First in a series of excerpts from the book “The HIP Investor” (John Wiley & Sons, 2010). See other published articles in the series here.
Capitalism used to be easy. Discover, acquire, and defend a unique resource. Pay people the least you can get away with. Off-load as many liabilities and risks to government as possible. And, of course, collect the profits in as short a time as possible. These captains of industry used to be called “robber barons”; today they are simply called “capitalists.”
The super-majority, about 7 in 8 dollars, of assets managed focus on a purely capitalist approach, which typically prioritizes short-term financial gain. However, this traditional approach has accelerated the number and intensity of societal problems.
To counter that, investors have allocated about 1 in 8 dollars managed to “socially responsible” investing — typically excluding “bad” companies from their portfolios. This has relieved some consciences, but in many cases the majority of these funds have failed to beat the typical benchmark. (Most mutual funds of the capitalist approach don’t beat their benchmark either.)
Now, there is a new investment approach—one that seeks bigger profits that capitalists pursue while building a better world that do-gooders desire. The goal is to generate human impact and profit, or “HIP,” simultaneously. HIP embraces a comprehensive view of society. HIP encourages for-profit companies to solve human problems, generating new customers, fulfilling employees, and serving society. HIP combines the pursuits of “doing good” and “making money” — drawing from the best of both worlds. “HIP investing” seeks the goal of bigger profits for your portfolio while building a better world.
S&P 100 Companies Pursuing Sustainability for Profit
In 2007, Dave Stangis was the director of sustainability at Intel Corp. When Stangis first learned of the HIP Scorecard and its focus on quantifiable results, it was an enlightening moment: “Measuring results that focused on the human impact outcomes of Health, Wealth, Earth, Equality, and Trust made sense business-wise,” said Stangis. “You have to show real results to demonstrate how serious a player you are in delivering impact.”
Intel Corp. [ INTC ] has been rated as one of the 10 most HIP companies, illuminating the five steps to a higher-impact and potentially more profitable business.
(1) Assessing the global trends of billion-person markets and trillion-dollar opportunities instills a new passion for solving human needs, like health care.
(2) Bringing products to market to serve those customers positions Intel for new revenues, such as health care wireless products and home monitoring systems.
(3) Counting the quantifiable impacts is possible by focusing on improved access to care and higher quality of life.
(4) Directly embedding these criteria into management practices is easy for the company’s engineering culture.
(5) Equating those impacts to financial value has highlighted results of $50 million from overall resource conservation and efficiency initiatives—more than a 2-for-1 return on its investments in those areas.
Stangis has imported that thinking and approach to Campbell’s Soup [ CS ], where he is Vice President of Sustainability. Energized by CEO Douglas Conant’s drive to integrate sustainability — which interconnects all the elements of company, customers, and society — into every business unit and employee’s mindset. “Sustainable performance is one of the seven ‘pillars’ here,” Stangis says of the company’s goals and strategies. “And it is expected to drive business value across the whole enterprise.”
Three Questions to Ask of Your Portfolio’s Investments
As an investor, how can you determine which companies are most HIP in your portfolio? Try these three questions – you can find the answers in company reports, third-party sources, and by asking the company itself (especially with social media like Twitter and Facebook, as well as on quarterly earnings calls and shareholder meetings.)
1. How HIP are the company’s PRODUCTS? What quantifiable impact do they have on the customer? How do they solve a human problem? What share of revenue do those HIP products provide? For example, Campbell’s Soup now sets revenue share targets based on the “milligrams of sodium per serving” in its soups and products. Campbell’s investor relations group shares this with both traditional and sustainable –focused financial analysts.
2. How is the company measuring its human, social, and environmental IMPACTS? Which are leading indicators for the business? How do those impacts drive profit and shareholder value? As we saw above with its $50 million savings, Intel Corp. aggressively pursues improvements in energy usage, water usage, and employee diversity, all of which can be enumerated and shown to directly link to bottom-line contributions.
3. How do existing MANAGEMENT PRACTICES reflect a HIP approach? Do the vision and metrics support a long-term, comprehensive view of the company, customers, and society? Do all systems for accountability and all processes for making decisions include criteria for both bigger profits and a better world? At General Electric [ GE ], its “ecomagination” strategy is a cross-company initiative, and produced nearly 10 percent of its 2008 revenues. Hard numerical goals for reducing greenhouse-gas emissions are integrated into executive and manager performance reviews, overall decision making, and pay and promotion decisions.
With this HIP analysis, you can assess firms on these three questions – and then allocate your portfolio accordingly.
The 4 Financial Benefits of Sustainability
HIP Investor’s research of more than 500 companies since 2006 shows that companies pursuing a HIP approach tend to drive more business value—through higher revenue, lower costs, optimal taxes, and higher investor demand.
Higher Revenue. Successful products solve a pressing human need. Population growth is fastest in lower income economies. New customers from these economies are seeking out lower-priced products (e.g., the Tata automobile) or higher value (e.g., solar energy stove). Procter and Gamble’s [ PG ] single-use shampoo customizes a smaller package size to achieve more affordable hair care for everyday families in places like India. In this market, 70 percent of all shampoo used in India is from single-use sachets, a multi-million dollar market. Overall hygiene of these customers improves too, a wellness benefit and a very HIP solution.
Lower Costs. Interface Inc. [ IFSIA ] saved a cumulative $400 million in costs since embarking on energy efficiency, materials reduction, and waste reuse and recycling – and tracks each location’s progress on its website. The Aeron Chair by Herman Miller [ MLHR ] is 95 percent recyclable, generates higher profit despite higher costs because of higher pricing and attractive market share, and is motivating for employees due to its eco-design.
Optimal Taxes. Health care retailer Walgreens [ WAG ] has adapted more than 100 of its California and New Jersey stores and at least two distribution centers to take advantage of renewable energy state tax incentives, creating an accelerated return on investment for those projects. In those locations, this solar power will generate 20 to 50 percent of electrical needs and provide cleaner, less polluting, and more independent power.
Investor Demand. When United Technologies [ UTC ] started publicizing sustainable products, like its more eco-efficient buses and zero-energy building designs, its stock price started to move up faster than the industry average at the time. Being transparent to stakeholders, including investors, can be beneficial to shareholder value.
The HIP approach focuses on leading indicators—products solving a human need, quantifiable human impact, and comprehensive management practices—which tend to lead to higher profit and shareholder value, benefiting investor portfolios vs. the standard market benchmark. (See www.HIPinvestor.com for latest performance and disclosures.)
How Does a HIP Investor Build a Better World – and Portfolio?
The HIP approach identifies more than 20 indicators whose values indicate positive results for society. These measures quantify the good that is created, allowing investors of all types to use this information to better design their portfolios. It also permits investors to gather a summary of human-impact results beyond pure financial returns. Investors applying the HIP approach can position their portfolio for potential “human impact and profit.” Typically, the better the human-impact performance, the better the performance of the portfolio.
Next time, in part 2 of 10, we will dive into the first of the five steps to becoming more HIP – assessing the trends to identify risks and opportunities of the entire global society, including environmental and social challenges. These risks and opportunities highlight possible corporate leaders and portfolio choices for a HIP investor.
To navigate this series, please use this table of contents.
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R. Paul Herman is CEO and founder of HIP Investor Inc. Herman is the author of “The HIP Investor: Make Bigger Profits by Building a Better World, published by John Wiley & Sons in 2010. Herman is a registered representative of HIP Investor Inc., an investment adviser registered in California, Washington and Illinois, and serving clients in Idaho, New York and Wisconsin.
NOTE: This is not an offer of securities nor a solicitation. The information presented is for information and education purposes, and does NOT imply any investment recommendations. Past performance is not indicative of future results. All investing risks loss of principal. The author, HIP Investor Inc. and HIP’s clients may invest in the securities mentioned above, including in the HIP Portfolios. Details and full disclosures are at www.HIPinvestor.com
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