socially responsible investing Archives

Rural Broadband: An Investment in Connectivity

Written October 28, 2021October 28, 2021 by Ailie Carlene Elmore

Author’s Note

“Growing up on a farm in rural Illinois, access to internet was always a hinderance in my family’s household. The screeching sound of the dialup internet starting up was all too familiar until about 7 years ago when my family was finally able to have WIFI connectivity (wireless local area network). Even then, video streaming was still out of the question, and it would take several minutes to send an email. When my brother and I moved home in March of 2020 because of the COVID-19 pandemic, we were both finishing up graduate school then both had to start jobs working remotely in May. We needed to coordinate Zoom calls because we would easily overload the WIFI network if both of us were on one at the same time. Even then, our internet would crash at least once a day. This is a familiar story for many rural American households that has been heightened as millions of Americans began working or learning from home due to the pandemic. Investment in broadband coverage is something that I happen to find very important if we are to be socially responsible investors.” – Ailie Elmore

Current Status of Rural Broadband

The need for digital interaction is increasingly becoming a necessity for people around the world. From working remotely, learning virtually, telehealth appointments with providers, and accessing other essential goods and services through E-commerce, the world has never been quite this connected. However, that isn’t quite true for all Americans. 22.3% of rural Americans and 27.7% of Americans in tribal areas still lack basic broadband coverage. The Federal Communications Commission (FCC) defines broadband as 25 megabits per second (mb/s) of download speed and 3 megabits per second (mb/s) of upload speed, however this continues to evolve with technological advances. For reference, the size of this article is roughly 1 megabyte which would take around .32 seconds to download with an internet speed of 25mb/s.

Unfortunately, many rural communities have been left behind in this technological advancement which has not only cost the United States socially, but economically as well. For example, many jobs have moved to remote work due to the COVID-19 pandemic, and companies have realized they can cut down on costs by not having employees come into a physical building. McKinsey estimates that remote work offerings will continue to grow as a result of the pandemic which could mean more job opportunities for those living in rural areas. However, improved access to jobs traditionally performed in an office setting only increases the demand for rural broadband connectivity.

Broadband Subscription by County in the United States.

Last month, we focused on education technology advancements that are reshaping the way we learn. However, 12 million school-aged children are left without broadband access in their home, inhibiting virtual learning potential. The COVID-19 pandemic shed light on this as these children were left without broadly available resources to complete their schoolwork. Likewise, remote employment has also been one of the positive outcomes of the pandemic, however the rural workforce struggles to keep up with the connectivity needs for video conferencing, transferring files, or collaborating virtually. The need for a digital infrastructure exists however the upfront costs for providers to initially invest becomes a tough pill to swallow. The initial cost to create a fiber network costs around $80,000 per mile which makes it difficult for companies to recoup their investment in rural areas where the population per square mile is much lower. This cost alone has disincentivized many major providers from investing in high-speed internet in rural areas.

The United States government has worked to spark growth in rural broadband through investing in broadband infrastructure. $47.3 billion was invested from 2009 through 2017 in this industry, and the USDA has invested heavily in programs, loans, and grants for rural connectivity infrastructure. In August of 2021, Agriculture Secretary Tom Vilsack announced $167 million in capital deployment for 12 states lacking access to high-speed internet in rural areas. “Broadband internet is the new electricity. It is necessary for Americans to do their jobs, to participate equally in school learning and health care, and to stay connected.” – Secretary Vilsack.

However, is this enough to bring rural America up to speed? In an analysis performed Deloitte on behalf of the USDA, they estimated an investment totaling between $130 billion and $150 billion would be needed to fully support rural broadband coverage and ensure high speed access. The U.S. government’s targeted, minimalist approach to rural broadband has left the door open for private companies to capitalize on this investment opportunity.

The Potential Economic Impact of Rural Broadband in the United States

While the need for rural broadband is apparent, it begs the question what kind of impact could investment in this space have? The USDA projects that if rural broadband enhancement was realized to its full potential, then it would boast an additional $18 billion of annual economic improvements in the United Sates. Furthermore, $1 billion in additional e-commerce sales would occur if broadband coverage was equivalent in rural areas to that of urban regions. Not only would rural broadband access improve the economic environment, but would also improve the quality of life for rural Americans. 60% of Americans who live more than 70 minutes from a physician do not have internet coverage that can handle telehealth visits. Additionally, lack of broadband inhibits peoples’ ability to connect digitally to sources of entertainment, knowledge, and social interaction.

A revitalization of rural communities could also occur if people are able to have the comforts of an urban digital infrastructure anywhere in the country from improved access to rural broadband. Improved rural internet connectivity could give people the capability to work remotely and more affordably live anywhere in America. The COVID-19 pandemic has already sparked a movement away from cities to the suburbs. Adequate investment in rural broadband could drive that movement even further away from metropolitan areas to the ex-burbs and towards the pristine, scenic mountains of Colorado, the beautiful deserts of New Mexico, or amber waves of grain of Iowa.

Not only would investment in broadband help the everyday person in rural America, but it could have substantial benefits to the agriculture industry, the lifeblood of many rural communities. Like many industries, technological advancements in agriculture have pushed the industry into digital integration. Precision agriculture has had substantial impacts on the productivity and efficiency of U.S. food production which has been driven by the farmer’s ability to connect to a digital universe. Currently, broadband is giving farmers access to a wide array of digital technologies, but the USDA projects that $47-$65 billion (Table 2 below) could be added in gross benefit to the economy if the full potential of broadband, and the digital landscape was reached in America’s heartland.

The impact rural broadband could have on the U.S. Agricultural Economy.

Row-crop farming operations have more widely adopted precision agriculture technology but there is still room for improvement in broadband infrastructure for livestock and specialty crop production. An investment in digital infrastructure could reap substantial environmental benefits as the USDA projects an 80% reduction in chemical application and up to 50% reduction in water usage as a result of precision agriculture. The World Economic Forum estimates that if just 15-25% of farms adopted precision agriculture technology then by 2030 there could be a 15% decline in greenhouse gas emissions and a 20% decline in water usage. A reduction in water consumption like this could provide 64.4 billion gallons of water additionally to Americans every day. Achievement of these kinds of broad-based outcomes would be major milestones across many of the United Nation’s 17 sustainable development goals, particularly 2) Zero Hunger, 3) Good Health & Wellbeing, 6) Clean Water & Sanitation, 8) Decent Work & Economic Growth, 11) Sustainable Cities & Communities, and 12) Responsible Consumption & Production.

Investment in Rural Broadband

In addition to the U.S. government making targeted investments in rural broadband, many private industries are also taking part in the broadband rollout only where investment is economically viable. Cellular-based internet providers such as AT&T and Verizon offer rural broadband coverage, but internet speeds are still troublesome for many consumers. There has also been a push to deploy fiber optic internet infrastructure by several private companies. However, this option is questionable economically for lower density communities with cost estimates of up to $80,000 per mile for broadband lines. The Federal Communications Commission offers assistance through the Alternate Connect America Model to private companies building fiber infrastructure in underserved areas. Unfortunately, this assistance is again targeted as the program is usually only available for very remote areas. As a result, private investment in rural broadband is economically constrained and limited in its scope and effectiveness.

A potential champion for rural broadband deployment has recently emerged in the founder of Tesla, Elon Musk. Through his company, SpaceX, he is revolutionizing the way that internet is provided in a capital intensive, winner-take-all approach. Using low-orbit satellites that are closer to earth than standard satellites, SpaceX has launched a program called Starlink that can provide internet service at triple or quadruple standard “high speed” internet. Currently, Starlink can provide between 80Mbps and 150Mpbs in download speeds and 30Mbps of upload speeds which is close to 6 times the definition for rural broadband mentioned earlier. Starlink advertises it will be able to provide its broadband coverage to anywhere in the world. While there is an initial consumer setup cost of $499 for a satellite and router then a monthly fee of $99, Starlink is a highly, attractive alternative to many Americans yearning for faster internet. The estimated payback on setup costs for a rural broadband subscriber at $150 per month is about 10 to 12 months. Musk said in May 2021 that the company had received more than 500,000 pre-orders for Starlink service.

Starlink has deployed more than 800 satellites thus far and says it still plans to launch 12,000 satellites costing around $10 billion to provide high speed internet to the masses.

Opportunities for Investment

As an industry that is experiencing rapid growth and is likely to continue to do so, rural broadband could be attractive for investors seeking to deploy capital in a socially responsible space. An investment in broadband coverage could take a variety of shapes as there are many players in the telecommunications industry. An investment in Starlink could be a particularly attractive long-term investment given its unique ability to provide high speed internet around the globe. The resulting business moat achieved through Starlink’s highly capital intensive ($10 billion) business plan could boast substantial returns in the future if Starlink is successful in establishing their low orbit satellite network and achieve subscriber goals. It is unlikely that another competitor will emerge with the boldness to spend $10 billion or more to compete. A publicly available Starlink would be an intriguing pure play on the rollout and associated societal and economic benefits of rural broadband deployment.

Musk has not announced a target date for the IPO for Starlink yet, but it is projected to come in the near future. In advance of a potential Starlink IPO, the First Trust Index NextG ETF – NXTG offers a broadly diversified play on the digitization of rural communities across the globe. NXTG’s strategy is to invest in public companies applying substantial resources to the research, development, and application of fifth generation (“5G”) and next generation digital cellular technologies within two sub-themes of 5G: infrastructure & hardware and telecommunications service providers. 5G infrastructure & hardware consists of data center REITs, cell tower REITs, equipment manufacturers, network testing, validation equipment, software companies, and mobile phone manufacturers. Telecommunications service providers consist of companies that operate the mobile cellular and wireless communication networks that offer access to 5G networks.

Our expectation is that NXTG would likely capitalize on a Starlink IPO when it becomes available. Currently, NXTG’s current holdings include companies developing digital technology such as Apple, Nvidia, HCL technologies, and NEC Global. NXTG’s 1 year return is just over 33% and has just over $1 billion in assets with exposure domestically and in foreign markets.

The deployment of rural broadband has the potential to provide for lasting economic and societal benefits that touch a variety of industries and rural communities left behind in the digitalization of commerce and social interaction. From an improvement in agricultural production and sustainability, to better access to health care and education, an investment in rural broadband will widely benefit mankind economically and socially and potentially achieve clients’ investing with purpose goals and objectives.

What is Education Technology?

Written September 27, 2021March 27, 2024 by Ailie Carlene Elmore

Chalkboards, pencil sharpeners, and slide projectors: all represent old school educational tools. Today these low tech devices are being rapidly replaced by virtual reality, white boards that can record what is written, and most importantly, computers. The locus of education has quite literally changed, from a physical lecture hall to a virtual classroom in the cloud. Leading this revolution is education technology, also known as “EdTech.” Education technology combines information technology and computer software with a wide array of educational methods to foster learning and student growth. Combining tools like virtual reality and artificial intelligence with other forms of media like podcasts and instructional videos, Ed Tech is re-shaping the way people learn from ages 2 and up. The COVID-19 pandemic spurred growth within this sector and has some wondering whether this trend will continue post pandemic.

Spurred Growth from COVID-19 Pandemic

1.2 billion children around the world went from sitting in classrooms to sitting behind a computer in April of 2020. A new wave of e-learning, which uses computer assisted teaching to educate, persisted throughout school districts. Prior to the COVID-19 pandemic, online resources such as Coursera and Kaplan existed but were not as widely adopted. As teachers navigated e-learning, students and parents had to take a more self-taught approach to learning. E-learning offered students more flexibility in their learning environment and gave them opportunities to seek out more widely available resources in the digital world. As a result of COVID-19, researchers are projecting a $70 Billion increase in the e-learning investments in the next five years.

Major Players in Education Technology

There are a variety of interlocking participants within the education technology market. The government has been involved in the space since 1994 with the creation of the Office of Educational Technology within the Goals 2000 Educate America Act. As part of the United States Department of Education, it works to develop policy, media tools, and digital infrastructure to support education technology for K-12 learners. Prior, to COVID-19 there was little funding available to build an e-learning infrastructure and even post pandemic, resources are scarce particularly in rural or lower income areas.

Private industry has been eating up the opportunity to build out an education technology infrastructure and flourished even further during the pandemic. Experts predict by 2025 that there will be more than 100 publicly traded companies listed as an education or training companies with market cap’s greater than $1 billion. The ability for these companies to create cost-effective technology that can be integrated into a classroom setting or at home will be crucial to their growth. Companies such as Course Hero and Coursera help students learn a variety of subject matters such as calculus and biology through online courses and interactive platforms. Other companies such as Wondrium have capitalized on the fact that millions of Americans of all ages are seeking continuous learning experiences by offering courses in traditional university level topics such as history, economics, psychology, etc. as well as special interest topics like food, music, travel, and many more.

Education and training companies are projected to continue increased market cap growth.

While some traditional learning institutions may fight the education technology boom, many more public universities are embracing new ways of instruction and learning. For example, the University of Illinois at Urbana-Champaign has been at the forefront of investing in technology for classrooms and e-learning. In particular, through the Center for Innovation in Teaching and Learning, investments in eTexts have been made to integrate classrooms with online media. Craig Lemoine, the Director of the Financial Planning Program at Illinois, has worked to build 3 personal finance eTexts that not only can be used for student courses but eventually can be sold to private individuals or companies. “The final product matched our goal… High quality from authorship to final digital product, accessible across any number of learning styles,” said Dr. Lemoine.

Investment Opportunities in Education Technology

The market for education technology reached close to $75 billion in 2019 and is projected to grow at a 20% annual rate to $319 billion by 2027. In 2020 alone, $2.2 billion in venture and private equity capital was raised for U.S. education technology startups focused in augmented reality, artificial intelligence, and online course development. Block chain technology integration is also expected to drive innovation and investment in education technology as the academic world seeks better options for safeguarding student records and performing analytics.

Hardware development in EdTech dominants the market.

While the United States and other countries have embraced investment in education technology, it has not been as well received in China. In July of 2021, China announced regulations that banned companies from making a profit in the education sector. Particularly, companies offering tutoring services must be registered as non-profit. This caused many Chinese EdTech companies’ share prices to plummet. Domestically, investment in education technology continues to boom with no signs of similar government heavy-handed prohibition on for-profit business models.

There are a variety of options for investing in the nascent EdTech sector whether that is by investing directly in listed companies in the sector such as Chegg,Inc. (NYSE: CHGG) or Kahoot (Oslo: (KAHOT.OL). Note neither CHGG or KAHOT has yet achieved profitability. Another new, more diversified approach to publicly listed investment vehicles in this space is Global X Education ETF – EDUT, first listed on the NASDAQ on 7/10/21. EDUT seeks to invest in companies providing products and services that facilitate education, including online learning and publishing educational content, as well as those involved in early childhood education, higher education, and professional education. This ETF’s top holdings are major players in EdTech such as Chegg, Pearson, and Zoom. As a newer ETF, EDUT has only $8 million under management today. We will continue to monitor EDUT progress as a thematic investment possibility in education technology.

Future Implications and Growth Potential

As a challenger to traditional learning, EdTech has some people questioning if it will replace traditional learning methods. We believe EdTech will aid and augment traditional learning rather than replace it by creating more collaborative and productive learning environments that increase student engagement while increasing educator efficiency. EdTech is geared towards creating a more accessible environment for students to learn. However, many of EdTech’s benefits are highly dependent on a student’s ability to access this technology through broadband networks. Shockingly, 22.3% of rural Americans and 27.7% of Americans in tribal lands lack even basic broadband coverage.

We believe there is a high correlation between Opportunity Zones (low income communities), food deserts, and educational deserts. In the coming months, we plan to explore this overlap and devise purposeful investment strategies to improve the lives of children and families across the country. Check back next month for an in-depth analysis on investing in broadband and the opportunities it could present.

Investing with Purpose

Written July 30, 2020November 25, 2020 by Annie Dysart , John Heneghan

ESG and SRI Investing

Investors use Environmental, Social, and Governance (ESG) criteria to guide more sustainable and socially responsible investment. ESG falls under the umbrella of socially responsible investing, or SRI. SRI is any investment strategy that considers both financial returns and social and environmental impacts when evaluating the suitability of investments.

Incorporation of ESG criteria helps asset owners align investment decisions to their values and beliefs. It facilitates investing with purpose. ESG links health and wealth outcomes, highlighting the interdependence of healthy populations, environments, and economies.

Environmental criteria address issues like climate change, pollution reduction, and sustainable utilization of natural resources. They increase pressure for regulations that establish environmental liability and steer markets towards sustainable products and services. The criteria also help evaluate practices like greenhouse gas emissions, water usage, and waste disposal. Furthermore, they encourage companies to exhibit transparency surrounding these practices.

Social criteria look at how a company interacts with employees, suppliers, customers, and communities. It addresses workplace health and safety, discriminatory practices, diversity, human rights issues, and again, transparency about these practices.

Governance criteria assess company leadership, board structure and diversity, executive pay, audits, internal controls, and shareholder rights. It evaluates accounting and disclosure practices and controls to prevent corruption and bribery issues.

The more sustainable a company, the higher its ESG score. Investment strategies that integrate ESG criteria into portfolios decrease the weight of companies with lower ESG scores and increase the weight of companies with higher ESG scores. Third parties evaluate company disclosures to subjectively generate these scores.

Several ESG ratings firms now exist to assess and score the ESG disclosures, such as Sustainalytics (with an ownership stake by Morningstar), Institutional Shareholder Services, and MSCI. Think of these as the Moody’s and Standard and Poor’s for sustainability.

Types of Sustainable Investing

ESG integration is one of the most common types of sustainable investment strategies. Restriction screening is also very popular, eliminating industries like tobacco, weaponry, or environmentally damaging operations. Morgan Stanley defined five types of sustainable investing or SRI:

ESG Integration – Proactively considering ESG criteria alongside financial analysis.
Restriction Screening – Exclusionary, negative or values-based screening of investments.
Impact Investing – Seeking to make investments that intentionally generate measurable positive social and/or environmental outcomes.
Thematic Investing – Pursuing strategies that address sustainability trends such as clean energy, water, agriculture or community development.
Shareholder Engagement – Direct company engagement or activist approaches.

The Rise of Socially Responsible Investing

Amy Domini is known as the godmother of socially responsible investing. She started the SRI movement in the 1990s and made the Time 100 list of the world’s most influential people in 2005. She said, “We must continue to stand together to demand that the search for monetary profits not come at the detriment of universal human dignity nor the undermining of ecological sustainability.”

The emergence of the term “ESG” traces back to a 2004 report by the Global Compact titled “Who Cares Wins.” It was published in response to growing investor demand for more sustainable investment avenues and laid the foundations for a common understanding of ESG investment criteria.

The report stated a belief that markets did not fully recognize the significance of emerging trends pressuring companies to improve corporate governance, transparency and accountability, nor the high stakes of reputational risks related to ESG issues.

It emphasized the long-term importance of sustainable development, saying, “A better inclusion of environmental, social and corporate governance (ESG) factors in investment decisions will ultimately contribute to more stable and predictable markets, which is in the interest of all market actors.”

The incorporation of ESG principles and the practice of SRI have exploded in popularity. In 2017, 48% of retail and institutional investors worldwide applied ESG principles to at least a quarter of their portfolios. By 2019, that percentage surged to 75%. The European Union (“EU”) holds the most sustainable invested assets at $14.1 trillion US dollar (USD) equivalents. The United States follows with $12 trillion USD of sustainably invested assets.

SRI now accounts for one out of every four dollars under professional management in the United States. In Europe, it accounts for one out of every two dollars. Sustainable investing is often a voluntary and strategic venture motivated by constituent demand, perceived potential for attractive financial performance, and evolving regulations driving greater disclosure on ESG factors.

Client demand from retail and institutional investors is the top reason for the incorporation of ESG factors in financial reporting disclosures. In the United States, corporations that provide ESG disclosures do so voluntarily. Unlike the EU, there is no definitive accounting or financial reporting framework in the U.S. under which ESG factors are measured and reported to stakeholders.

ESG is most popular among millennials, women, and high-net-worth individuals. 95% of millennials surveyed by Morgan Stanley in 2019 expressed interest in sustainable investing and 90% want to tailor their investments to their impact goals derived from personal values and beliefs.

Millennials are poised to inherit over $68 trillion from their predecessors by 2030. Accordingly, the millennial ‘approach to investing’ will be an important determinant in the demand for ESG investments going forward.

The Deloitte Center for Financial Services (DCFS) projects client demand will accelerate ESG-mandated asset growth by three times that of non-ESG-mandated assets to comprise half of all professionally managed investments in the United States by 2025. Investment managers will likely respond to client demand for ESG by launching new ESG funds.

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The iShares ESG MSCI U.S.A. ETF (ESGU) launched in 2016 is the largest Socially Responsible ETF, with $7.8 billion in assets under management. ESGU tracks the MSCI USA Extended ESG Focus Index.

The index functions to maximize exposure to positive environmental, social and governance (ESG) factors. MSCI’s ESG rating framework determines these factors. Additionally, the index exhibits risk and return characteristics similar to those of the MSCI USA Index.

The MSCI USA Extended ESG Focus Index is sector-diversified and targets companies with high ESG ratings in each sector. It excludes tobacco and firearms manufacturers. iShares MSCI KLD 400 Social ETF (DSI) based on Domini’s groundbreaking work in socially responsible investing was the largest ETF prior to the launch of ESGU by BlackRock.

By February 2020, the number of ESG ETFs had skyrocketed to 293, with 805 listings globally. According to ETFGI, total assets invested globally in ESG ETFs reached a new record of $82 billion at the end of May 2020. There are currently 108 socially responsible ETFs traded in the U.S. markets, gathering total assets under management at a value of $37.2 billion and an average expense ratio of 0.39%.

Several brand-name U.S. mega-cap companies are seizing opportunities to incorporate ESG into their governance frameworks. As a result, they will demonstrate their commitment to sustainability to shareholders, stakeholders and customers.

This year, Microsoft pledged to be carbon negative by 2030. By 2050, they aim to remove all the carbon emitted either directly or from electrical consumption since their founding in 1975. This carbon negative goal will be achieved through a $1 billion climate innovation fund to accelerate the global development of carbon reduction, capture, and removal technologies.

By contrast, Starbucks has less ambitious (yet more attainable) sustainability goals. By 2030, the company will reduce carbon emissions by 50 percent. They will also reduce waste sent to landfills from stores and manufacturing by 50 percent. Finally, they will conserve or replenish 50 percent of the water currently used for direct operations and coffee production.

ESG Impact on Expected Returns

Many investors express concern that ESG investing will limit their investment options and potentially lead to lower returns. Studies and analyses express varying conclusions regarding whether ESG investing helps or hurts overall portfolio performance. There is a lively theoretical and practical debate.

In this video, Ben Felix from PWL Capital provides important insights to consider before committing to a sustainable portfolio, based on the assertion that sustainable portfolios provide lower expected returns.

Felix discusses the impact of socially responsible investing on expected returns according to a December 2019 study written. After analyzing a global sample of 5,972 firms between 2004-2018, the authors concluded that companies with higher ESG scores tended to deliver lower average returns than companies with lower ESG scores.

Investor tastes and preferences contribute to pricing effects on expected returns of sustainable and unsustainable companies. Investors with a strong preference for sustainable investments are less likely to invest in unsustainable companies that don’t reflect their core values and beliefs. They are more likely to invest in sustainable companies with lower returns for the tradeoff of aligning investment to their values.

Another implication of this tradeoff is that sustainably-minded investors will require higher expected returns to consider investing in an unsustainable company; the opportunity for financial gain would have to overshadow their desire to uphold a socially responsible portfolio.

At the other end of the spectrum, The Harvard Business School conducted a study in May 2019 that found companies adopting sustainability practices outperform their competitors. According to their analysis, a $1 investment over 20 years yielded $28 in return for companies focused on ESG factors versus a $14 yield for companies without focus on ESG factors. So rather than sustainable portfolios providing lower returns, Harvard concluded that ESG factors enhanced returns.

Research Affiliates, a global investment research firm, recently weighed in on whether ESG integration contributed to portfolio performance in their report, “Is ESG a Factor?” Factors are stock characteristics associated with a long-term risk-adjusted return premium.

In other words, an investor can systematically employ a factor to enhance portfolio returns. Factors must satisfy three critical requirements: they should be grounded in credible academic literature, consistent across definitions, and robust across geographies.

Research Affiliates concluded ESG was not a factor because there is little agreement in academic literature regarding its robustness in earning a return premium for investors, it lacks a common standard definition, and its performance results are not robust across geographies. They believe ESG is an important investing consideration despite dismissing it as a factor and lacking complete confidence in its ability to currently deliver as a theme.

One of our core investment beliefs is that investor preferences are broader than risk and return. Nevertheless, ESG can be a very powerful theme in the portfolio management process in the years ahead. However, as noted by Research Affiliates in their ESG factor analysis, one of the fundamental issues with ESG integration is that there is no common framework for evaluating companies’ ESG impacts.

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Call to Action

In his upcoming book, “Impact: Reshaping Capitalism To Drive Real Change”, Sir Ronald Cohen boldly addresses the obstacle of a lack of a common ESG impact measurement and assessment framework. He proposes the international adoption of “generally accepted impact principles” to transparently and consistently reflect the measurement of ESG impacts in financial statements to display “impact weighted profits.”

Cohen argues that today’s technology and big data allow us to reliably measure and assess impacts. He recommends that if governments force companies to publish impact weighted accounts, companies and stakeholders will develop a sharper focus on improving their impact and find creative solutions to social and environmental problems. Cohen calls this novel approach impact capitalism.

Impact capitalism is the invisible heart of markets that drives the invisible hand of Adam Smith’s Wealth of Nations. Impact is the third essential dimension to consider alongside risk and return when considering possible investments. Connecting social initiatives to investment criteria in this manner will enable entrepreneurs to finance purpose-driven investment and charitable organizations.

Investments are deemed attractive when their risk-reward potential is favorable. However, some investments have hidden costs that negatively impact employees, surrounding communities, or the environment.

Many companies do not factor in the cost of mitigating social and environmental problems caused by their operations in their traditional investment analysis, such as a factory that emits air pollution and afflicts people in the area with respiratory problems. These unpaid costs are also known as externalities – costs that are often incurred by vulnerable populations that don’t have the means to fix the problem themselves.

Impact investing presents an opportunity to take the pain out of profit. Its framework fosters financial success that is both self-interested and societally beneficial. When positive impact and profit coexist, everyone wins.

We think impact capitalism has the potential to drive creative solutions for the many socioeconomic imbalances and environmental issues we face today. Watch for our upcoming digital series that will explore these critical matters in greater depth.