It’s becoming increasingly apparent that the cookie-cutter career path of the past century has shifted and business takes place in a whole new landscape. Millennials have diverged from the conventional corporate route of past generations because life in the 21st century commonly begins at a higher rung of Maslow’s Pyramid. This factor alone has allowed for young Americans to create wildly successful businesses, such as Facebook and Snapchat, which were inconceivable just a generation ago. With all physiological, safety, and social needs met at an early age, people who are just dipping their toes into the professional world as well as others with years of experience, desire more from their professions – more than just money.
I recently attended a fellowship called StartingBloc, an institute that helps young social innovators and entrepreneurs address current global challenges by giving them the education, inspiration, and connections to create lasting change in the world. A band of enthusiastic people fueled by a non-monetary fire gathered together to learn how to successfully impact a social cause of proprietary significance. The diverse StartingBloc cohort consisted of fellows from different educational, geographic, and demographic backgrounds, but each person was commonly inclined to devote his or her career to making an impact in a community. It seems that the business landscape will continue to change because a growing number of people in the workforce value making a social impact more than making massive paychecks. However, increasingly affluent lifestyles require larger sums of money and there will always be bills to pay. Here’s the multibillion-dollar question: Can a business focusing its efforts on creating a social impact be monetarily profitable?
Social impact enterprises can take form in a variety of manifestations, such as alleviating poverty, combating sexual abuse, reforming education, and- my personal subject of competency- shifting to renewable energy and sustainable lifestyles. Investing in businesses with socially oriented missions is often considered a type of charitable donation rather than a return on investment driven decision.
Investors have attempted to marry social impact enterprises and conventional investment practices over the past decade, giving rise to Impact Investing firms. An article in the Stanford Social Innovation Review defines the practice of impact investing as “actively placing capital in enterprises that generate social or environmental goods, services, or ancillary benefits such as creating good jobs, with expected financial returns…” The article cites a number of market frictions restricting the advancement of impact investing including, but not limited to, lack of standardized social impact metrics, inflexible institutional practices, small deal size, limited exit strategies, and governance or legal problems. The article deduces that impact investors are looking for diamond in the rough deals and a replicable model to align social impact enterprises and profitability does not yet exist
In relation to traditional investing practices, impact investing is still in diapers. It’s too early to determine the long-term feasibility of the industry, but let’s put ourselves in the shoes of business executives or traditional investors. Their mission is to cultivate a profit, bar none, so why would they ever shift to more sustainable, yet more costly, methods of business that will detract from the bottom-line? Take the following scenario as an authentic case study:
Repurpose Compostables manufactures cups and utensils made from plant materials. Compostable products biodegrade within a few years, contrasted with typical plastic products, which take up to 1000 years to break down. Given this excessive discrepancy between the lifespan of the products, using compostable products yields a more sustainable practice… so why are plastic products found in almost all restaurants, bars, and businesses? It’s all about the bottom line. Repurpose Compostable’s products cost somewhere in the neighborhood of 10% above comparable plastic products. No businessperson primarily concerned with profitability would knowingly choose to raise costs by 10% without receiving some type of value in return.
In situations such as the case study above, seeking monetary profitability prohibits the implementation of more socially valuable practices. Additionally, seeking monetary profitability also acts as a barrier to innovation when the underlying value of an asset is too minute (similar to the small deal size market friction cited by the impact investing analysis). An anecdote to illustrate this point can be taken from my experience working at the Los Angles Cleantech Incubator where a couple dozen startups run innovative enterprises in a variety of industries, from electricity efficiency software to plasma lighting to e-waste recycling, nested under the umbrella of clean technology.
Los Angeles has always lacked a proprietary water supply capable of sustaining its population. In recent years, a drought crisis has cast a shadow over the region. Water shortage is clearly one of Southern California’s most pressing issues, yet, not a single company at LACI focuses its efforts on combating the problem. This discrepancy between the demand for water and the amount of companies developing innovative solutions can again be attributed to the cost of water. Los Angeles District of Water and Power charges a rate of less than $0.01 per gallon of distributed water; less than a penny per gallon in the midst of a statewide drought crisis! At this price, the potential profit from developing innovations to sustain the water supply is too insignificant for companies to pursue. Water innovation should be ubiquitous in Los Angeles, but due to the lack of profitability, it’s seldom pursued as a business.
The numerous problems stacked up against social enterprises to attain profitability are vast, but I have come across two methodologies that may offer a fighting chance to achieve ongoing monetary profitability.
I had a conversation recently with Megan Guy who briefed me about her current advisory work with The Nature Conservancy. The well-funded global non-profit, staffed by seasoned business veterans and headed up by CEO Mark Tercek, seeks to dovetail nature and finance by valuing and cataloging all assets found in nature that implicitly receive a value of zero without a stated valuation. An article in The New Yorker, entitled Green Is Good, outlined the cutting-edge project initiated by The Nature Conservancy. “The key idea is to create tools that can assign monetary value to natural resources. Tercek, a former partner at Goldman Sachs, thinks that environmental organizations rely on fuzzy science and fail to harness the power of markets. With the help of sound metrics drawn from the world of finance — ‘a higher level of accountability,’ in his words — some of the ecological harm caused by the very same corporations can be undone.” (Max, 2014).
This method of placing specific financial values on natural assets has the potential to award social enterprises with monetary gains that have yet to be realized. Perhaps the same system can also be replicated for other social pursuits such as the reformation of education and the alleviation of poverty.
The second strategy with the capability of altering the playing field that has begun to emerge involves behavioral psychology. Opower is a customer engagement company that partners with utilities to reduce energy usage by delivering personalized reports to homeowners about their energy consumption in relation to other homeowners. The company places behavioral science at the core of its business and has tapped into a strategy that could incite consumer change across myriad industries.
Behavioral science could also be used to steer people towards employing sustainable business practices and away from current norms. Behavioral science could be used to shed light on issues that require reformation so that the current practices become so unpopular, uncool, and unattractive, that no one employs them. Behavioral science could be the necessary tool to trump decision making from a strict bottom-line perspective.
Yes, profitability while creating a social impact may be possible. However, this is an entirely new frontier. Solutions that have worked in the past can’t be replicated and put into action to bypass the prevailing roadblocks. Innovation holds the key to marry social impact with profitability.