Social impact investment way to go

Boardroom discussions are ongoing on whether corporates should be involved in corporate social responsibility (CSR) or not. This is happening not only in Kenya but the world over.

This question arises since studies on the correlation between Corporate social performance and corporate financial performance have not produced any conclusive results.

Consequently, corporate leaders such as Bill Gates and Warren Buffet, among others, have shifted to social impact investments (SII), which is better.

Most corporates such as Safaricom, Equity Bank, Co-operative Bank and Kenya Airways just to mention a few, have continued practising CSR, which is also good.

However, is it not high time they realised that socially responsible investing (SRI) is better?

The CRS model is the traditional approach to corporate philanthropy. It puts an ‘obligation’ on large corporations to contribute part of their significant resources and cash reserves to the communities in which they operate.

This model rests on the assumption that corporations need to give back to society, and when they do, they should be celebrated for their magnanimity.

It, therefore, appears paradoxical that though giving back is an ‘obligation’ yet it is ‘strictly optional’.

Corporate social programmes are, therefore, seen as completely separate from the company’s financial health.

This means that there is no correlation between corporate social performance and corporate financial performance.

Some countries such as India have gone ahead to make CSR compulsory with the hope of improving social impact.

By making CSR obligatory for businesses, India created a superlative example of how businesses can create shared value for society while operating responsibly.

According to KPMG’s 2018-19 report, corporate India spent more than $600 million (INR 5779.7 crores) in 2014-15 and more than $1 billion (INR 8,691 crores) in 2019-20 towards CSR.

India has even gone ahead to enforce adherence to these obligations in terms of a mandatory two percent spent in a financial year.

If a corporate fails to do so, the unutilised amount is transferred into an escrow account and if not used within the following three years, is deposited into the ‘National Unspent Corporate Social Responsibility Fund’.

However, while more than 100 companies spent more than the prescribed two percent, the country’s most backward districts continued to remain deprived.

This in effect means that CSR, whether voluntary or compulsory, is not the silver bullet to improve social performance. Maybe this partly explains why SII is slowly gaining prominence over CSR.

Michael Porter and Krammer have proposed a shared value model, which holds that there is a mutual dependence between corporations and society.

This means that both business decisions and social policies must follow the principle of shared value whereby the choices benefit both sides.

In contrast, CSR initiatives today are a bunch of philanthropic activities that are at times disconnected from the company’s strategy and at long last neither make any meaningful social impact nor strengthen the firm’s long-term competitiveness.

This leads to a tremendous loss of opportunity both for businesses and for society. It is on this basis that SII is better than good CSR.

Impact investing is a newly accepted type of investing where corporates make financial gains and contribute to society’s welfare at the same time.

They are commonly made with firms that have a good sense of social impact and share the investors’ enthusiasm to do good for the community.

Some modifications of impact investment (SII) are SRI and environmental, social and governance (ESG), which marry economic growth and environmental preservation.

So far, several great corporate leaders have shifted from CSR to SRI.

There is a need for the promotion of SII in Kenya. This can be done by first enabling investors to choose from among the firms with an attractive social impact and then decide where to contribute — charity, environment, clean energy etc.

Though ESG largely focuses on financial returns, it nevertheless promotes social impact. Socially responsible investing, on the other hand, involves selecting firms based on certain moral and ethical criteria, which appeal to the investors’ conscience.

Switching from CSR to SII is commendable. This is because it is a ‘win-win’ situation.

Firstly it gives investors financial returns while at the same time helping them give back to society.

Secondly, it promotes social impact and pushes companies to contribute more. Thirdly, it reduces the negative externalities of economic activity on the environment.

It also helped develop sustainable businesses that continue to constantly benefit the community. This calls for social welfare, sustainable development and environmental protection.

Developing a strategy, therefore, to make a profit and then using a small percentage of the profit to support the local community should be at the core of our organization’s strategy.

This can be done, while at the same time promoting conservation of the environment. This approach eventually leads to a win-win situation between the financial performance and the Social and Environmental outcomes.