Q&A with Harvard’s George Serafeim: The link between corporate governance and environmental and social impact | ImpactAlpha

Impact investors looking to drive positive benefits across their portfolios, however, have to ask a tougher question: Does ESG performance actually make any difference in terms of actual social and environmental impact? As ImpactAlpha’s podcast roundtable put it earlier this year, “If ‘ESG investing’ is so great, why is the world going to hell?”

Smarter
Investors are flocking to so-called ESG investing. In the public-equities markets, attention to environmental, social and particularly governance issues seems to have a positive correlation with reduced risks.

The argument is so strong that some asset managers argue that not considering ESG exposes legacy conventional investors to uncompensated risks and may even constitute a breach of fiduciary duty (see, “As assets flow to ESG investing, investors on the sidelines face hidden risks”).

Impact investors looking to drive positive benefits across their portfolios, however, have to ask a tougher question: Does ESG performance actually make any difference in terms of actual social and environmental impact? As ImpactAlpha’s podcast roundtable put it earlier this year, “If ‘ESG investing’ is so great, why is the world going to hell?”

To get at the question, we caught up with George Serafeim, a professor at Harvard Business School, who has emerged as a leading thinker on corporate impact. His course, “Reimagining Capitalism: Business and Big Problems” won an Ideas Worth Teaching award from the Aspen Institute. In an essay he co-authored in Harvard Business Review last year, Serafeim tried to provide a “a road map for corporations to pursue profitable multisector strategies to transform impoverished communities into vibrant, sustainable economies.”

Serafeim will address “Impact at Scale” in his keynote at the Palladium Impact Summit in New York next month. (ImpactAlpha is a media sponsor of the June 25 event; subscribers can get 10% off with the code IMPACTALPHA10.)

Serafeim is a master of three-part frameworks. In our conversation he laid out the three deficits that hinder corporate sustainability efforts, the three stages of corporate organizational maturity around such issues and the three obstacles to corporate transformation.

“In many cases transformational change requires a short-term decline in performance and return on capital because you need to invest in future long-term growth,” Serafeim told ImpactAlpha. “That issue of managing the worse-before-better is a very difficult issue.”

Excerpts of our conversation (edited for clarity and length):

ImpactAlpha: Let’s cut straight to the chase: Are good ESG data actually going to show that the environment, social conditions and governance is actually getting better?

George Serafeim: It’s a great point. If every large consumer goods company has a great deforestation policy, why are the forests still disappearing? This is the conundrum that we are facing: at the end of the day does this accumulate to something that is moving the needle, or are we playing in the margins?

For many well-intentioned impact or sustainability strategies, the reason why they fail is three-fold: an ideation deficit, a financing deficit, and a governance deficit.

The ideation deficit is because most large corporations—in their supply chains, products and so forth—are not thinking boldly enough and in systems-level terms, because that’s not how they are trained to think. They can find point solutions but not systems-level solutions.

For example, when you’re thinking about consumer goods companies and farming practices, the traditional intervention has been “Let’s give a little more money to the farmers and hope for the best.” And this hasn’t worked, because you’re not changing fundamentally the incentives in the system. When you pull back that financing, the equilibrium becomes whatever it was before.

The financing deficit is because many of those companies have fairly high costs of capital in underserved areas. There aren’t that many opportunities to satisfy hurdle rates of 15% and 20%. They haven’t been collaborating with alternative sources of financing that might have lower cost of capital – impact investors who might say, “I could invest and rationalize this with 6% or 7% return on capital.”

We’re having a governance deficit because many of those interventions in those markets have been happening in the absence of good metrics brought together by a balanced scorecard system and a strategy map, where the whole community can agree on how value is being created and shared.

Source: Q&A with Harvard’s George Serafeim: The link between corporate governance and environmental and social impact | ImpactAlpha

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s