Investors aiming to make a positive social or environmental impact often target start-ups and companies based on the products they offer, like affordable housing or solar power systems. However, a growing number of investors are now looking beyond products, focusing instead on the business models and leadership that drive these companies.
The Challenge of Maintaining Mission
Start-ups dedicated to positive social impact typically have business models that support a diverse workforce and prioritize employee well-being. Yet, as these companies grow, go public, or are acquired, there’s a risk that their original mission could be lost.
Key Points:
- Growth and acquisitions can dilute the original mission.
- Maintaining a focus on social impact requires strong foundational structures.
Public Benefit Corporations: A Solution
One effective way to safeguard a company’s mission is to incorporate it as a Public Benefit Corporation (PBC). PBCs embed ethical and sustainability commitments into their charter documents, ensuring a balance between shareholder interests and those of employees, customers, and the environment.
PBC Highlights:
- PBCs must balance profit with social and environmental goals.
- They can reject buyers who don’t align with their values.
Global Adoption and Variability
While the United States pioneered the PBC model, countries like Colombia, Italy, and France have adopted similar frameworks. However, the specifics can vary significantly. For instance, in Delaware, a PBC is a for-profit entity, whereas in California, it operates as a non-profit.
Challenges:
- Navigating different models and regulations can be complex.
- Terminology confusion, especially between PBCs and B Corps, complicates understanding.
Protecting the Mission: Purpose Trusts
Simply incorporating as a PBC doesn’t guarantee the mission will be preserved. Investors can establish purpose trusts to ensure companies stay true to their impact objectives. For example, Patagonia, a benefit corporation, transferred its voting rights to a purpose trust to maintain its mission.
Purpose Trust Benefits:
- Ensures ongoing alignment with impact objectives.
- Provides oversight and approval rights over significant changes.
Emerging Trends in Impact Investing
Despite the complexities, more investors are becoming open to assessing companies based on their business models and leadership. This includes investing in employee-owned companies or those with female management teams to promote gender equality and reduce inequality.
Emerging Focus Areas:
- Employee-owned companies for equitable business practices.
- Companies with diverse leadership for advancing social equity.
Conclusion: A Growing Movement
The trend towards evaluating business models and leadership for ESG impact is gaining momentum. As more entrepreneurs seek to embed their values into their businesses, the opportunities for this type of impact investing are expanding.
Future Outlook:
- Increasing interest in alternative business models.
- More focus on leadership diversity and social equity in investments.
By shifting their focus to business models and leadership, investors can better ensure that the companies they support continue to drive positive social and environmental change. This approach not only protects the mission but also helps create a more sustainable and equitable future.
