insights_chipotle_cultivateBarbara Gray, CFA – March 12, 2014 – The wave of socially conscious and empowered Millennials will be an influential force on corporate America and Wall Street over the next few decades as they seek to align their values with those who they buy from, work with, do business with, and invest with. As Rhoden Monrose, a 27-year old former derivatives trader who left his lucrative career to found CariCorps to build a more socially responsible Wall Street, from the ground up” observed “for Millennials, social responsibility is their first language…these things are expected, they are a non-negotiable”. As their baby boomer parents start to retire and the transfer of wealth begins, this new socially conscious generation of 80 million strong (between the ages of 21 and 36) will be looking to invest their money in alignment with their values and beliefs.

A recent study by UBS[1] found Millennials to be the most fiscally conservative generation since the Great Depression as they “experienced the financial crisis and all the market volatility and job security issues that came with it – early in their careers.” However, risk tolerance is still a function of age, as evidenced by the fact that 29% of Millennials they surveyed have an aggressive/somewhat aggressive risk tolerance level, versus only 15% of Baby Boomers. Given their young age, their investment objectives will be different than their parents’ as they will be seeking Growth, in addition to Safety of Principal and Income. And given their socially conscious DNA, those seeking capital appreciation will be looking to invest in innovative companies that are disrupting the status quo and doing social good. We believe this will lead to the emergence of a new class of investors: the Socially Conscious Growth investor and we believe the Socially Responsible Investment (SRI) community is ideally positioned to meet the needs of the next generation of investors: the Millennials.

“Business as usual is changing. While once companies saw sustainability issues as risks to be managed, many now also see sustainability as a source of innovation that drives growth and profitability.” – The Value Driver Model: A tool for communicating the business value of sustainability, December 2013

The above quote taken from the December 2013 paper “The Value Driver Model” highlights the recent advancement in the United Nations Principles for Responsible Investment (UN PRI) thinking about sustainability in terms of growth opportunities versus risk management. Notability, it is a radical departure from the ESG-centric focus of previous papers published by the UN PRI and was a collaborative effort with the UN Global Compact Leaders on creating long-term value. The UN PRI, which was launched in April 2006 as a partnership between the UN and investors to promote responsible investment, has become an influential force in the world of Social Responsible Investing (SRI). Over the past eight years, its membership base (comprised of pension funds, investment managers, private equity firms, and service providers) has grown to over 1,200 signatories, representing US$34 trillion in assets under management, equal to 15% of the world’s investable assets.

What is interesting is the UN PRI’s latest paper discusses the business value of sustainability in terms of driving growth, improving productivity, and reducing company-specific risk factors. The book “Focus: Use Different Ways of Seeing the World for Success and Influence[2], which introduces the concept of prevention-focus versus promotion-focus, provides a useful way of looking at the progression in thinking by the UN PRI. For example, we see their mindset shifting:Book_Focus

  • From a Prevention-Focus of how to minimize losses by incorporating individual ESG (environmental, social, governance) factors into their analysis from a fiduciary perspective to reduce exposure to companies that generate negative externalities.
  • To a Promotion-Focus of how to maximize gains by advocating a more holistic mindset through looking at all stakeholders as a source of sustainable value creation by finally including the C (Consumer) and other E (Employee) into the equation

A good analogy is to envision the SRI community advancing up Maslow’s Hierarchy of Needs pyramid. Instead of just fixating on the bottom two layers (physiological and security risk factors) as a means to reduce their risk exposure to companies with Negative Social Capital, they are now starting to look at the top three layers (belonging, esteem, self-actualization) as a means to maximize investment growth opportunities in companies with Positive Social Capital.

In addition to focusing on traditional “best in class” companies, we believe the SRI community should also look to invest in the companies best positioned to capitalize on sustainability as a means to drive growth, improve productivity, and reduce company-specific risk: purpose-driven companies with a stakeholder-centric mindset that are focused on long-term sustainable value creation. Based on our research, we have identified the following companies as meeting such unique criteria:

Starbucks (SBUX): In 1987, Howard Schultz started his Starbucks movement to “inspire and nurture the human spirit – one person, one cup and one neighborhood at a time”.

Whole Foods Market (WFM): In 1980, John Mackey planted the seeds for his Whole Foods Market movement, inspired by the mission to “help support the health, well-being, and healing of other people and the planet”.

Chipotle Mexican Grill (CMG): In 1993, Steve Ells began Chipotle Mexican Grill inspired by the simple philosophy to demonstrate that food served fast doesn’t have to be a traditional “fast-food experience” and this vision has evolved to now change the way people thing about and eat fast food guided by his mission of “Food With Integrity”.

lululemon athletica (LULU): In 1998, Dennis Wilson started his lululemon movement inspired to “create components for people to live a longer, healthier, and more fun life”.

LinkedIn (LNKD): In 2003, Reid Hoffman founded LinkedIn and planted the seeds for his “Start-Up of You” movement inspired by the greater purpose “to create economic opportunity for every professional in the world”.

As Christine Day, one of Howard Schultz’s first hires at Starbucks (SBUX), and the former CEO of lululemon (LULU), recently asserted, “for me, it’s all about purpose-driven companies”. The challenge for the SRI community will be to figure out these “rebels with a cause” as their transformational leaders would rather invest their time and energy on disrupting the status quo to advance their movement than filing Corporate Social Responsibility (CSR) reports. Of the five companies in the BCR Portfolio, we note that only Starbucks has filed a formal CSR report. As Chris Arnold, head of Public Relations at Chipotle Mexican Grill commented when asked why they haven’t filed a formal sustainability report: We’d rather invest those resources in doing things that actually drive change, than in talking about that change.”

While ESG information can be helpful to risk analysis, it is not sufficient for identifying companies that practice capitalism in a manner that benefits all stakeholders, including investors. Instead of waiting to invest in these companies until they file a formal CSR report, we encourage investors to assess companies’ level of transparency, authenticity, and engagement by using their corporate Facebook, Twitter, and LinkedIn social media sites as real-time listening posts, like we did back in the summer of 2011 to come up with the list of companies for our Customer Value Index 200 (CVI 200). And crowdsourced-based review sites such as Yelp, Trip Advisor, and Glassdoor provide investors with additional insight into customer and employee perceptions of these companies.

The new Social Era of transparency, connectedness, and stakeholder empowerment is creating new Social Value creation opportunities of advocacy, learning, and collaboration/co-creation. The companies best positioned to capitalize on these opportunities to build long-term sustainable value are those with a greater purpose, authentic core values, and a strong corporate culture that are focused on generating Positive Social Capital (i.e. shared value and/or positive externalities) for their customers, employees, suppliers, communities, and the environment. Although Positive Social Capital is an intangible asset, that unlike goodwill, does not show up on their balance sheet, investors need to factor it into their analysis and valuation process as it will lower companies’ risk profiles and enhance their growth profiles.

The bottom line is companies and investment firms looking to attract Millennials would be well advised to take heed of the following saying: “You are what you do, not what you say”.

Disclosure: I have a LONG position in Starbucks (SBUX-NASDAQ), Whole Foods Market (WFM-NASDAQ), Chipotle Mexican Grill (CMG-NYSE), lululemon athletica (LULU-NASDAQ), and LinkedIn (LNKD-NYSE).

 


[1] UBS Investor Watch 1Q14 “Think You Know the Next Gen Investor? Think Again

[2] Focus: Use Different Ways of Seeing the World for Success and Influence, Heidi Grant Halverson & E. Tory Higgins, Plume, April 2013