Why does impact investing make commercial sense?
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In the latest in our weekly series from fast-growing outdoor maintenance firm Ground Control, its chairman, Martin Leuw, explains how he profits from ventures with a purpose.
The challenges that listed companies now face from the intense institutional focus on their environmental, social and governance strategy are fascinating.
Simon French, chief economist at the broker Panmure Gordon, recently warned against investors using “blunt instruments” to assess compliance. He argued for a more nuanced approach than simply “invest or divest” decisions, with company boards encouraged to make appropriate improvements over time.
From talking to the public company non-execs I know, corporate ESG box ticking is distracting from crucial boardroom discussions on strategy and execution. But for private companies — the space in which I operate — that shouldn’t detract from the underlying benefits of doing the right thing. Turning what is an instinctive approach for many into a clearly communicated set of policies and processes provides a fantastic tool to prevent value from being lost and differentiate firms from less enlightened peers. The last thing that ESG should be is a compliance headache.
In 2013, when I started investing in businesses that had an explicit purpose beyond just profit, many people I met were baffled. The conventional wisdom was still that you can’t make an impact on social problems and make a profit as well. “Isn’t it philanthropy” was a typical refrain. When irked, I’d sometimes throw back that many tech firms are loss-making, so are they “not- for-profit” ventures? It was tongue in cheek, but it made people think for a second about the labels we put on different kinds of corporate activity.
I try to keep things simple and see ESG investing as about turning potential drivers of value loss to value gain. If you create something that customers and employees value, the returns to your business over the lifetime of those relationships are potentially enormous. One of my investments is in Ground Control and here is how I see that investment play out.
Firstly, while the environment is at the core of what we do — we’re an outdoor maintenance company — it has become increasingly important to our customers and suppliers. When we do the right thing by the environment that is recognised and helps us to develop sustainable relationships that make our business more efficient. Customer retention and repeat business is of enormous importance to us. Too often I see businesses focus more on customer acquisition than retention and then they wonder why they are underperforming. Just because your sector has high customer churn your business does not have to do the same.
Taking the trouble to measure our carbon emissions through all our activity, which includes what we do for our customers as well as what our suppliers do for us, helps to bind these relationships together. There is even more collaboration and we share a common purpose. We also leverage initiatives such as our all-electric fleet and our venture fund that invests in environmental innovation. And we measure their impact, including through tracking our net promoter scores.
Social starts with our team. Few employers would dispute that one of the highest areas of shareholder value loss, rarely well measured, is employee turnover and poor productivity, let alone the costs of absences and training up replacement hires. It is sometimes too easy for executives to explain away high vacancy rates and high turnover as typical for their sector, but if your sector has poor employment practices, perhaps you are benchmarking yourselves against the wrong peer group.
The best way, I think, to tackle that is by being an employer that has a clear purpose beyond simply the task of enriching shareholders. By being inclusive, you will attract talent, rather than lose it, and motivate them to be better versions of themselves. In doing so you help your business. There are numerous surveys of best companies to work for and we’ve made these surveys an integral performance measure.
The third area of unnecessary value loss is weak governance, usually through poor risk management. The most newsworthy examples are in the public markets, whether that’s emissions in the motor trade, unethical behaviour at banks, or poor planning by energy suppliers. But in my experience, private businesses are pretty poor at this too. They benefit from the lack of scrutiny, although social media is rapidly changing this and can be a harsh reality check.
This is impact investing in my book, and Ground Control is reaping the rewards of its focus on ESG, with rising revenues and profits. For those that want to see the same, and to get their businesses fit for 2030 and beyond, there is plenty of help out there. We’ve had a good experience with the Cambridge University sustainability team and have used the tool kits provided by Chapter Zero, an initiative helping non-execs address climate change in the boardroom. We’re also applying to become a B-Corp, which again balances purpose and profit, so will share how that goes when we complete the process.
So, yes, you can make money from impact investment. It taps right into some of the key forces driving business and society today.
Martin Leuw is chairman of Ground Control, based in Billericay, Essex. Martin and his fellow directors Simon and Kim Morrish are sharing their experiences of trying to double the size of the business over the next five years.