The field of “impact” has greatly expanded over the past few years. “Impact” is generally defined as an emphasis on environmental, social, and governance (ESG) factors in addition to financial returns by both corporations and investors. Initially (and often still) viewed as an extension of philanthropy, impact first rose in prominence through the corporate social responsibility (CSR) departments of large corporations and the philosophies of a new breed investors who heralded the importance of double, triple, or quadruple bottom line returns by focusing on employees, the community, and the natural environment in addition to financial returns.
With the growing recognition of the significant and positive impact that ESG factors can have on profitability, impact has now spread to mainstream companies and capital markets. In addition to the growing number of “impact first” investors and social enterprises, there has also been an expansion in focus on impact by traditional corporations and investors that emphasize financial returns.
If you are managing a company that has been established to bring new technology, goods, and services to market (outside of the clean technology/renewable energy sector), you may want to consider impact for the following reasons:
If selected and implemented carefully, the adoption of one or more of the solutions below may increase your valuation and generate greater returns through a sale or IPO. Further, you will be better prepared to respond to investors in both private and public companies who are asking more questions about ESG and requiring ever more robust reporting.
New corporate forms (see below) are gaining mainstream acceptance and companies using new forms have filed for a public offering and become attractive acquisition candidates. Nonetheless, should you prefer your existing corporate form, you can incorporate impact into your company’s DNA.
Establishment of an affiliated .org (501(c)(3) public charity) can provide a company with numerous advantages including:
The .org can be established as a 501(c)(3) foundation or public charity, in the latter case only if there is significant funding from outside of the affiliated company. However, public charities have considerably more flexibility to — and are really the only tax-exempt entities that can — provide the benefits above. Also, note that both the establishment and the operation of a hybrid are complex. The flow of funds, intellectual property, services, and resources between the two entities must be documented by agreement and carefully managed to avoid loss of tax-exempt status and excise taxes. Further, good governance requires disinterested members for both the non-profit and boards to provide regular oversight over the relations between the two affiliates.
A company that wishes to accentuate ESG factors should consider how it wants to measure, verify, and report on such impact. For public companies, there is increased focus on “integrated reporting,” with standards being set by groups like the Sustainable Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI), which is identifying the ESG factors by industry that are material to operations and should therefore be included in a 10-K or 10-Q. Many private companies chose to report pursuant to the GRI or to become certified “B-Corps.” A B-Corp is not a new corporate form; a company becomes a B-Corp by completing an audit prepared by B Labs, submitting the same to B Labs, and paying a license fee for the mark. Most B-Corps do not convert their corporate form but B Labs usually requires conversion into a new “benefit corporation” form in the license agreement.
Management and investors that wish to measure carbon emissions should consider including metrics and a verification process that will allow reporting pursuant to COP21.
Founders who wish to protect against mission creep in normal operations or change of control can consider isolating a valuable part of the company’s intellectual property (important to operations but not critical to valuation). Such intellectual property can be either retained by a founder or held by a for-profit or non-profit affiliate and licensed to the company pursuant to an exclusive royalty-free license with an affirmative covenant to maintain the agreed mission focus. If and to the extent that there is a material change to the mission of the company without the consent of the licensor, the license can either terminate or the company can pay penalty royalty payments.
Many companies that are serious about impact wish to ensure that they meet standards set by the board, management, or outside investors. Such companies can expand evaluation criteria for salaries, bonuses, and promotion to include ESG. The key is identifying factors that are clear and easy to measure and report.
Investors who want to ensure impact in their portfolio companies, for either mission or profit-driven reasons, should consider the following:
Investor appetite for green bonds is expanding exponentially. Green Bonds were created to fund projects that have positive social, environmental, and/or climate benefits. The majority of the green bonds issued are green “use of proceeds” or asset-linked bonds. Proceeds from these bonds are earmarked for projects that are focused on environmental and social returns but are backed by the issuer’s entire balance sheet. For those instruments focused on carbon mitigation, it will be critical that the reporting to investors in these bonds is consistent with the verification and reporting required under COP21.