Measured Progress

Investors are figuring it out: Short-term numbers don’t tell the whole story. How to think about valuing the invaluable.


It’s no secret how Wall Street looks at a stock; most investment banking analysts play some version of the same numbers game. They gin up models of a company’s financial drivers, then plug in data based on what they know or can guess about revenue and spending. The spreadsheet spits out projections of future cash flows and profits, which imply a certain valuation.


The problem, of course, is that there’s much more to corporate performance than what we can glean from traditional financial reporting. Any company creates impact across multiple realms. Its products and services can improve customers’ health and welfare, or not. Its workplace practices have consequences for the wealth and well-being of employees. Its activities touch the community and the environment, for good and bad.

Over the long term, arguably, these nonfinancial dynamics shape a company’s performance as surely as any financing strategy or marketing plan. They can be a source of risk, or of competitive advantage. But as investors, most of us are still conditioned to accept a myopic view of corporate purpose: A company’s role is to generate financial returns, period. Even if we didn’t buy that, the social impact of businesses has always been insanely difficult to measure. So rather than do all that messy research, we’ve tended to look the other way.

But what if we agreed that short-term profitability doesn’t guarantee long-term investing success? And what if we could measure those nonfinancial returns? Then the game changes in some pretty profound ways.

More and more, investors are actually asking how companies treat their workers, what levels of greenhouse gases they emit, which patents they’ve filed for, and many other questions that can’t easily be answered by quarterly earnings reports. One indicator: In 1995, some 55 socially screened mutual funds had $12 billion in assets, according to the Social Investment Forum. A decade later, such funds numbered more than 200, with $179 billion in assets. It isn’t only the Whole Foods crowd taking heed: More than 100 investment managers and investors, representing $5 trillion in assets, have signed on to the Principles for Responsible Investing, introduced by the United Nations last year. “Environment, social, and governance issues are now commanding dramatically more attention,” Goldman Sachs chief U.S. investment strategist Abby Joseph Cohen told attendees at a sustainable-development conference last year.

That demand has fueled (and funded) the creation of a sort of shadow research industry consumed with both pinpointing nonfinancial metrics and linking those measures to financial performance. It’s populated by folks such as Swiss serial entrepreneur Peter Ohnemus, whose upstart firm, Asset4 (backed in part by Goldman Sachs, offers institutional investors more than 250 indicators that cover both economic and so-called extra-financial characteristics of the nearly 1,500 companies it covers. Ohnemus’s goal: “We want to be the Bloomberg of extra-financial data.”

He’ll have competition. In 2004, European asset managers and pension funds formed the Enhanced Analytics Initiative, agreeing to promote nonfinancial measures by steering at least 5% of their broker commissions to firms that incorporate environmental, social, and other factors into their research. That’s fueling demand for research on nonfinancial performance, sustaining a small raft of specialty firms such as Innovest Strategic Value Advisors, IW Financial, and KLD Research & Analytics.


Fast Company has launched its own effort in this realm, teaming with researchers R. Paul Herman of HIP Investor and Sara Olsen of the Social Venture Technology Group to develop an exclusive approach to measuring the human and social impact of businesses. Herman and Olsen surveyed 21 leading public companies on sustainability processes, metrics, and outcomes, combining the results with existing public data.

The result, what we call the HIP (that’s Human Impact + Profit) Scorecard (see chart), provides a tangible guide for investors trying to build nonfinancial metrics into their stock-picking approach. We assessed companies’ progress in developing management practices focused on generating and measuring impact on customers, employees, and the environment. And we estimated the percentage of each company’s revenue associated with sustainable practices.

It’s a potentially powerful approach–but one that also makes plain how difficult this sort of analysis remains. It’s pretty straightforward, for example, to collect information on the breadth of health benefits a company offers its employees. It’s another thing, though, to calculate the actual impact of those on employees’ health–and how that reflects back on the company’s future financial performance.

Even with a lot more resources dedicated to the task than a decade ago, measuring and quantifying so-called environmental, social, and corporate governance (ESG) factors is tricky. Sure, businesses have begun to disclose more information, driven in part by investors demanding more transparency. “There’s a whole movement pushing companies to standardize reporting on ESG and to integrate it within their traditional reporting,” says Jane Ambachtsheer, who heads Mercer Investment Consulting’s responsible-investment practice. But while a handful of companies (like those we surveyed) are eager to share, most haven’t even begun to think about such issues. Beyond that, many intangibles simply aren’t very … tangible.

So how do you measure corporate conscience? The strategies have grown more sophisticated since people started thinking about socially responsible investing in the early 1970s. Back then, Pax World launched the first socially responsible mutual fund in the United States–and its approach centered on banning investments in so-called sin stocks, those companies involved in alcohol, gambling, tobacco, and weapons. Now Pax has begun incorporating data on climate change, sustainable development, and human-rights concerns–criteria it says “were not topical when the screens were first adopted.”

Asset4’s proprietary system tracks everything from patent filings to carbon-dioxide emissions reports. Scoring companies on each of those 250 criteria, it then produces an integrated overall rating, from A-plus to D-minus. It also lets users customize their ratings, keying in on specific ESG criteria. “We slice and dice the data and serve it up ready to be consumed,” Ohnemus says. “Users can then do whatever they want with it.”


Innovest, by contrast, starts by analyzing sector-specific risks and opportunities. Its analysts then gather data and interview corporate executives about company-specific environmental, social, and other issues. It weights the data differently, according to industry; carbon emissions, say, are likely more important for an oil-refining company than for a software outfit.

Both approaches rely mostly on corporate self-disclosures and what companies choose to reveal about their human impact mostly isn’t subject to any broad standards. That’s one hurdle to broader adoption of such strategies. Another may be that investors aren’t quite sure yet what to do with the results. About 75% of institutional investors believe that ESG issues can affect investment results, according to a recent Mercer survey. Yet fewer than half of those institutions plan to assess whether such factors are considered as part of their investment process.

That finding signals the reality that still governs Wall Street: For most investors, it’s still all about the numbers–and mostly, it’s about the short term. Even contemplating the measurement of human impact implies an investment horizon far longer than the average I-bank analyst is trained to contemplate.

That will change. Ultimately, the evidence is just too powerful not to be embraced by mainstream investors. A recent study by Accenture determined that intangible assets account for about 70% of the value of the S&P 500, up from 20% in 1980. That’s one reason the world’s six largest accounting and auditing firms last November called for a drastic overhaul of corporate reporting to better account for the extra-financial drivers of corporate performance. In other words, incorporating ESG factors into business processes and evaluations is shifting from a moral imperative to a business one as well.

As that happens, the investing world could look more and more the way it does at London-based Generation Investment Management, founded in 2004 by David Blood, former head of Goldman Sachs Asset Management, and former vice president Al Gore. There, human and social impact is simply part of everyday investing. Every dollar under management is subject to strict guidelines on sustainability and long-term success.

It will be five years, perhaps longer, before that approach is broadly accepted in the United States. “Over time, more and more managers will see the value of long-term research,” says the firm’s U.S. president, Peter S. Knight. “To integrate the two disciplines, the long-term research plus fundamental equity analysis, is hard to do. But I think it will happen.”


Yuval Rosenberg is a freelance writer in New York.