Interview: R. Paul Herman on how to invest to maximize social impact and profit
“Capitalism used to be easy,” writes R. Paul Herman in the opening line of his new book, The HIP (Human Impact+Profit) Investor: Make Bigger Profits by Building a Better World. Businesses, he argues, used to get away with jeopardizing the long-term health and stability of society in the name of short-term profits. In light of the recent mortgage crisis and BP oil disaster, many would argue that they still do.
But Herman, who has worked at McKinsey & Co., the Omidyar Network and Ashoka, argues that a shift is underway. His analysis shows that companies which pay attention to social impact outperform less conscientious competitors on profit measures. He has created an investment advisory firm and consultancy, HIP Investor, Inc., to help companies and investors increase financial returns while addressing critical human needs. Herman spoke recently with us about why social investing is no longer about shunning “bad” companies in favor of “good” ones, but rather using market signals to push everyone in the right direction.
Dowser: Define HIP investing in two sentences or less.
Herman: HIP investing is having every part of your portfolio – cash, stock options, bonds, real estate – generate a positive human, social, and environmental impact while also making money.
And what is the role of the HIP Investor consultancy?
HIP Investor ranks companies by their human, social and environmental impact. We help executives and leaders see that they can position their organizations to do more good for the world and, at the same time, make more money.
How does HIP differ from other types of social investing?
We look at things from a pragmatic, not a purist, perspective. Traditional social investing kicks out ‘negative’ companies from investment portfolios. At HIP, we’re inclusive of all companies. We believe that even companies like Philip Morris and Halliburton and Exxon can improve and create better jobs, be more eco-efficient. We don’t kick them out of the room; we just put a little dunce cap on them in the corner.
Are any companies already doing that type of performance review?
A similar system exists at GE for greenhouse gas reduction. If business units don’t deliver greenhouse gas reduction along with profit, then they won’t get their full bonus; they must deliver both eco and financial results.
Don’t we have to consume less in the future? Does the HIP approach imply that we can consume differently rather than less?
The world encounters increasingly scarce resources. However, humans have pioneered technologies that use those resources in more and more efficient ways. So for example, in California they’ve used electricity in increasingly efficient ways over the past 30 years that have eliminated the need for building new power plants.
But do we need to consume less overall? At the very least, high-income societies need to consume more efficiently, if not consume less. And at the same time, low-income but high-growth communities in China and India want to mimic the quality of life that they see in high-income communities. So they’re going to need to innovate in ways that will use fewer natural resources—and, in fact, they already are.
Data shows that HIP investing actually outperforms ordinary investing, and yet most people aren’t doing it. Why not?
Data-driven people are ignoring data. That’s kind of a shock. When traditionally trained finance analysts or businesspeople hear the words ‘environmental’ or ‘social,’ a block goes up, for some reason — even though these products are as or more profitable than their alternatives.
Let’s get down to some specifics. You compared Target and Walmart from a HIP framework. What did you find?
Target wins on the impact side. They have a lot more operating metrics that contribute to human, social and environmental impact.
But on the management practices side, Walmart is doing a lot of really powerful things. For example, they’ve created a sustainability index that they’re rolling out to all 60,000 suppliers. So we would expect Walmart to accelerate over time.
Apple is beloved by people who are devoted to green. And yet, according to the HIP index, Microsoft fares better.
There are two reasons for that. First, Microsoft communicates a lot more about what they do; they’re more transparent. Second, Apple doesn’t think enough about social impact when they design projects. For example, you can’t change out the battery on an iPad [so you have to throw it away when the battery dies].
You also compare Pepsi and Coke, and conclude that Pepsi has slightly better corporate practices. In my view, Pepsi and Coke are both in the business of giving people diabetes. How do they qualify as HIP investments when their products make people less healthy?
In the most HIP world, you might invest in a smaller beverage company that doesn’t use high fructose corn syrup. It just means that your portfolio might have higher risk.
Pepsi and Coke are both large companies, so that’s lower-risk because large companies attract most of the market’s capital. One of the things HIP is trying to do is shift how that large amount of capital is moving, and to get companies to compete around that.
So let’s say this is really successful, and in 50 years all companies are doing this. What does the world look like?
At least three things will be in place. First, the majority of companies’ revenues will come from products that do good as well as make money—things like microfinance, healthy organic products, or eco-efficient transportation. Second, companies will not just be looking at profits, but eco, social and human impacts. And there will be performance measures. Muhammad Yunus says there might even be a section of the Wall Street Journal dedicated to this. And third, companies will embed this approach into every decision they make, every new product, every way of allocating people or money inside the company and every performance review.
This interview was edited and condensed.
Photo: Laura Read