If you’re a business school student, there’s a good chance you’re at least broadly familiar with the life of Andrew Carnegie. The Gilded Age robber baron casts a pretty long shadow… particularly in his model for the life of a businessman in America: a ruthless competitor in business who compromised nothing in his pursuit of profit, and a committed philanthropist in his private life, clearly segregating his desire to conquer the business landscape and to mold a better world. Carnegie had a clear and inspiring vision of a better society, but he opted to leave it entirely out of his life as a captain of industry.
For a new generation of business school students, though, the idea that one’s fiduciary and social responsibilities are mutually exclusive isn’t one they’re ready to accept. They want to learn how they can combine their career and their ideals, and increasingly, they’re finding answers in the classrooms at America’s most prominent business schools.
A new generation of future business leaders are seeing concepts like impact investing, sustainability, and ESG integrated into the curriculum at some of America’s most prominent business schools, potentially forming a lasting impact that could help forge a future wherein the machinery of capitalism isn’t at odds with the goal of a more equitable society or a healthy environment. Rather, understanding the inherent connection between the long-term health of a business and that business’ ability to have a positive impact on the world around it is something recognized among professors and students alike at business schools across the country, and has become an essential part of how those schools are teaching their students to approach business.
The Limits of Philanthropy… and the Opportunity in Business
“I am a big believer in business,” said Dean Sally Blount of the Kellogg School of Management in her remarks at commencement in June of 2015. “It is the most powerful and potent social institution of our day, creating jobs that have lifted hundreds of thousands out of poverty each year over the last decade, and circling the globe with the internet, social media, and other innovations that have created unprecedented levels of market access and opportunity. Yet, I would argue that we have not yet realized business’ full potential for improving our world.”
“Recent data and experiments have shown that philanthropy alone cannot create the impact on people and our planet with the scale and efficiency that focused market investments have the potential to do,” Blount continued. “To do that, we need more people creating companies, and investment pools to fund those companies, that bring social principles to the forefront. Companies that are designed to address social good while also making a reasonable profit. … As a business school professor, I have long known that we can provide good senior care, good child care, wetlands remediation, and reasonably priced payday loans to the working class, and still make a profit.”
Blount’s address was an eloquent exploration of something that has been swirling throughout the business world for some time now. There is, indeed, a growing body of evidence that suggests that the desire to do good doesn’t actually hinder one’s ability to generate investment returns and/or profits, like the Wharton School’s 14-year study of some 53 impact investing private equity funds that found the IRR for mission-aligned exits was 33.52%, good for an S&P 500 PME of 3.26.
But it’s not merely that having a positive social impact won’t cost you anything, there’s also a growing body of evidence suggesting that ignoring sustainability winds up being pretty expensive. Take the report from Generation Investment Management, which made the case that valuations of oil companies are potentially shaky, given that they’re built on oil reserves that climate change will force humanity to leave in the ground, making them what the report terms “stranded assets.” Any investor building a portfolio that ignores concerns about the environment or social responsibility is potentially ignoring crucial risk factors that could ultimately cost them a big piece of potential returns.
In these cases, it’s a simple dollars and cents equation, just one that’s more realistic about the multitude of risk factors facing the future of a business that exist outside of what you see in a traditional balance sheet. It’s becoming increasingly clear that, if you intend to still be in business 10 or 20 years down the line, you have to put some thought into how you’re affecting your environment and community. And that’s precisely what professors at Kellogg, Wharton, Haas, Cornell, and a variety of other business schools across the country have begun to build into what they’re teaching their students. The world of finance is changing, and the collection and analysis of new and better data is beginning to make it possible to factor an array of new considerations into any investing decision.
The Other 10%
For everything that’s new though, one of the recurring themes one finds when talking with the people teaching these concepts is that things are actually very much the same.
“Ninety percent of what you need to understand [about impact investing] is the same as a traditional venture capital deal,” said Jacob Gray, Senior Director of the Wharton Social Impact Initiative in describing impact investing. “But what you do need to do is understand that crucial extra 10 percent, which is: ‘how do you measure and evaluate the impact of a deal?’ And that’s what the faculties are getting more conversant at and what the students demand.”
That extra 10% is crucial, an incremental change that can produce exponential shifts in perspective. However, it’s important to note that it doesn’t involve upending the business education orthodoxy. The skills are essentially the same… it’s the applications that’s evolving.
“What I would say is that Kellogg, in many ways, hasn’t changed the core of its finance curriculum,” says Paul Christensen, a clinical professor of finance at Kellogg where he teaches a course on microfinance. “We still offer Finance 1 and Finance 2, we still teach the fundamentals of net present value and capital markets and corporate finance structures. What we do, though, is now we’re adding layers to it.”
In that sense, this new focus can appear like an ideal melding of the twin faces of Carnegie onto each other, the strategic thinking and fearsome drive of his business career brought to bear on the human interests of his philanthropic one.
“Starting to look at the cost of human and social and environmental resources, out and across a longer time horizon, that’s not one singular curriculum,” says Megan Kashner, Director of the Social Impact Program at Kellogg. “It is many questions, many topics, many subject areas. And it’s really a shift in mindset more than it is a singular linear curriculum.”
This is not simply in the hands of the professors at these schools, though. The students are essential to driving forward this shift, demanding education on sustainable investing and management and then showing clear enthusiasm for the subjects once they reach the classroom. And, while youthful idealism on the part of college students is clearly nothing new, the fact that, in this case, it’s combined with a growing pragmatic case in the markets gives plenty of reason to believe this isn’t merely a passing infatuation of youth.
“The things that we attribute to millennials is that they care about principles, they care about values. We’ll see if that lasts into their 30s and into their 40s,” says David Chen, Adjunct Professor of Finance and Program Director of Impact Investing at Kellogg. “But I think that we can harness that and give enough examples and career opportunities that it doesn’t have to dissipate. They don’t have to start by wanting to save the planet and then become a hedge fund manager in their 40s. That’s why we’re very careful in our class to continue to frame this not as an obligation or as an imperative, but as an opportunity set.”
That framing, as an opportunity for an enterprising investor or entrepreneur, also casts a wider net not limited by ideology. Any student, regardless of their beliefs, can find a new power in what can be accomplished in the world of business.
“This is not a fringe group of students who are the traditional activist type of a person,” says Gray. “It’s really very mainstream students who intend to have very mainstream careers and that was tuned in to me.”
And the response as observed by many of the professors at these schools has generally been very positive. Students are hungry for this sort of knowledge, and excited to see a path forward, where their career in business can match their world view.
“You know people are taking courses that weave in concepts of impact investing because they’re choosing those courses,” says Kashner. “But as we also weave concepts of social impact and impact related business case and impact investing related content into other coursework, we’re getting nothing but positive feedback.”
Environmental Consciousness that Relies on Business Acumen
mattwalker69 via Flickr
Perhaps nowhere is the essence of this new generation of business school educators and students better personified than at the Kellogg-Morgan Stanley Sustainable Investing Challenge, where students develop plans for investment funds that combine competitive returns with social impact. Take, for instance, 2016’s winner Terra Limpa. The nation of Angola, recently emerged from a lengthy civil war, has large stretches of otherwise valuable farmland that’s been rendered unusable by the presence of landmines, all while a nation that once boasted a thriving agricultural sector is forced to import much of its food supply. Terra Limpa, developed by students Suzana Amoes, Ryan Alam, and Megan Strawther at USC’s Marshall School of Business, would acquire farmland, clear it of landmines, hire local farmers to work the farms, sell the crops within the country, and ultimately exit the investment by allowing the laborers to purchase the plots by setting aside a portion of their wages.
Far from rejecting market dynamics, it’s clear that this sort of plan would be completely impossible without the considerable expertise for finance and business cultivated as part of a traditional business school education. The $30 million fund proposed by Terra Limpa would be a clear example of a successful double bottom line, one where the profitable response to a market inefficiency and a successful response to a humanitarian crisis is combined.
“We taught the students that the use of this thought process can be applied across every single investment strategy, every single asset class, and that we were not just relegated to social venture capital funds and microfinance,” says Chen. “In fact, it could be used across a whole set of the asset classes and markets. We forget that carbon cap and trade is a market. We forget that water temperature credit trading is a nation market. We can use these same techniques for wetlands trading, wetlands credit rating, wetlands mitigation. And so it goes, on and on.”
At the end of the day, if the goal is to do the most good possible, using the tools of a solid business education to pursue the goals of philanthropy may ultimately be the best way to do it.
“Unless you speak the language, unless you have the fundamentals of asset allocation and understand net present value and portfolio theory, impact investing is just this feel-good term that we use to call philanthropy by a different name,” says Christensen. “These are fundamental finance principles. So in that sense, the finance core is still the same. However, more and more faculty are exploring the ways in which finance and capital markets can be harnessed to provide access to funding for the things that not just make money for investors, but that are also targeted toward doing good in the world.”
In an Eco-Conscious World, Sustainability Courses Make Students More Marketable
Of course, no business school would be true to its mission unless the skills and knowledge it was teaching were preparing students for their careers after leaving school, and the knowledge of impact investing is proving very valuable to some alumni as they move through their careers. As more and more investment banks, hedge funds, and institutional investors begin to increase their emphasis on ESG and sustainability, having a base of knowledge in the area can give graduates a competitive advantage in the job market.
“Two of my ex-students, because they had this framework of thinking, were drafted into duty at a very, very important, name-brand investment bank who needed to start putting together their own product offering and strategies for their clients in this area of sustainable and impact finance,” says Chen. “In other words, they needed to go beyond white paper and actually start putting together [something that] would serve their clients. And because they were prepared in class for a way of thinking, I think they were extraordinarily well prepared to do this.”
At the end of the day, it’s increasingly clear that understanding the way a businesses’ operation connects it to the broader world is something that’s of growing importance inside academia and the business world alike.
“We taught the students that you should not be thinking about this as concessionary,” says Chen. “What you should be thinking about is how we apply the instruments and techniques and tools that we’ve learned in finance and frankly, in strategic marketing and ask ourselves how we can apply them to intentionally do beneficial things and tap into market inefficiencies to create returns for investors.”
The concept, though, was perhaps best expressed by Dean Sally Blount near the conclusion of her 2015 convocation address.
“Our purpose is to educate, equip, and inspire leaders who build strong organizations and wisely leverage the power of markets to create lasting value,” she said. “We develop brave leaders who do this by inspiring growth in people, organizations, and markets. And we know that market growth in and of itself will not be able to solve the ever-widening social problems that we will collectively confront over the next 50 years, be it water, education, or jobs. It is only through human intervention, through real people, Kellogg graduates, that we can bring concepts of fairness, morality, and sustainability to life in markets. It’s only through people that markets grow wiser and kinder.”
From equities.com on February 2, 2017
Written by: Joel Anderson
Featured photo: HBS1908 via Wikimedia Commons