Profit comes from Purpose
It’s very easy to think of responsible and ethical investing as some special science forever at the margins. But there is a growing recognition that this approach is becoming far more mainstream. Underpinning this view is the notion that real sustainable profit can only come from Companies who have a purpose to benefit society and the environment they live in. More and more experts from many fields are talking about this link between profit and purpose.
In my last blog I mentioned how Professor John Kay, government adviser, stresses the importance to the market of companies allocating capital towards long term sustainable needs for society. Providing a further dimension to this was a TED presentation made recently by Alex Edmans, Professor of Finance at London Business School. Alex Edmans Ted Talks
In his presentation he talks about how profit and purpose is not an either-or choice. Instead the profit will follow from a company’s purpose. This purpose can be external reflecting what it achieves for its customers and users but can also be internal based on how it operates.
Alex Edmans concentrates more on the internal purpose. In particular he has investigated how employee well-being affects Company returns. This has involved a 4 year study based on ‘Fortune’s top 100 companies to work for’. In the study he wanted to look at how future stock returns were impacted by employee well-being. Using recognised analysis he discounted other possible factors, such as general industry success and other growth factors. The results showed that the share returns of the 100 best companies consistently out –performed their peers by 2-3% per annum over the period between 1984 and 2009.
This naturally has positive repercussions for responsible investors. In this regards Alex also brings up a really interesting point. Much traditional analysis, such as price earnings ratios, is so easily accessible it’s often more difficult to gain real underlying value at the time when a stock is bought. Environmental and social data however, such as employee well-being, is more difficult to access. Much of this information is offered by specialist consultants, who work closely with SRI and Ethical fund managers, whilst not currently being recognised by many traditional fund managers.
Therefore there is real profit with purpose.
Please subscribe if you want to receive more articles