Beyond the Bottom Line: Why Companies Are Focused on Social Impact
Over the past few years, the idea of what broader role a business should play in society has undergone a substantial change. Gone is the view, summed up in 1970 by Nobel Prize-winning economist Milton Friedman, that the only social responsibility of companies was to increase profits. Cut to today, and there are a growing number of CEOs and investors who are taking a longer-term view of their company’s success and impact.
This shift reflects greater interest and scrutiny from the public, as well as employees and shareholders, into what a company stands for and how its values translate into action that benefit society beyond the boardroom. In response, companies are putting their money where their mission is: Promoting good works and better aligning the purpose of the organization to something “greater.”
The ideological move is mirrored by greater interest in socially responsible investing. According to the United Nations’ Principles for Responsible Investment, the category has been rising dramatically over the past few years. Tim Manuel, Aon’s head of responsible investment in the U.K., states, “By focusing on and promoting its wider social impact, an organization sends important signals about its values and culture to employees, shareholders, customers and beyond. That social impact can come from many places, from the organization’s commercial activities through to the investment approaches it offers in its retirement provision plans.”
Corporate strategy in two areas – investment decisions and overall employer brand – demonstrate how companies have aligned their organizations with their overall corporate impact. Such alignment with a greater good also carries impact related to how an organization prioritizes innovation to create a better world. As Michael O’Connor, co-president, Aon, puts it “The commercial impact of innovation is significant, but the long-term social impact is even greater.”
For decades, marketing campaigns sought to align companies with broader values. But now the public expects more from companies than just feel-good ads or slogans. The increased availability of information about companies and their activities has brought increased scrutiny from the general populace and activist shareholders. These factors have helped the recent rise of corporate social responsibility (CSR) programs. In 2011, just 20 percent of S&P 500 companies published reports on CSR and related initiatives; by 2016, that figure had risen to 82 percent.
When companies are successful, their mission and commitment to CSR are intertwined, creating a favorable brand reputation that extends from products to the balance sheet to culture. It’s not coincidental that companies such as Cisco, Disney, Google, Intel and Microsoft rank among the Fortune 100 as well as the top 10 companies by CSR reputation”.
Recruitment also plays a part in the shift. To target top talent, companies now must emphasize their employer brand, and that includes articulating their values. Millennials now account for the largest share of the workforce, at approximately 56 million. Increasingly, this demographic is leading the push with organizations, with recent research indicating that 60 percent of millennials are seeking employers whose social responsibility outlook aligns with their own.
Studies show a growing trend with the types of benefits people are seeking, once they find the right organization. Research by the Morgan Stanley Institute revealed that 90 percent of millennials want sustainable investing options as part of their 401(k) plans. In addition, 82 percent of millennials say it’s important for companies to promote the health and wellness of consumers and employees through their investment portfolio.
Adding a Social Responsibility Lens to Retirement Investments
Little wonder, then, that a growing number of organizations are including socially responsible investment options in their 401(k) plans and investment portfolios.
Aon’s recent Global Perspectives on Responsible Investing examined the trends shaping how companies make these investment decisions.
One of the challenges for both companies and individuals is the lack of a standard definition for the various categories within the “responsible investment” segment. At a basic level, this category considers a company’s wider positive impact on society, which can take the form of providing clean water, promoting healthier lifestyles and fighting poverty, among other examples.
According to John Belgrove, senior partner, Retirement Practice, Aon, “Regardless of how people are defining these newer type of investments, the trends are clear: we’re seeing changing attitudes toward responsible investment due to increased interest from shareholders and employees.”
More and more companies are including these types of investments in their portfolios, and the report highlighted three main factors behind the growth:
Regulatory changes across geographies
According to the United Nations’ Principles for Responsible Investing, the number of regulatory changes has increased exponentially over the past decade. In recent months, almost every geography has seen dramatic changes across the responsible investing regulatory regime.
Demographic shifts within the workforce
Now that millennials have eclipsed baby boomers as the largest segment in the workforce, they are making their voice heard on investment matters. Millennial employees have expressed their interest in having such investment options at higher rates than their peers. Similarly, women are also committed to such investing, complemented by growing influence – they now control more than 50 percent of the investable wealth in the U.S.
Meredith Jones, partner, Retirement Practice, Aon, notes: “The collective push by millennials and women for social impact investing is largely responsible for the twofold increase in total assets in this category over the past five years.”
Quality of data
Until recently, companies and investors lacked a sufficient volume of data to support investment decisions in social impact. As Belgrove explains, “When we are making investment decisions, we look at historical evidence and data. As this area tends to be newer, we had to wait several years to achieve a critical mass of data to support investment models and analysis.” Trends are clear though, he adds, the category is seeing tremendous growth, and as more data becomes available, more precise investment decisions can be made.
How Socially Responsible Investing Supports Reputation and Talent Attraction
Booming economies and falling unemployment rates around the world have made the competition for talent fiercer. This means that, when assessing career options, candidates are considering not just compensation and benefits but also a company’s mission.
In response, companies are investing in the development of an employer value proposition (EVP) – the value employees attach to their association with an organization. An EVP can consist of many factors, including a company’s reputation, emphasis on health and wellbeing and social impact. Aon’s 2018 Trends in Global Employee Engagement found that a company’s EVP can have a pronounced impact on overall workforce engagement. The report also revealed that an EVP was among the dimensions that had the greatest increases compared with the previous year.
Boon Chong Na, managing director & partner, Talent, Rewards and Performance, Aon Singapore, explains, “If talent attraction and engagement are not strong enough reasons for management to take action, shareholders are also urging companies to incorporate environmental, social and governance considerations into their business plans – with a part of the executive pay tied to their achievements.”
Teryluz Andreu, North America, culture and engagement leader, Aon agrees that the impact of the “greater good” can pay dividends related to improving attraction and retention of an organization’s talent. She underscores the importance of similar values and engaging in the cause, “when employees see alignment between their company’s causes and their own personal values – and are also involved in the efforts to make a difference in the world – employee engagement scores can actually go up.”
How Socially Responsible Investing Could Evolve
The benefits of integrating social impact into corporate decision-making extend beyond those related to talent and reputation. Alignment with social impact helps not only bring talent into an organization but sends signals about the company’s values and culture to other key stakeholders, including regulators, shareholders and customers.
These benefits – combined with demographic shifts in the workforce that have already had a far-reaching impact on businesses and their approach to social impact – will likely add to the growing move toward responsible investing.