceived by the company): BasedonwhatinvestorssayinmonthlydiscussionswithTotal’sfinancedepartment,itappearsthatmostmainstreaminvestorspaylittleattentiontothesocialimpactsoftheseefforts.Suchsocialprojectsaremorecommonlyviewedasanentryticketthatgivesaccesstofossilreservesinhostcountries.However,untilmainstreamfinancialanalystsagreeaboutthenecessityofobtainingasociallicensetooperatetoaccessresources,de:riskoperationsandprotectthecompanyagainsttangiblecostslikepenaltiesandadditionaltaxes,itwillstillbeviewed(andaccountedforbythesubsidiaries)asanoperatingcost.

Challenges & learnings: Likesafetyandenvironmentalexpenses,thereturnoninvestment(ROI)forsocialinvestmentsishardtoestimatebecauseoftheimportanceofthehumanfactor.Forexample,whatwouldhavehappenedifTotalhadinvestedmoreinYemeninthecasedescribedabove?AndwhatifTotalhadn’tinvestedatall?

Butunlikesafetyandenvironmentalissues,socialissuesarenotprioritizedbyanalystsfromthemainstreamfinancialcommunityduringtheirregulardiscussionswithTotal.Investorsfeelthatasociallicensetooperateislessimportantthanasafetyorenvironmentallicensetooperatetomitigateoperationalrisks.

Thereforethereisanopportunityforcompaniestobetterarticulateandcommunicateabouttheimportanceoftheirsocialinvestmentsandtheassociatedrisksandrewards

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Case Study: ABB and International Committee of the Red Cross microgrid pilot project38

In2016,ABBenteredintoapartnershipwiththeInternationalCommitteeoftheRedCross(ICRC)toprovidesolar-poweredmicrogridstotheICRC.ThefirstpilotprojectisaimedattheICRClogisticshubinNairobi,Kenya,whichcoversoperationsinSouthSudan,Somalia,Kenya,DjiboutiandTanzania,aswellasinneighboringcountries.ICRC’sservicesinclude:restoringcontactbetweenrefugeesandtheirfamilies;protectingandassistingthoseinjured,displacedoraffectedbyarmedconflict;visitingdetainees;andsupportingthedevelopmentoflocalcommunities.

Social value: ThemicrogridswillenabletheuseofrenewablesandreducecarbonemissionswhilesupplyinguninterruptedelectricitytoRedCrossfacilities.Thiswillenableoperationstocontinuewithoutinterruptionandwillpreventdamagetocostlyelectricalequipmentthatoccursbecauseoffrequentpoweroutages.Oncethepilotprojectprovesthetechnologyissuccessful,similarmicrogridswillsupplyelectricitytoothercriticalinfrastructure(forexample,hospitals,waterpumpingstations,etc.)thatwilldirectlysupportlifesavingoperations(suchasguaranteeingstablepowersupplyduringsurgeriesorprovidingcleanwatertociviliansinconflictareas).

Commercial value: Thepilotproject’sforeseeneconomicbenefitsforABBarethemaintenanceofastronglicensetooperateinKenya,animprovementofthebusinessenablingenvironment,andentryintoanewandinnovativemarket.Theprojectiscommerciallyviable.39 IthasbeeninvoicedasanorderforABBandtheICRCwillcovertheprojectcosts(someUS$500,000)directly.

Furthermore,thepilotprojectisreplicableforcriticalfacilitiesinareasthatrequirestableoff-gridelectrification.Inthesecondstage,theICRCintendstoattractthirdpartyfinance(forexample,fromdevelopmentbanks)toscaleuptheinitiativeandcreateadditionalrevenue.Thusthepilotprojectiscloselytied-inwithABB’scorestrategicinitiativetoincreaserevenuesanddevelopitsbusinessinthearea of innovative microgrids.

Investor view (as perceived by the company): Thepilotprojectmaybeappealingtoinvestorsbecausecleanlocalpowersuppliestocriticalfacilities(andavoidedbrown-outsandblack-outs)haveaclearbusinesscasefortheendcustomerandthereforecommercialvalue.WithinitialstagesfundedinpartnershipwiththeRedCrossandaviewtosecuringexternalfinancetoscale,theriskforinvestorsisrelativelylimitedandthecommercialgainforundertakingtheprojectisseen.Investorsmayalsolikethatthepilotprojectisapositivestoryforthecompany,whichmayleadtoreputationalbenefits.

Challenges & learnings:ABBhassupportedtheRedCrossforthepastdecade,contributingtowaterandhabitatprogramsforvictimsofconflictintheDemocraticRepublicofCongoandIraq.Itwasfromthislong-standingrelationshipthatthisopportunitywasidentified.OneofkeylearningsfromtheprojectisthatcorporatepartnershipswithleadingNGOsmayserveasaviableapproachtoraisefinanceforsocialimpact.

However,inordertoattractfinanceatalargerscale,companiesneedtoidentifyprojectsandconceptsthatarescalableandreplicable.Individually,theyareoftentoosmalltobeviableforthecompanytopursuecommerciallyandengageonwithmainstream investors.

Thekeychallengetoensuringthatprojectscanbescaledorreplicatedisthetimerequiredtodocumentthepositivesocialimpact(andfinancialvalue)toinvestorswithquantifiableKPIs.Itusuallytakesatleast1-2yearsuntilapilotprojecthasprovenitstechnologicalviabilityandpositivesocialimpact.Untiltheseprojectscanbescaled,replicatedorbundledwithothersimilarsocialprojects,suchsocialimpacteffortswillremainatthelevelofcorporatephilanthropy.

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Case Study: LafargeHolcim’s Affordable Housing program40

Fourbillionpeoplearoundtheworlddonothaveaccesstodecenthousing,including150millionpeopleindevelopedcountries.Toaddressthisneed,LafargeHolcimisofferingarangeofinnovativeaffordablehousingsolutions,includingmicrofinance,earth-cementbuildingsolutions,slumrenovation,collectivesocialhousing,andsanitation.

TheAffordableHousingprogramwaslaunchedinthemid-2000s.Unlikeearliercorporatesocialresponsibilityeffortsontheissue,thenewprogramhadastrongcommercialfocus.Theprogramidentifiedtwomainfocusareas:sustainableconstructionandaffordablehousing.In2011,theExecutiveCommitteeapprovedthebusinessplanfortheAffordableHousingprogram,whichlaidoutclearrevenueexpectationsandapaybackperiod,andagreedtolaunchitinfivecountries.

Since2011,theprogramhasbeenrolledoutto24countriesandhas:

• Providedtechnicalassistanceforhousedesignandtrainedbuilders;

• Foundsolutionstodistributingbuildingmaterialstoruralandotherhard-to-reachcommunitiesandslums;

• Developednewconstructionsolutions,suchasDurabric(anon-firedearthandcementbrickthatreducesconstructioncosts,ismoreresistant,andresultsinsignificantlyfeweremissionsthanatraditionalclaybrick).

Social value:Thesocialimpactisbroad—creatingaccesstohousing,loweringthecostofhousingoptions,buildingtheskillsoflocalpeopleandmakingthemmoreemployable,liftingthequalityandsafetyofconstruction,andsupportingaccesstofinanceforhomes.In2015,LafargeHolcimhadAffordableHousingprojectsin24countriesandbenefittinganestimated440,000people.Throughpartnershipswithmicrofinanceorganizations,16,000microfinanceloanshavealsobeenprovided.

Commercial value:In2015,theAffordableHousingprogramwasprofitableforthethirdyearrunningandgeneratedanadditionalEBITDAofCHF15million.Intheprocess,LafargeHolcimhasdevelopedseveralpartnershipsbasedonitsoperationalknow-howandexperienceintheconstructionsector.Thesepartnershipshaveresultedinflow-oncommercialopportunitiesandrevenuestreams.

Investor view:In2012,LafargeHolcimpresentedtheprogramtoinvestorstodemonstrateitsstrongfocusoninnovation.Thecompanyclearlydefinedtheexpectedpaybackandsocialbenefitsupfrontandinvestorsprovidedpositivefeedback.FindingadditionalresourcestoacceleratemarketpenetrationhasbeenthemainchallengeinfurtherdevelopingtheAffordableHousingprogram.

LafargeHolciminitiatedawell-plannedseriesofdiscussionswitharangeofinvestorsandhighlightedthestrongsocialandfinancialvalueachievedbytheprogram.Thesediscussionsmobilizedinvestorsupportfortheprogramandledtothecreationof“14Trees”byLafargeHolcimin2016.ThisnewjointventurelaunchedwithCDCGroup,theUK’sdevelopmentfinanceinstitution,hasacapitalofCHF10million(CHF5millionfromCDCGroupandCHF5millionfromLafargeHolcim)andaimstoacceleratetheproductionandcommercializationofDurabric,whichsavesupto14treesperhousebuilt.Since2013,morethan3millionofthesebrickshavebeenproducedinMalawiandusedinsome500buildings.“14Trees”alsoaimstobringinnovativebuildingsolutionstomarket,reducingconstructioncostsbynearly25%comparedtotraditionalsolutions.

Challenges & learnings: Aswithmanyothersocialimpactinitiatives,theAffordableHousingprogramwaschallengedinitsearlyphaseandperceivedasCSRorcorporatephilanthropy.Toovercomethischallenge,theprogramhadtoframethebusinesscaseclearly—intermsofexpectedrevenuesandpositivesocialimpactconditions—andgetbuy-infrom executive management.

Risksalsoneedtobeunderstoodclearlyandmanagedwell.Therisksfortargetgroupsatthebaseoftheeconomicpyramidaredifferentfromthoseinmaturemarkets(forexample,highervolatilityoflocalcurrency,lackofhousingfinancingandpoorrepaymentrates,andpoorlandtitling).Withoutstrongsupportfrommanagement,cleartargetsandobjectives(suchas50millionpeoplebenefittingfromthecompany’sinitiativesby2030),andarobustcommunicationplan,theinitiativecouldnothavebeensuccessfulandreplicated.

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Key learnings from the case studiesThefourcasestudiesprovideanunderstandingofhowcompaniesperceive,assessandcommunicatethevalueofsocialimpact.Whileeachcompany’sexperienceisunique,therearesomesimilaritiesinthechallengestheyidentifywhenitcomestomobilizingcapitaltoscalesocialimpact.

InthecasesfromTotalandStatoil,wherecompanieswereinvestinginsocialimpactprojectstomitigaterisksandobtainalicensetooperate,thefinancingfortheseprojectswasraisedinternally.Infact,forTotal(whoseproductionisentirelyoverseas),socialimpactprojectsareviewedasoperatingcostsbythecompanybecausemainstreaminvestorsapparentlydonot(yet)acknowledgethevalueofdedicatedsocialimpactactivitiestoobtainasociallicensetooperate.And,asseenintheStatoilcase,whensocialimpactisviewedasanoperatingcost,theincentivetoinvestmoreisweak.

BothTotalandStatoilbelievetheanswerliesinbridgingthecommunicationgapwithinvestors.Inordertodoso,bothcompaniesareseekingtoestablishmoreactiveandclearcommunicationwithinvestorsonthevaluegeneratedbysocialimpact.Whilequantifyingthevalueofsocialimpactisassumedtostrengtheninvestorengagement,bothcompanieshavereasontobelievethatthisvaluedoesnotneedtobeexpressedinmonetarytermsjustyet.Investorshaveacceptednon-monetaryvaluationsofhealth,safetyandenvironmentalinitiativesforsomeyearsnow.Thechallengeishowtoreplicatethissuccesswithsocialimpact.

Thecallforbettersocialimpactvaluationextendsacrosstheentirespectrumofcompanies’valuechains,notonlyonriskreduction.ThishasbeenhighlightedintheABBandLafargeHolcimcaseswherethekeysocialimpactdriversarecapturingopportunitiesandincreasingrevenues.Infact,thelackofdocumentedpositivesocialimpactandcommercialvalueforsocialimpactprojectsisoftenthekeybarriertomobilizingfinance.

TheABBandLafargeHolcimcasestudiessuggestaneedtoscaleup,replicateand/orbundlethesepilotprojectswithotherprojectstoattractsupportfrommainstreaminvestors.Thiscannotbedonewithoutastrongproofofconceptanddocumentedsocialvalue.Untiltheseprojectscanbescaled,replicatedorbundled,and,importantly,untiltheirbusinesscasecanbeformulated,suchsocialimpacteffortsmightremainatthelevelofcorporatephilanthropyandnotattractmainstreamfinance.

AkeylearningfromABB’smicrogridpilotprojectisthatcompaniescanstarttheirendeavorsonsocialimpactviapartnershipswithleadingNGOs,internationalorganizationsanddevelopmentbankstofinancetheearlystagesoftheirsocialimpactprojects.TheLafargeHolcimaffordablehousingcasestudyproveshow,oncetheproofofconceptandsocialvaluehavebeendocumented,thebusinesscasecanbescaledup,replicated,andeventuallyattractmainstreamfinancingmechanisms.

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5. Conclusions & recommendations

Withhugesocialproblemstotacklegloballyandthegrowingimportanceoftheprivatesectortotheglobalsustainabledevelopmentagenda,companiesneedtounderstandhowtomobilizemainstreamfinanceforpositivesocialimpact.Theneedandopportunityforinvestmentinsocialimpacthasneverbeenstronger.

Themainquestionofourreportwas:How can mainstream finance be mobilized to invest in positive social impact?

Weexaminedfivehypothesesonpossiblebarriersandsolutionstomobilizingfinanceforsocialimpactfromtheperspectivesofbothinvestorsandcompanies.Throughourexplorationoftheseperspectives,wehavebeenabletoidentifyaseriesofkeyrecommendationsforcompanies.

Wehavediscussedthefactthatthesheersizeofmainstreamfinanceassetsindicatesthatitisthemoreinterestinglevertosteerpositiveimpactatscaleandhasagreaterprobabilityofsucceeding.Wehavealsoquestionedtheviabilityofcreatinganddevelopingacompletelyseparateassetclassandshownthatitisamyththatsocialimpactbonds(SIBs)areapanacea.Thesefindingsdemonstratethatcompanieswillneedsupportfrommainstreaminvestorsinordertotrulyscalesocialimpactinitiatives.Itconfirms,thatmainstreamfinancemechanismsaremorepowerfulincreatingsocialimpactatscalethanaseparateassetclass(forexample,SIBs).

Ourresearchhasalsoshownthatthelegalobligationtomaximizeshareholdervalueintheshort-termisalsoamyth.Whilethisideologyisentrenchedincorporatethinking,itisnotinthebestinterestsofcorporations,societyorinvestors.Companiesarefreetoactforallstakeholders,notjustinvestors,solongasitisinthebestlong-terminterestofthecompany.Surprisingly,ourinvestorsurveyrevealedthatonly17%ofinvestorsthinkthatsolelyfocusingonshareholdervaluemaximizationisinthebestinterestsofacorporation’slong-termvalue.Instead,themajorityofinvestorsperceivethecreationofpositivesocialimpactasalevertoreducerisksandincreasethevalueofacorporation.Whilethecasestudiesseemtomostlysupportthatincurrentcorporateenvironmentstheshareholdervaluemaximizationideologyisabarriertomobilizingmainstreamfinanceforsocialimpact,theliteraturereviewandinvestoropinionsseemtoindicatethatthisbarriercouldbeovercome.

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Recommendations on solutions

• Companiesneedtobetteridentifyandcommunicatethebusinesscaseinordertomobilizemainstreamfinanceforsocialimpact.Thecasestudiespresentedinthisreportshowthatthecapitalisthereandcanbemobilizedifbusinessstringencyisappliedtosocialimpact.Ifastrongbusinesscaseisprovenandpromotedinternallyandexternally,itcanattractfundingtohelpscaletheinitiativeorventureandcreatelastingsocialvalue.

• Companiesneedtodemonstratehowpursuingsocialimpactreducesrisksorincreasesthevalueofthecompanyandpresentthistotheirinvestors.Achievingthiswillrequireabetterdelineationbetweencorporatephilanthropyandthecorebusinessdeliveringsocialimpact

• Companiesneedtoquantifythesocialimpactbusinesscaseinordertoraisecapitalforsocialimpact.Receivingquantifiedmetricswouldhelpinvestors(internalandexternal)tounderstandhowsocialimpactgeneratesvalue;itwouldspeakthelanguageofinvestorsandhelpovercomethecommunicationgap.Companiescansatisfyinvestorexpectationsforquantificationusingexistingtools,suchascost-benefitanalysis,quantificationofrisk,anddemonstratingsuccessfulinternalpilotprojects,coupledwiththegrowingbodyofmethodstoquantifysocialvalue.41

• Companiescanfindamorebalancedapproachbyintegratingsocialimpactintotheireverydaymanagement,forexample,byintroducingasocialimpactKPIforallproducts,managedwiththesamerigorandstringencyasfinancialKPIs.

• Moreover,companiesneedtolearntorecognizewhatfinancingmechanismtouseandwhen.Forspecificsocialimpactinnovation,companiescouldcreatepartnershipsandexplorealternativefinancingmechanismstotestsocialimpactprojectsuntiltheyareviableenoughtobesupportedbytraditionalfinancesources.

• Lastly,corporatemanagersandinvestorsneedtomakeafundamentalchangefrom“shareholder”to“stakeholder”valuemaximizationintheireverydaypractices.Changingappraisalcyclesorincentivestructures,suchasabolishingquarterlyreportingorshort-termmanagementtargets,areexamplesofoneofthebiggestleverstodrivesocialimpact:amindsetshift.

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Wewouldliketothankthe24investorswhotookthetimetorespondtooursurvey.

WewouldalsoliketothankSuzanneFeinmannandKitrhonaCerrifromtheWBCSDforveryvaluablefeedbackonourdraftreport.

Finally,wewouldliketothankourorganizationsfortheirsupport,enablingustoparticipateintheWBCSDleadershipprogram2016.

AuthorsAitkenRoss,AllianceTrustInvestments

AntonioCarrilloDoblado,LafargeHolcim

KatharinaBeck,AccentureStrategy

KnutRagnarAustreng,Statoil

RidhimaKapur,Novozymes

SamuelMerkli,ABB

UgoCatry,Total

XavierBlack,Deloitte

Designer Sukie Procter

About the World Business Council for Sustainable Development (WBCSD)

WBCSDisaglobal,CEO-ledorganizationofover200leadingbusinessesandpartnersworkingtogethertoacceleratethetransitiontoasustainableworld.Wehelpmakeourmembercompaniesmoresuccessfulandsustainablebyfocusingonthemaximumpositiveimpactforshareholders,theenvironmentandsocieties.

Ourmembercompaniescomefromallbusinesssectorsandallmajoreconomies,representingacombinedrevenueofmorethan$8.5trillionand19millionemployees.Ourglobalnetworkofalmost70nationalbusinesscouncilsgivesourmembersunparalleledreachacrosstheglobe.WBCSDisuniquelypositionedtoworkwithmembercompaniesalongandacrossvaluechainstodeliverimpactfulbusinesssolutionstothemostchallengingsustainabilityissues.

Together,wearetheleadingvoiceofbusinessforsustainability:unitedbyourvisionofaworldwheremorethan9billionpeoplearealllivingwellandwithintheboundariesofourplanet,by2050.

www.wbcsd.org

FollowusonTwitter and LinkedIn

Disclaimer

ThispaperistheoutcomeofoneoftheWBCSDLeadershipProgram2016groupprojectsaspartoftheirlearningjourney.Itdoesnotrepresentapolicy,apositionorarecommendationoftheWBCSD.Thispaperneitherpromotesnorvalidatesanyparticularapproachortool.Thestatementsinthispaperaresolelytheopinionsofitsauthors,anddonotreflecttheirrespectivecompanies’viewsinanyway.

Acknowledgments

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22Edelman(2012).GoodPurpose.

23DeloitteToucheTohmatsuLimited(2016).TheDeloitteMillennialSurvey2016.

24AccentureStrategy(2015).Sustainabilityvaluemanagement.Strongermetricstodrivedifferentiationandgrowth. https://www.accenture.com/au-en/insight-sustainability-value-management

Endnotes

25BASF(2016).Severalinvestorpresentations.

26Geller,Martinne(2015).“Unileversaysitssociallyresponsiblebrandsoutperformrest”. Reuters.4May2015.

27GlobalEngagementStudiesInstitute(GeSI)andAccentureStrategy(2016).#SystemTransformation.HowDigitalSolutionswillDriveProgresstowardstheSustainableDevelopmentGoals. www.systemtransformation.gesi.org,lastchecked21/08/2016.

28AccentureStrategyandUnitedNationsGlobalCompact(2016).UNGlobalCompact—AccentureStrategyCEOStudy2016.Agenda2030:AWindowofOpportunity.

29 UNPrinciplesforResponsibleInvesting(PRI)andAccentureStrategy.(2014).The InvestorStudy:InsightsfromPRISignatories

30AccentureStrategy(2015).SustainabilityValueManagement.

31Socio-economicdataof24surveyedinvestors.Countryofworkplace:16xUK,4xUSA,2xGermany,1xNetherlands,1xSouthAfrica.Maininvestmentmarkets:19xmaturemarkets,2xemergingmarkets,2xother,1xnotresponded.Gender:20xmale,4xfemale.Age:3x60orolder,5x50-59,10x40-49,3x30-39,3x21-29,0x20 or younger.

32 Pleaserefertochapter2.

33 Giventhenatureofthisquestionnairewhichhaspositivesocialimpactatitscore,theanswerscanbebiasedtowardsfavoringpositivesocialimpactoverfinancialvalue.However,weassumethattheanswerscanbeatleastfairlyreliable.Weknowmorethanthehalfoftherespondentspersonallyandknowthattheyusuallyarenotdrivenbysocialvaluebutshort-termfinancialreturns.Anotherindicatoristheapparentlyhonestansweringofthequestionofhowmuchtherespondentknowsaboutsocialimpact:just27%saidtheyknowalotorhugeamountaboutsocialimpact;over70%admittedtheyjustknowalittleorafairamount.

34 Basedoninterviewswith:S.Furnes(August2016),SeniorConsultantforSRI,InvestorRelations,StatoilAsA.(K.R.Austreng,Interviewer);P.Hutton(August2016),SeniorVicePresidentforInvestorRelations,StatoilAsA.(K.R.Austreng,Interviewer);A.Mohan(August2016),SustainabilityAdvisorforSRI,StatoilAsA.(K.R.Austreng,Interviewer).AndfromStatoilAsA(2015).SustainabilityReport2015. Stavanger:StatoilAsA.

35 StatoilAsA.(2015).SustainabilityReport2015.Stavanger:StatoilAsA.

36 Basedoninterviewswith:V.Dufief,CSRDeputy,FinancialCommunication),Total;J.-M.Fontaine,GroupHeadofCSRandSocialBusiness,Total;J.Schmitt,GroupHeadofSustainabilityandformerHeadofFinancialCommunication,Total;A.Zaw-Win,CSRDeputy,E&Pbranch,Myanmar,Total.AndfromTotal(2015).SustainabilityReport2015.

37 Thetermsupermajorgatherstheworld’slargestinternationaloilandgascompaniesworldwide,excludingthenationaloilandgasfirms.ThesupermajorsareconsideredtobeBP,Chevron,ConocoPhillips,ExxonMobil,Shell,Total&Eni.

38 BasedoninterviewswithM.Cooke(July2016),HeadofHSEandSustainability,ABB(S.Merkli,Interviewer);M.Gavi(July2016),ProgramDirectorMicrogrids,ABB(S.Merkli,Interviewer);R.Popper(July2016),HeadofCorporateResponsibility,ABB(S.Merkli,Interviewer);M.Rombach(July2016),PartnershipsManager,InternationalCommitteeofRedCross(S.Merkli,Interviewer).

39 ABB’sscopeofsupplyincludessolarinverters,adistributedcontrolsystem,lithium-ionbatteryenergystorage,transformers,switchboardsandsystemengineeringservices(includingannualpreventivemaintenance).

40 BasedoninterviewwithF.Perrot(July2016),HeadofAffordableHousing,LafargeHolcim(J.Pluess,A.CarrilloDoblado,Interviewers).Andon:LafargeHolcim(2015).SustainabilityReport2015;LafargeHolcimWebsite:http://www.lafargeholcim.com/affordable-housing.

41 DeloitteAustralia(2016).Developingtheevidencebaseforinformedsocialimpactinvestment.

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