Socially Responsible Investment - what impact and intrinsic value?

I would like to make to main comments: (1) what is the actual impact of socially responsible investing and (2) what is the relative financial performance of SRI to other funds ?

(1) Regarding the actual impact of SRI I think it a trully wide question that might be discussed from different perspectives. If we think on a long-term CSR perspective I trully believe that if this SRI acquires the critical mass and demand from main stream and institutional investors with will surely drive a need for compliance from corporations in a wide basis. Basically one can argue that this effort if successfull will really provide an impact across the board (sectors and geographies). The need for access to capital markets and financing will lead to compliance given that premiums might be charged to social responsible companies. Ofcourse this fact is mainly dependent on the potential future trends from investors. Hence I believe that insitutions today like ASRIA really fill in a huge gap of information providers that will have as main role the creation and understanding of this untapped demand.

(2) Regardind social responsible oriented funds I would like to refer to a recent McKinsey study: "Socially responsible businesses sacrifice financial returns to pursue social or environmental objectives; that much is known. Just how much of a trade-off they make has always been unclear, however, and evidence from the capital markets is inconclusive. A recent study has produced some surprising results: over the ten-year period we examined, a portfolio of investments defined as socially responsible generated returns of 8 to 14 percent. That is lower than the rate typically earned by "angel" investors—wealthy people who make direct equity investments in entrepreneurial ventures, usually at an early stage—but comparable to capital-market returns."
I would consider this finding as very encouraging due to the still somehow insipient corporate world consideration/concern and therefore less diversified potential targets of SRI (as compared to the global market).

Lastly I would like to thank and congratulate Melissa Brown for her time and informative session on SRI.

Cheers !

From Microfinance to the Bottom of the Pyramid: serving the poor profitably

I would like to basically make a comment regarding both micro finance and bottom of the pyramid market potential. I do believe that micro finance is nothing more than an application of financial credit to the bottom of the pyramid market. It is a basic adaptation of a common product of credit to the necessities of the bottom of the pyramid: no possibility to give any collateral is replaced by group solidarity, amounts and channels of distribution are adapted to local needs among many other specificities.

I do think that BOP really represents a big potential for multinationals. It is enough to analyse what multinationals such as Unilever and other similar companies are doing in consumer good markets. In India Unilever, for example, introduced an inexpensive powder detergent called Wheel and outsourced its production to a local manufacturer. The product was less refined than Unilever’s premium Indian brand and sold for about one-third as much, allowing the company to serve a previously neglected low-price market. With only one strong competitor in it, Wheel quickly won 38 percent of the powder-detergent market in India, thereby matching the competitor’s market share. Margins in this market, due to less spending in branding and other administrative costs, were however as high or higher than for the premium brand.

What is the social impact of this business development of BOPs? The main social impact of this type of activity is the supply of much better quality products or services to low income consumers at a cheaper price. Additionally it also impacts a lot the whole economic and social tissue of less developed countries and regions. In order to capture this low-priced markets multinationals usually try to emulate local competitors. By doing so they try to retain the best local managers that best know the market and don’t focus so much on branding but much more on distribution effectiveness, efficiency of operations and simplicity. By doing so the local market/industry gets more developed through bigger economic activity as well as more efficient hence being able to produce more value to both production factor owners and end consumers.

Fair Trade : the new financing for multinationals and retail players?

After my previous blog on fair trade I have kept reflecting on the main pitfalls and advantages of fair trade. Nevertheless, I do continue to think that clearly the pitfalls and main impact of fair trade are undoubtedly not sufficient to justify the “investment” in it. When evaluating the cost of fair trade there are many factors that should bee considered:

A) One has to think on the premium consumers are paying for fair trade products being both (1) what they pay above a price of a normal product with the same quality level or (2) the difference in quality when compared with a product in the same price range.
B) Cost and opportunity cost of time spent by non-profit organizations on the fair trade business

Given this investment in fair trade one has now to evaluate the positive impact it has on society as a whole. In here is where a supply chain analysis might enter into play. Let’s assume for a moment that cooperatives do work, that the system works perfectly and that basically we are getting 3rd world producers to reach self-sufficiency and market their products in the open international market.

Basically consumers are paying a premium for a product that goes all the way through the value chain, hopefully, into the hands of under developed farmers and cooperatives. With this money they are supposed to develop their agricultural techniques and infrastructure in order to increase productivity and quality in order to in the medium term being able to access on their own the world market. What happens when they do are able to access the world market?

Basically what happens is that excessive supply on international markets of crop x is aggravated even more creating even more pressure on prices. Even if excessive supply is not created (due to small impact of fair trade in creation of more supply) farmers will still be making small margins per kg/ton/square km of production. So where did all the money that was pumped in the system in the meantime was transferred into? Basically it was pumped into production factors that are now producing value that is being captured by retailers of for profit brands in developed countries or by big distribution multinationals. Does it make sense to create an entire scheme of wealth transfer that basically bounces back even creating in the meantime more disparities due to local disruption of current production structure?

In my opinion fair trade in its pure sense is sincerely a non-effective and efficient way of investing into developing countries. One may consider more structural projects that basically aid developing the productive capacity in a customized way according to the local requirements of a determined region that will enable self sufficiency in the long-term.

Car sharing: leading to increase car usage ?

I just want to raise the discussion on I believe was the main goal of the majority of the car sharing companies: to reduce overall environmental impact of car usage. The main argument about the positive environment impact can be summarized in two main points: (1) less occupied space (each car share in average represents 5/6 cars that are no longer needed); (2) less pollution since car sharers tend to use more public transport than the average automobile owner.
After doing some research I found that basically car-sharing companies in Europe are flourishing in all countries in very different formats and with very different objectives: from non-profit firms to for-profit firms, with missions ranging from green companies to “a better luxurious alternative to public transports”. My main hypothesis is that the ripple effects of car sharing will indeed induce to overall more car usage not off-setted by the increased usage of public transport. The proliferation of car-sharing companies and associations and the increase competition for clients to sustain the even-more expensive networks of cars and locations will probably lead to a competition on prices hence resulting in the democratization of car-usage. Even more, the increase in size of these companies will lead to the weakening of the their neighbourhood/ communal feel and associated auto censorship of excessive car usage.

Another factor that in my perspective will also lead to increase usage of cars are the creation of international car-sharing networks like European Car Sharing that, among other benefits, enable international mobility of members giving them access to local car sharing networks. Basically when abroad people will now have access to a cheap and accessible fleet of cars hence not needing anymore to recur to public transport (one of the main means of transport when abroad).
Although with no scientific sound facts to back out this hypothesis I do think that one has to step-back and reflect on the possible ripple effects of such a huge boom in the car sharing industry in Europe and in the US (e.g., City Car Share - http://www.citycarshare.org/) Will it attain its main objective ? Are alternative/concurrent business models more valid, as lift sharing ? (http://www.liftshare.org/)

Ashoka and Unltd UK a different breed of non-profits...

As per our last class I have been reflecting in the roles of organizations such as Ashoka and Unltd UK that focus on individuals rather than organizations for local development of impactful projects.

I feel that basically this specific type of NGOs really fill an existing gap in the non-profit sector by concentrating on developing and supporting social entrepreneurs at a local level in a project by project basis always bearing in mind the potential coming from spreading ideas/projects among vaster geographies/situations. Hence I believe that the added value comes from their ability to assess at a local level the potential impact in the community of a particular project whilst prioritizing funding of different projects that compete for funding at a national, regional and global level enabling at a later date the generalization at a larger scale of the major breakthroughs.

Ashoka and Unltd UK although sharing the same philosophy they differ slightly differ in their target audience/projects. In one hand Ashoka is a global organization with international funding that seeks projects at a large scale often exceeding several thousands of euros of funding during extensive periods (eventually for life) and on the other hand Unltd UK that focus on the UK community necessities funding social entrepreneurs in three different potential levels but often with a roof of a few thousand euros. If in the case of Ashoka its aid comes in after the inception of the project in the case of Unltd UK they provide aid right from the idea and provide even consulting services for their clients (the social entrepreneur). Nevertheless a common root connects both organizations: they both aim for local, impactful and sustainable change whilst enhancing knowledge development that can be further applied at a larger scale. They also try to create the necessary conditions for a flow of real-time interchange of ideas and know-how.

These three factors: (1) funding of selected individual's projects and ideas at a local level, (2) active management of knowledge ensuring both development of general frameworks and "formulas" as also enhancing interpersonal exchange and (3) effective life cycle support of implementation and measure of effectiveness certainly do create social value hence providing "la raison d'etre" of Ashoka and Unltd like NGOs.

Fair Trade ... more than charity ?

It is commonly accepted that the WTO (World Trade Organization) has been increasingly marginalizing small producers in developing countries. The small producers (craftsmen, farmers and converters) in these countries are excluded from the world’s main trading channels. As an alternative fair trade offers them the opportunity of finding alternative outlets for their products and generating a better income from the work they do (through offer of minimum conditions of trade).

It also intends to help develop alternative trade solutions between the countries of the North and those of the South and to demonstrate their viability.

Nevertheless, and despite all the unquestionable virtues of fair trade some question poped up in my mind. The first was what was the philosophy behind fair trade and the development in efficiency and quality of small producers?

Fair trade as it is commonly defined aims at developing small producers giving them access to better conditions that should enable them to in a sustainable fashion develop capabilities of competitively accessing global markets. If one thinks about it this is only one side of the coin, or even, a two-sided knife. It seems to me that if focus is solely on efficiency improvement and quality conformance ATOs are only preparing small producers to be able to pass value from their production to the large multinationals that explore the remaining steps on the value chain until retail. In other words, ATOs can be in a extreme and provocative perspective perceived as agents in service of multinationals ensuring their access to greater supply in terms of quality and price. Given this idea I believe that in a parallel fashion to ATOs initiatives in fair trading the issues about trade regulation and coordination should also be top priorities in the agenda in order to sustain long term enhancement of captured value on the production/extraction steps in the value chain. This, in my perspective, is particularly true for fair trade of agricultural products and extraction of raw materials.

An example of the importance of this side-line matters is the call for action from United Nations Secretary-General Kofi Annan at the UN Conference on Trade and Development in Sao Paulo. (http://news.bbc.co.uk/1/hi/business/3804007.stm)

Welcome !!!

This blog is part of the Blended Value Strategies class at INSEAD in Singapore. I will be posting content as we move in our course. Please feel free to add comments at any time.