‘Ethical’, while not a dirty word in business, certainly has some way to go to rehabilitate its reputation in the corporate community. Though CSR initiatives and departments have multiplied in recent years, the fact remains that in many cases these are branding initiatives and reactions to shareholder demands more than they are genuine statements of values or ethical intent. But, as consumer behaviour shifts and government regulation moves with it, is there a business case to be made for putting social impact at the heart of business best practice, and in particular, should more private equity firms make impact – be that social, environmental, ethical – a central aspect of their deal strategy?
The Ethical Markets 2017 report found that the total value of ethical spending in the UK grew by 3.2% between 2015 and 2016 to £81.3bn. The average household spend on ethical products has nearly doubled since 2010, and the ethical food and drink category has expanded by over £4bn since the start of the decade. More and more consumers are searching for products that match their values.
The category is only set to expand as the purchasing power of the Millennial generation grows. We are currently in the midst of the largest transfer of wealth in the history of humanity, as baby boomers and Gen X’ers pass on their capital to their children.
While I tend to be hesitant about sweeping generational generalisations, study after study has found that Millennials prefer to do business with corporations and brands that demonstrate pro-social values, emphasise sustainability and practice ethical business standards. Indeed, a survey found that nine in ten would switch brands to one associated with a cause. Investors ignore this preference for ethical brands at their peril.
Businesses are responding – L Catterton-backed Lily’s Kitchen was a founder member of the B Corp community in the UK and it regularly articulates its belief in the mantra of ‘doing well in order to do good.’ A report on B Corp businesses published earlier this year found that companies with the certification (which is notoriously difficult to get) grew 28 times faster than UK GDP in 2017.
There’s also a talent aspect. It is becoming increasingly difficult for businesses to hire and retain the best young talent if they do not have a clear and defined wider purpose. More and more young people want to work for companies whose values match their own and whose purpose they believe in. I just experienced this when placing a European President into a fast-growing US consumer goods company backed by PE. They are now busy continuing to build on their sustainability agenda with proposed changes, such as to their supply chain, with the goal of reducing their use of plastic (the candidate came from a B Corp business).
Private equity, and the investment community in general, has been taking note. Since the introduction of The UN’s Principles for Responsible Investing charter in 2006, over 1,000 asset managers have become signatories. A PWC survey of the PE industry in 2016 found that 83% of firms now have a responsible investment policy and private equity has begun to integrate social impact and sustainability concerns into the deal cycle.
The pros of this are clear, and there are obvious reputational and regulational hazards if it’s not handled right. Importantly, government regulations are likely to become more, not less, stringent in this regard. Indeed, in 2016 the UK government created an advisory group to look into ways to grow a culture of social impact investing and saving in the UK.
Bridges Ventures is perhaps the most well-known example of a UK private equity firm that has made impact investing a central aspect of its strategy. Since its foundation in 2012 Bridges has raised 8 funds and as of 2015 had £600m under management. As their exit from The Gym Group in 2015 shows, there’s significant money to be made by investors concerned with yielding social as well as financial value. Similarly, LGT’s Impact Ventures arm has invested $66m since its foundation. In 2014 it backed online mental health and wellbeing service Big White Wall, which is growing its international presence and plans to launch in Canada.
Speaking to Oliver Wyncoll, a partner at Bridges, he told me that the key was in understanding that social impact investing and generating strong financial returns can operate in tandem – ‘impact investment has an intentionality to select and then generate positive outcomes alongside financial returns as a lock-step.’ This goes against the view still held in some circles that there is an automatic trade-off between social impact and profit. Oliver confirmed that the biggest hurdle to overcome is changing LP’s perceptions than an impact investment strategy does not need to mean a trade-off with financial returns.
The challenge is ongoing, but there is a growing interest among the LP community in responsible and sustainable investing. Asset managers representing $32trn, 15% of the world’s total investable assets, have a responsible investment policy while 46% of respondents to the PWC survey said that a majority of their LPs are interested in responsible investment, up from 21% in 2013. You don’t have to be a quantitative analyst to see the trend line. Indeed, Oliver told me ‘in the not too distant future, given the current momentum among some of the world’s largest pension funds and the support coming from government, integrating social impact concerns into the deal process may soon become a requirement.’
The growth of new accounting techniques, and in particular the development of social impact auditing has allowed for the quantification of non-financial value. Investors under pressure from consumers and governments to yield impact returns now have an evidence-based metric to inform their decisions and investment strategies, and to measure the success of their choices.
‘The market is growing – it is attracting investors and interest and it is engaging management teams and shareholders. While currently a nascent sub-sector of private equity it will inevitably grow and specialise in the coming years.’ – Oliver Wyncoll, Partner at Bridges Ventures
Private equity firms making consumer investments are in the middle of a two-sided process. On the one hand, customers are growing increasingly concerned with the provenance and sustainability of the products they buy and on the other, an increasingly large body of LPs are moving to invest in strategies and managers that prioritise ESG and social impact.
Recent examples of the efficacy of investing in ethical brands in practice include Quorn (previously backed by Exponent) and Froosh. For both businesses, the ethical aspect of their branding, be it an emphasis on sustainability or a championing of investment in the developing world, was not incidental to their success. Froosh was acquired from Unilever Ventures in 2017 by Fazer Foods, which cited the company’s work in developing countries as a key factor behind their investment. Exponent sold Quorn for £550m, a more than 2x return on their initial investment, and this year the food brand reported revenue growth of 16% to £205m on the back of increasing interest in less meat-intensive diets. Just this week Strand Equity made a minority investment in vegan skincare brand Youth to the People, a business which expects to triple its revenue in 2018.
Obviously, a business can’t rely on values alone to attract consumers – the classic foundations of great product, market knowledge and customer service remain absolutely essential. But, in a crowded market filled with consumers ever more distrustful of traditional marketing techniques engaged in a constant search for authenticity, values-based branding and genuinely sustainable practice has a clear business case to be made.
Across the industry, consumers and LPs alike are starting to agitate for responsible investment practices in consumer companies with social impact. The shift may take several deal cycles to truly make itself known, but the trend is clear. The ethical value of ethical investing has always been evident – what recent years have increasingly shown is that there’s business value too.