2nd in a series of excerpts from the book The HIP Investor (John Wiley & Sons, 2010). See other articles in the series here.
Human, social and environmental challenges surround us. In recent years, many capitalists have treated these seemingly intractable issues as nuisances for governments to debate or nonprofit organizations to address. However, leading businesses and investors are finding that 4 global trends can provide attractive opportunities for growth, resilience and competitive advantage. In other words, companies and investors can solve human problems for potential profit.
The world is shifting as growing populations seek higher quality of life, finite natural resources are depleting in serving those needs, transparency of everything is on the rise, and consumers demand products and services that are “good.” These 4 global trends are driving forces underlying 21st century investing.
Trend 1: 9 billion customers with many unmet human needs
Businesses focused solely on traditional “developed” markets are missing tremendous opportunities for growth. The global population is expected to be 9 billion by 2050, 40 percent growth over four decades – so high-growth “developing” markets provide a wealth of opportunities.
Today, over 3 billion people live on less than $2 per day. By comparison, some European cows are “paid” more, when farm subsidies are calculated. Companies developing new products like Group Danone’s yogurt in Bangladesh focus on this new class of customers, resulting in revenue growth for the firm and its franchising local entrepreneurs selling at retail and door-to-door.
Meanwhile, one of the fastest growing restaurant companies in India is Yum! Brands, owner of KFC, Taco Bell and Pizza Hut. However, the products are localized: Tandoori and Masala pizzas in Bombay and vegetarian choices at “Kentucky Fried Chicken.” Back in the U.S., the chain offers grilled chicken to meet nutrition-conscious customers. Innovators can leverage their big brands, while adapting to local tastes to seek out revenue growth and market share – with healthier choices.
Trend 2: Finite natural resources are increasingly scarce
As a society, we often consider natural resources to be boundless but the reality is becoming clearer — we are using (and abusing) the resources faster than they can be created. We risk exhausting these key resources, including oil, copper, and fresh water. Leading companies recognize this. Hewlett Packard manages fleets of printers and recaptures end-of-life printers for recycling and so focuses on “dematerializing” its products into services.
In January 2011, coal prices reached two-year highs, as Queensland, Australia floods closed ports and mines. Simultaneously, the US EPA is aggressively restricting mountain-top Appalachian sources. As the U.S. continues to generate approximately 45 percent of its electricity from coal, the risk to many residential, commercial and industrial customers are higher prices; renewable wind power, increasing swiftly in Iowa, Minnesota and Texas, can reduce price volatility and increase self-sufficiency.
However, the capital spending of the 10 largest oil companies in the US and Europe totals $130 billion – the total wealth of Bill Gates, Warren Buffett and Carlos Slim – yet less than 5 percent is focused on renewable energy solutions. Companies that are not diversifying their fossil fuel intensity pose increasing risk to investor portfolios and the potential profits at risk from triple-digit prices of commodities like oil.
Trend 3: Everyone knows everything all the time
The quality and quantity of information available today is unparalleled. Leading firms are becoming more open and transparent, using two-way forums and tools like Facebook, Twitter, LinkedIn, and blogs, on top of annual reports, shareholder meetings, shareholder calls, and Corporate Social Responsibility reporting. In 2009, EngagementDB’s research analysts found that among large brands, higher stakeholder engagement, through social media, could contribute to an average of 18 percent revenue growth. Those big brands ignoring these new connections with customers averaged 6 percent revenue losses.
One of the most transparent companies is high-tech titan Infosys, a global company based in India. Its 200-page annual report shares everything from its financials calculated in six different countries’ accounting formats and languages, the pay and experience of hundreds of managers, and even an estimate of the “human asset value” of its professional high-tech staff on a 21st century balance sheet – where people are valued as an asset, literally.
With increased information comes increased expectations. Individuals now expect full disclosure and the real statistics behind, well, everything. Risk to volatile moves in stock price is amplified by flash mobs’ use of Twitter & Facebook via rapid response and surprise action. The backlash against companies that hide from their stakeholders is real, and the reward for transparency of information is high. The more information firms disclose, the easier it becomes for investors and stakeholders to evaluate products and operations, which interestingly tends to correlate with higher portfolio performance.
Trend 4: Demand for ‘Good’ is growing
In addition to demanding detailed information on products, customers are seeking measures of “goodness.” Moms are buying healthy, sustainable products, like organic milk and fresh fruit. Children are demanding that their families purchase earth-friendly, nontoxic products. The growth of Good Guide, an online portal and iPhone app providing health, safety, and environmental ratings of 150,000 consumer products, is a prime example of this trend.
This quest for “good” is translating into consumer action. Mintel has tracked more than 13,000 new products making sustainability claims since 2005. S&P100 firms like Campbell’s Soup see it as a source of competitive advantage. Campbell’s quantifies and categorizes its revenue by how many “milligrams of sodium per serving” in each food product. For fiscal year 2010, Campbell’s targeted 30 percent of its revenue from “lower sodium” products (480 mg/serving or less); as of its 2009/2010 Sustainability Report, 26.8 percent of revenue came from those “wellness” and “heart healthy” products. It is this consumer demand for “good” goods that drives top-line revenue and seeks bottom-line profitability.
Investing
These 4 global trends are growing in scale and depth. Forward-looking investors are evaluating these trends for portfolio decisions, and seeking out sustainability-oriented companies that are tapping growth, managing risks, reducing costs, delivering “good” impacts and communicating openly with stakeholders.
Investors and companies pursuing a “HIP” approach, which seeks higher human impact plus profit, can build a better world while contribution to a stronger portfolio. A HIP Portfolio made up of these firms, and weighted according to their leadership, can be constructed to seek higher performance, lower risk, and increased impact. (See the HIP 100 Index Portfolio at www.HIPinvestor.com for an example of this approach.)
The next installment of this series will dive into the specific products forward-looking companies are developing in response to the world’s new realities and the opportunities that come with them, aligning their approaches across five categories of human need: Health, Wealth, Earth, Equality, and Trust.
To navigate this series, please use this table of contents.
____________________
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
___________________________
Follow us Twitter.com/NobleProfit
Register at Noble Profit to gain valuable insights in related topics.
Noble Profit is brought to you by Creative Entity Org and Creative Entity Productions created by Amy Seidman.
Noble Profit™ is an authentic source for discovering innovation, trends and investment in clean tech, and sustainable business.