New fundamentals of 21st century investing

R. Paul Herman

Almost a decade into the 21st century, investors are beginning to see the new fundamentals of creating not only the next wave of profits, but also the potential for tremendously positive human impact. When evaluating investments for your portfolio, consider the following indicators when measuring both profit and human impact. Because these factors tend to be leading indicators, integrating them into a portfolio creates an opportunity for investors seeking to make more money while benefitting the public good.

Indicator 1: Revenue from positive-impact products
Nutritionists at global beverage and food company PepsiCo (NYSE: PEP) claims 30 percent of its $43 billion annual revenue comes from the sale of healthy products that are “good” for customer’s health and nutrition. These include brands such as Tropicana orange juice, Quaker Oats oatmeal and Naked juices. GE (NYSE: GE) claims 80 of its “ecomagination” products generate $17 billion in revenue, or almost 10 percent of the firm’s top-line.  Tellabs’s (NASDAQ: TLAB) eco-efficient equipment, which consumes 80 percent less energy for telecom customers such as Verizon, totals at least a third of its $2 billion in sales.

The growing trend among customers who are demanding products with positive impact means these segments tend to grow faster than the less sustainable products offered by these firms, which can be positive for your portfolio.

Indicator 2: Customer satisfaction
In the book “Satisfaction,” JD Power shows that satisfied customers—and their referrals— drive top-line revenue, profit and shareholder value. However, most public companies do not openly share this ratio. The American Customer Satisfaction Index
(www.theACSI.org) from the University of Michigan tracks annual scores of big brands. In wireless telecom, Verizon (NYSE: VZ) leads the sector and Sprint (NYSE:S) lags, which tends to correlate with their ultimate profitability.

Indicator 3:  Employee satisfaction and engagement
Since 1998, Fortune magazine has published the “Best Places to Work For” list annually, compiled by the Great Places to Work Institute. Wharton professor Alex Edmans examined the shareholder value performance of these employee-friendly firms, adjusting for annual changes. Edmans found that firms with higher employee satisfaction outperformed the benchmark— because they were under-valued by traditional profit-only investors. Mutual fund Parnassus has a Workplace Fund (PARWX) which draws on this approach, and has tended to outperform its benchmark significantly. 

Indicator 4: Energy intensity and greenhouse gases (GHG)
The Carbon Disclosure Project, now in its seventh annual compilation, tracks companies reporting of equivalent carbon intensity.  More than 1500 firms reported in 2008, providing a new well of information (which Bloomberg terminals now provide) for investors to evaluate the risks—and opportunities—inside and across industries. TruCost even evaluates the specific earnings-per-share at risk, especially in sectors like utilities and industrials, while the CDP’s Leadership Index rates transparency as well as results.