We've been talking about how businesses drive impact. I think a question that comes to mind is, can a business create positive impact and make money too? That's what I want to talk about in this video. The short answer to that question is yes, a business can create positive impact and make money too and we've seen that in the companies that Nick and I were just discussing. Certainly, those companies have been quite successful. Yes, it's possible to do both. Can you invest in companies? Can you invest in these high impact companies and make money too? Here again the answer is yes. That's what the world of Social Impact Initiative has shown in our research on impact investing private equity funds. That's research that my colleague Professor Chris Gates is going to be describing in his module so you'll hear more about that research. The only thing I would add is, it's still early in research on impact investing and financial performance. We've been collecting additional data within the Wharton Social Impact Initiative and we hope to have more definitive evidence soon. But the best evidence comes when you have a lot of research on a topic. I talk about that in the next module. I talk about meta analyses and really a meta analysis is a statistical summary of many studies on the same topic. That's really the gold standard of research and we're nowhere near that yet. This is really an area of research that's just beginning to take off. Another question may come to mind and that's really, what's the relationship between a company's impact and its financial performance? That is, is there a trade-off such that the greater a company's social impact, the lower its profits? Maybe because creating impact cost companies money or conversely, does impact drive profits such that the greater a company's social impact, the higher its profits? Perhaps because creating impact saves companies money in employee, customer and investor recruitment and retention. Does creating impact cost the company money or does it save it money? The short answer is, we don't know yet. Certainly, there are some areas where it's pretty clear that impact can save a company money. Companies often save money when they clean up their environmental performance but when it comes to a detailed analysis of the relationship between impact and financial performance and how this plays out for different companies, we don't have great evidence yet. One reason we don't have a lot of evidence on this topic simply is because this is a new way for businesses to do business and we're just starting to study it. But I think a bigger barrier here is it's really hard to measure and quantify the impact of a company. If you go back to the Starbucks example and Starbucks College Access Program, how would you measure and quantify the impact of that program? Well, I'll say more about that in the next video but suffice it to say, it's tricky and it's even more difficult to compare the impact the different companies can have in different ways. We don't necessarily have standardized measures that help us compare different companies. If you think back to the companies that Nick and I were chatting about, it'd be tough to compare the impact of Starbucks versus Greyston Bakery versus Walmart versus Salesforce and D.light and Raise.me and MAC Cosmetics. It's like whoa, those companies have impact in a lot of different ways. Putting a hard number on that to say which one has more impact, that's going to be a challenge. All of that is a challenge even if we had data and a lot of data available on how companies create impact but we don't have great data on that. Companies are not required to present impact data so it's not necessarily publicly available. All of that is to say, it's clear that companies that create a positive social impact, can be highly profitable. We see lots of examples of those companies but what the overarching pattern is across many many companies and what these relationships are like, we're just beginning to explore those questions. We are seeing increasing evidence that ESG, that's Environmental Social and Governance criteria, help us predict company performance. And that seems to be particularly the case if these factors are especially relevant or material for a given sector and if we consider a company's long term performance. Companies that pay more attention and do a better job managing their environmental impact for example, over the long haul, there is some evidence that these companies are going to perform better which is great. We would hope that would be the case. But for people really interested in impact, it's not entirely clear if existing measures of ESG actually capture impact. Now, E stands for environmental so those measures may get at what we would consider environmental impact but let's take another aspect G. What is G? I don't have a lot of time to go into all the details here but G stands for Governance. And how is G operationalized? That is how do we measure G, Governance? Existing measures tend to look at things like, how are your top executives paid? Are there independent board members on the board? How diverse is the company's board? Does it include women? How transparent has the company been in reporting on its political contributions? How transparent are the company's accounting practices? And have auditors approved of the company's accounting practices? Now, those are standard measures of governance, is that impact? Well, to me that's good business. It's absolutely clear that it's good business but it's not impact per se. I say all this just to kind of give you a little peek into the world of measuring impact, measuring ESG. There's a lot of interest among researchers and investing advisers in this topic. I think we're going to know a whole lot more within a few years. To recap, can businesses drive impact and profit? Can they achieve both? Absolutely. Can investors achieve market rate returns by impact investing in private equity? Absolutely, the early evidence is looking very encouraging we found some of that evidence. We want to do more research to really verify our early findings. Does it pay for a company to drive impact? Certainly, there are good reasons to think the answer is yes. In many cases, companies can drive impact and save costs, particularly in making changes that reduce a company's environmental footprint and its packaging or shipping costs for example and in many cases, companies can drive impact and increase employee and customer attraction and retention. But certainly, there is a lot more we need to learn about the relationship between a company's social impact and its financial performance. For example, we might wonder is it the case that the relationship between impact and performance is linear such that the more impact a company creates, the better its financial performance. As somebody who is passionate about social impact of business, I hope that's the case but I would acknowledge that it may be a curvilinear relationship so that the more impact a company creates, the better it's performance. But there comes a point where that financial payoff starts to taper off, that the more a company invests in impact, at a certain point it hurts its profits. We don't know yet. These are important questions to investigate for future research so we know companies can create a lot of impact and be profitable. We see that with great exemplars but there's a lot more research to be done and I think that kind of work is going to be done at Wharton. It's going to be done by the Wharton Social Impact Initiative and by our terrific faculty and I think we'll have a lot more answers within a few years.
