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Archive for April, 2011

When I was in business school, I had the honor of being a managing principals on the first student run socially responsible investment fund of its kind.  Imagine a hedge fund with a social as well as academic purpose, run entirely by graduate business school students and with only a modest $1.25 million of assets under management.  The small irony here was that I had just left Wall Street for business school to escape what I found to be a greedy, self-absorbed culture fixated on value extraction, not value creation.

Participating in the fund was not an attempt to reconcile myself with an industry from which I had become estranged.  Rather, the fund gave me a chance to participate in a unique and ambitious academic social experiment to further the field of SRI and my own professional mission statement.

Each of the managing principals had an investing hypothesis.  Mine was essentially that ESG (environmental, social and governance) metrics were leading indicators of business (and by extension financial) performance.  More specifically, I was interested in investing in business models built on exceptional ESG standards because I foresaw those companies (Johnson Controls and Cisco were among my investments) as better able to capitalize on the market opportunities created by social trends (think greenmania and bottom of the pyramid) as well as influence the discourse around legislation and regulation with legitimacy (legislation and regulation being major cost drivers).

I do not intend to fully explore my investing hypothesis here (although my investment did result in outstanding returns, Cisco’s recent declines notwithstanding); rather, I wanted to share some thoughts on recent validation of my hypothesis.

Bloomberg, whose terminals power so much of Wall Street, seems to agree about the importance of ESG.  Now traders can access ESG data right along side the VOX (well, figuratively speaking anyway).  In addition to being just good cost controlling practices, ESG policies indicate the sort of forward looking management perspective that can break free of short term investor pressures and realize outstanding sales growth from innovation (rather than the usual fraud and asset bubbles).

Dominic Barton wrote a recent HBR blog post alluding to the market opportunity that the Great Recession has created.  His take on it is not so much that there is a market opportunity but a (chicken-little) crisis to which business must react, lest the social contract between business and society rupture and capitalism itself collapse around us.

I (choose to) see it a bit differently.  Rather than a catastrophe to be avoided, this is a chance for brands to capture consumer mind share and market share with sincere, authentic initiatives to align their interests, to implement leading (not lagging) ESG policies that will result in net welfare creation, for companies, consumers and societies.

I am not thinking just about the excitement about Cleantech set off by An Inconvenient Truth, nor simply the bottom-of-pyramid strategies that treat developing markets as incubators and consumers-in-training.  In EaarthBill McKibben points out an enticing (and scary) corner of the market that is not being given much attention (perhaps because we are in denial).

Assume for a moment, as McKibben argues, that some amount of climate change is a foregone conclusion.  We have more extreme weather events to look forward to, like the floods in Pakistan or the wild fires in Russia we saw this past year.  Putting aside the human tragedy and political upheaval these sorts of “natural” disasters are sure to cause, the world will be looking for new ways to preserve the same standard of living we have come to enjoy.

The new climate is signaling a new world, and from a business perspective, a new competitive environment. (Don’t take me to be callous and opportunistic like the Wall Street I criticize; this just isn’t a blog about social justice.)  There are already lots of competing solutions aspiring to stop/prevent climate change, but not as many people seem to be talking about solutions for dealing with a climate that has already changed.  What kinds of products and services will people need to deal with the new climate?  What kinds will they want to preserve some semblance of the lifestyle they have grown accustomed to?


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