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Why Investing Isn’t One Dimensional

March 9th 2018

On 12th January 2018, an open letter was sent to numerous CEO’s with a clear message: if all you do is concentrate on short term profit then your business is going to die.  The letter stated that “without a sense of purpose, no company can achieve its full potential. It will ultimately lose the license to operate from key stakeholders. It will succumb to short-term pressures to distribute earnings, and sacrifice investments in employee development, innovation, and capital expenditures that are necessary for growth….And ultimately, that company will provide subpar returns to the investors.”

If this letter had come from some not-for-profit charity or environmental activist then it would not have caused much of a stir.  But instead the author was Larry Fink, head of Blackrock – the world’s largest investor, with upwards of $6trillion under management.  His goal is to now find companies that “not only deliver financial performance, but also show how it makes a positive contribution to society”.

But profit is a quantity, easy to define.  Purpose and societal contribution less so.  The key is to understand that it’s sustainability that Fink was driving at.  And sustainability has some pedigree.  Sustainable development was defined by United Nations way back in 1987. Even earlier, in 1981, Freer Spreckley first articulated Triple Bottom Line (TBL) accounting, by expanding the traditional reporting framework to take into account social and environmental performance in addition to financial performance.

Today there’s now Quadruple Bottom Line:  the fourth pillar denotes a future-oriented approach (future generations, intergenerational equity, etc.). And there’s now some rigour in the approach.  Cambridge University has had an Institute for Sustainability Leadership for some time. 

So what does this mean for the early stage investor?  Returns only happen because someone else sees a future in the business and wants to buy in, via sale or IPO.  And if the largest investor on the planet says that such a future has to be sustainable and have a purpose, then that will eventually flow down the investment tree and so we should all think about it too.

After all, any purely financial return is merely imaginary - money only becomes real when you spend it on something.

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