|R. Paul Herman|
Leslie Berliant: How did HIP Investor get started?
R. Paul Herman: My background and training is in finance. I have a degree from the Wharton School of Management at the University of Pennsylvania and had done management consulting at McKinsey and CSC Index. The idea for HIP is grounded in my desire to have investors align their values with the true cost and value of how corporations operate. Some call it social investing, but the real value is in solving human problems, whether companies or governments are doing it. The idea for HIP came from talking with million and billion dollar investors who wanted to create impact with their portfolios and get both a social and financial return. There was a gap in the market in that investment advisors didn’t have information to prove that if they solved a human problem or created social impact, they could also be profitable or even more profitable. So HIP was founded out of the need to fill that gap and verify that if you increase health, wealth, focus on earth or equality, you can make money and help society at the same time.
LB: What does it mean to be a HIP company?
RPH: A HIP company is like a traditional company in that it looks at its customers and their problems and determines how to solve them. The majority of products and income, however, derive from positive and not negative impact. It is a company that increases the health and wellness of its customers or employees, like a health care company, or General Mills that rewards employees for being healthier and having lower body mass index. Or companies like Citibank, ABM Amro and ICICI that all have active profit center business units that seek to increase access to capital for people of all incomes. Or companies that focus on earth or environment that would have lower carbon footprints then their competitors, so a company like Interface Inc. that seeks to be sustainable by 2020 and restorative by 2021 looks to see how the environment can be better off after they sell their carpet and is also the leader in selling carpet products.
From an equality perspective, a HIP company would be as representative inside the company from a gender, ethnic or income class point of view as is its customer base. Verizon is one that does this with staff, executives, board of directors. There is a quote from Alan Lafley, the CEO of Procter & Gamble, that the highest innovation comes when there is a highly diverse staff. There was a study done at Simmons College that looks at diversity of boards, as well as a Catalyst study, both showing higher returns and lower risk when there is a more proportioned work force or leadership at a company.
In each of those 4 elements (health, wealth, environment, equality) there are large gaps between HIP companies and how most companies operate today. When companies pursue this, thought, they find that they have access to new markets, for example Wal-Mart selling health care. Or they may have higher margins, like General Electric or Hewlett Packard which started engineering for disassembly which simplified assembly and dropped their costs. The potential for a HIP company is to deliver human social impact and higher profits at the same time. We can ask what proportion of products deliver higher impact and find where there is the largest potential for growth.
LB: Does the main stream financial media understand this concept of HIP?
RPH: The mainstream financial media is increasingly covering environment and health aspects, but it is not yet integrated together from a unified perspective. It is sometimes difficult to show that complexity given space constraints or the need for a compelling headline. And in the Wall Street Journal, there is still a slight bent towards questioning climate change, at least in its editorial pages, which sometimes runs into its features. If you look at Fast Company Magazine, on the other hand, the proportion of articles focused on sustainable companies is the majority of magazine. There was a recent issue on 50 ways to be sustainable, a cover on Wal-Mart’s sustainability efforts, a cover on Al Gore. It’s emerging where the frequency is increasing, but the distribution of articles varies by publication
LB: What about the mainstream investment community?
RPH: It’s very interesting. Individual investors have a current desire to invest in way that is consistent with their values and has a positive impact. However, when translated into what financial products are available, there are very few mutual funds or electronic funds that one can buy. There are just a handful, maybe 30 products, that do so. One of the few is PowerShares, which focuses on energy and other resources like water. Social K is a new company which has a platform for employers to offer to employees to invest in socially responsible investments. Companies, in order to appeal to customers and to Wall Street, still focus on traditional messages. But for companies that have filled out carbon disclosure reports, there’s additional information there not found on websites or in annual reports that speaks directly to sustainable investors. They’re not blasting this to the traditional investor communities because there is still a belief that sustainably focused investors are still a small segment and that traditional investors would be scared off by things like carbon assessments. People in this narrow traditional interpretation are proven wrong, though. Many energy efficiency projects have pay offs in 2 years or even less. Sun Power and First Solar IPOed and grew 2 to 7 times in a short period of time, and GE Ecomagination, says that they will certify $20 billion this year, more than 10% of their revenue, as green or sustainable. And that is expected to grow to $50 billion by 2010.
LB: You have talked about valuing the “China price” versus valuing the “HIP price”, what does that mean?
RPH: Traditionally the China price is the lowest financial cost which has also created tremendous environmental liabilities because of laws in Europe and the US which tend not to be practiced in China. Part of the China price was labor costs and environmental liabilities. With lead paint in toys and toxins in toothpaste, it is clear that the lowest financial cost is not an acceptable product. The HIP price insures health, environment, wealth and equality that still support value for customers. The China price will have to be higher because there are invisible costs that cause liability and in the future will restrict potential markets and adversely effect a brand. A growing segment of society care about issues and are willing to pay what looks like higher explicit price and not willing to incur those liabilities. Having HIP market share leads to gaining a proportion of HIP revenue.
LB: What are your top 3 recommendations to companies that want to be HIP?
- Focus on human problem that you’re solving. For example, tobacco companies view their business as the production of tobacco when they could view it as servicing customers that need to reduce stress, weight or network with their peers and come up with a whole new, non-negative product. Energy companies can look at themselves as creating a way to carry goods, services, technology, etc. to end users. When you focus on human problem solving and not the products that you’re selling, you can develop new products, profits and markets.
- Unleash employees’ passion and creativity around integrating human impact into the business. At Herman Miller, 1 out of 6 employees are on the official sustainability network, managing environmental and sustainability projects throughout the company. Among new hires and 20 and 30 somethings, there is a desire to find purpose at work. Executives and management are still often living in a tradition of maximizing money and profit and not of integrating environmental or social concerns into the business. By formally and informally tapping the creativity of employees, though, companies can invent themselves for the next wave of consumers and reduce the risk of having a negative impact on the environment and society.
- Measure and manage the quantifiable impacts and results of human impact which are health, wealth, earth and equality. When those are on the same score card as revenue, profit and share holder value, a company can test the interrelations and whether they are positive or negative. Pacific Gas & Electric, for example, measures the financial metrics, social metrics and environmental impact metrics, along with employee satisfaction so that they can see a full view of company. Essentially, it is the HIP Score card.
- To demand from financial advisors or your financial company to be able to recommend on stocks, funds and bonds that are positive for impact and make your advisor accountable for doing this by making sure that the know that if they don’t, they will lose your business.
- Read the sustainability reports for your stocks, the annual reports, investor powerpoints and carbon disclosures and seek to understand what they are reporting and ask the company why there is different information in those different documents.
- Actually reallocate your portfolio towards businesses with a positive impact and sell those stocks or funds that have a negative impact. Vote with your investment dollars and though it’s easy to say that one person can’t change anything, over a period of time, like with South African divestment, the cumulative impact of investor dollars can actually change the world.
RPH: This is a question my mom loves to focus on because she likes movies that are complex and show that characters are a mix of good and evil. Companies are people, so they are also a mix of good and bad. Not pure evil or pure benefit. I built the HIP scorecard framework to showcase where you can have positive and negative impact and what I found was that no company is perfect. Yet. A company like Interface, that is a leader in environmental sustainability, does not yet have a board or executive team that is fully proportional to the markets they serve, for example, women. Large numbers of their customers are designers and architects that are women and their team does not yet reflect this.
LB: Should entire industries be written off because of their impact? For example, take the diamond or gold trades, for example. Even though diamonds and gold can be certified conflict free, what about the impact of mining on the environment?
RPH: Again, ask questions. What is the human problem that these companies are solving? In those industries, one is that diamonds and gold are a store of value from an investor perspective that helps to diversify a portfolio. The reasons they get sold are partly investor and partly consumer driven. Consumers want something precious to give or to have so that they can present themselves in a unique way. What are the alternatives to that? One is that there may be natural products that could be a more sustainable input than an extracted mineral. Part of their value, though, is scarcity, so you may need more scarce item or scarce design. Another aspect is with something like coffee, bananas or chocolate, which require highly labor intensive processes, the emergence of Fair Trade is a growing market. This can be applied to these products, as well. Through a combination of solving human problem and changing production and use, the process can move both of those industries over time.
LB: A lot of environmentalists say that we need to not just focus on more sustainably made products, but we need to reduce our consumption overall, do you agree with this assessment?
RPH: I agree that the pace of consumption for most high income countries is not a sustainable path and if you look at something called the global footprint network, they analyze countries by their United Nations Human Development Index score and their carbon intensity. What they found rating over 100 countries is that there was no country that hit an acceptable human development index score, which was basically where Mexico is at, that wasn’t also experiencing less than a sustainable usage of resources. In essence, any country over the minimum human index score used more than one equivalent earth of resources. The question is what level of development is acceptable that enables us to continue to live as a species on earth? There was one country that had a minimum score of less than one earth and that was Cuba. Cuba is seeking to promote this as a positive reinforcement for the socialism approach. I personally believe that just like we created industry to accelerate our growth, we can also create industry to make us more productive. Like we did with information technology, we need to apply the same motivation for increased productivity with less impact to industrial processes. We also need a world where the quality of life is more important than the quantity of goods consumed, but that doesn’t make it inconsistent with growing profitable businesses.
LB: Can the free market solve economic disparity?
RPH: With better information on human impacts, the free market can solve many issues around access to capital, health and wellness and of course environmental sustainability. For example, in the U.S., there are 10 million households that are unbanked but they still earn money. Wal- Mart petitioned to become a bank to serve these households and was rejected because of efforts by banking industry lobbyists. So instead, they launched a pre-paid debit card to act as a financial system for those households so that they can hold money in those accounts and spend it and remit overseas, competing with Western Union, and they can even invest it with a business partner of Wal-Mart. This was a free market response to a gap for low income people by creating a new product.
LB: I know that you tout the disclosure to investors of the potential effects of climate change on profits and financial risk as a way toward measuring human impact, but what about those companies disclosing their actual impact on climate, environment, health, etc.? For example, should ADM have to disclose its pesticide impact?
RPH: They would be well served if they did because investors are otherwise in the dark about potential liability. So if ADM wants the highest price earnings multiple, than any uncertainty depresses that multiple, so potential liability from pesticides is one element of that. Companies that aren’t forthcoming about liabilities and risk are depressing share holder value based on expectations of future earnings of the company. So, for example, what Nike found in disclosing labor practices and breaches of ethical conduct is that they were embraced by the investor and citizen communities for disclosing them so that more people could help them solve the problem. No company holds all the expertise in its disciplines. They can create a new market for solutions to address these problems. Another free market solution, Innocentive, is a company that is a market place for chemist, biologist and physicist solutions for companies seeking solutions to problems of those natures. It matches scientists to those companies and eliminates the lack of transparency while compressing the time it takes to solve them because actual solutions exist, they just need to find a way to the people that can solve them. A similar approach could work for ADM or other companies seeking solutions for problems they have.
LB: Can the free market system solve the climate crisis or do we need regulation?
RPH: There are two potential scenarios. One is with what Kyoto has shown is that countries will self select into a proactive solution. In Europe, business has been a partner with governments in setting up cap and trade, and though it’s not pure free market, it is the next best solution for companies to trade within a regulatory framework. Although targets have not been aggressive in the past 3 years, everybody has agreed to participate in the same framework. In the U.S., The US Climate Action Partnership (USCAP), including Environmental Defense, the NRDC, General Electric and others has been adding members since launching earlier this year. The free market is leading the government in seeking to be proactive with CEOs like Jeff Immelt of General Electric as one of the founding ten. It is possible that if government listened to citizens and business that they could apply a partnership that created a cap and trade system that would let the free market operate under some regulatory boundaries. However, it’s tricky. Oil companies are pointing to auto makers to design better engines and auto makers are pointing toward oil companies to design biofuels, so it will probably require some aggressive regulatory intervention to fix the problem in the near term.
If there were a Katrina like event where a glacier off Greenland would melt and put Miami under water, then there might be a more aggressive free market push, but most likely will need some kind of government intervention since we are getting late in the game on the types of changes required. A new framework, whether free market or regulatory, will compress the time to get to a more sustainable environmental approach and will amplify the winners and losers that will come about. It’s a very unique investment opportunity to understand who is more at risk and who is less at risk. It will amplify the movement of stock within industries. The faster investors understand human, social and environmental impacts, the better position they will be in to profit in the short and long term. And companies that understand human problems and position themselves for positive impacts will be more stable, higher growth and less risky, and attract the best, most passionate people to their organizations.
LB: In your mind, is USCAP a sincere effort or is it an attempt to get ahead of regulation?
RPH: I think it’s both. It’s sincere because the companies are made up of people and the leaders of those companies are operating out of opportunity or out of fear. Duke Energy is one of the founding ten. They have a large carbon exposure and it is in their best interest to help shape solutions and also in their shareholders’ interests. That’s not necessarily insincere. They have to report to a regulator in North Carolina and other states, the regulators are elected or appointed by the Governor depending on the state, so the utility that has to serve customers, satisfy shareholders and regulators, and attract talent, has to respond to those sources. General Electric sees great opportunity in waste water management, and renewable energy. Their infrastructure needs to be stable in order to sell into the EU, China and India. Jeff Immelt has also said that because he is a child of the 60’s. this is a vision and expression for GE going forward which matches values, business opportunities and sustainable society. And the traditional investment community is not trying to reward USCAP participants, so the conclusion is that there is some element of sincerity and risk management. It’s a mix overall.