ImpactAlpha, Jan. 14 – When it comes to corporations known for responsible business and sustainable practices, Unilever is often cited as one of the best examples.
But when the Canadian research firm Impak Finance last year drilled deeper into corporate impact, Unilever scored only 302 out of a possible 1,000 points. The French energy equipment and management company Schneider Electric, less often cited, scored 441 points.
The difference? While Unilever, with more than $56 billion in revenues in 2018, arguably employs industry-leading practices across its operations, relatively few of its products and brands directly improve social or environmental conditions. Schneider, with about $29 billion in sales, drives about 30% of its revenues from activities related to the U.N. Sustainable Development Goals, primarily through reduction of carbon emissions, according to the Impak report.
“One dollar invested in Schneider Electric will deliver more positive externalities related to the SDGs than a dollar invested in Unilever,” Impak Finance’s Boris Couteaux told ImpactAlpha.
Positive externalities, once treated as, well, externalities, are becoming the new coin of the sustainable investing realm. For decades, “socially responsible” investing has screened out negative-impact companies like tobacco. More recently, ESG analysis (for environmental, social and governance) has screened in companies using best-practices for reducing risks. The ability to calculate positive externalities could help identify companies that deliver actual social and environmental benefits through their products and services.
As those benefits are increasingly valued – by customers, employees and communities as well as investors – they are starting to move onto balance sheets in a variety of ways. “Positive externalities used to be ignored by corporate accountants because the firm, by definition, didn’t get paid for them,” Couteaux said. “Now, they can get paid.”
“Now a bunch of fund managers are asking, ‘What sustainability value-add, what future-proofing value-add, is actually hidden inside your company that hasn’t been well understood yet’?” Equilibrium Capital’s Dave Chen said in a recent ImpactAlpha podcast. “Some of these sustainability fund managers are looking at companies like and saying, ‘Your sustainability value add has not been priced into your stock.’”
Chen’s example was John Deere & Co., the $40 billion farm equipment and agtech giant that is putting an increased focus on helping farmers adapt to climate change. “Their customer is a farmer,” said Chen, who spent a day at Deere’s Moline, Ill., headquarters. “This is sustainability not as a series of white papers or marketing. It’s now being productized. It’s the technology cost-curve that is allowing them to productize and find the answers to the right questions.”
Commanding a premium
That productization is what Impak Finance is looking for in its analysis of positive externalities. Couteaux calls it the “What” factor, for what companies actually produce, rather than merely how they operate, and it accounts for the biggest share of the total score. Out of possible 400 points, Unilever scored 51 points; Impak could trace a positive impact from only 9 of its 100 brands. Schneider scored 156.
“About 30% of its sales revenue is related to SDGs and all things considered, this percentage is a significant commitment coming from a for-profit business,” Impak reported. (Impak is assessing companies represented in France’s CAC 40 index; it has not assessed John Deere & Co.)
Schneider Electric is productizing what it calls “decentralized, decarbonized, digitized” electricity.
Its customers are commercial and industrial enterprises that increasingly are looking for cost savings and reliability, as well as carbon-emissions reductions.
“A few years ago, it was difficult to sell that story to the financial markets,” Emmanuel Lagarrigue, Schneider’s chief innovation officer, told ImpactAlpha. “They would say, ‘Oh, yes, energy efficiency. That has a cost on short-term returns.’ Now it’s commanding a premium.”
Solar, storage and other technologies are disrupting the electricity grid in the same way the internet and distributed networks disrupted telecommunications two decades ago, Lagarrigue says. Sustainability is integral to that disruption, as global electricity demand doubles in the next 20 years.
“If we are going to double the amount of electricity we use as a planet, there is no way, structurally or financially, that the current way we produce it is going to continue,” he says. “The way that energy, especially electricity, is generated, transported distributed, exchanged, uploaded, downloaded in the future – that will change.”
“It will be much more efficient from a capital-deployment and from a sustainability standpoint to go for decentralized energy.”
Such micro-grids are the fastest-growing part of Schneider’s U.S. business. The company has a partnership, AlphaStruxure, with private-equity giant Carlyle Group to take on large projects such as the transition of New York’s JFK airport to 100% renewable energy. Through another deal, with Blackstone, Schneider works with the investment firm’s portfolio companies to optimize energy use for sustainability. Last month, Schneider said it would meet its goal of carbon neutrality in its expanded ecosystem by 2025, five years ahead of its earlier target, and reach net-zero operational emissions by 2030.
“The point is to make infrastructure more sustainable …and to create new cash flows,” Lagarrigue said. “Impact investing now commands a premium. That’s a big change over the last three to four years. You have a lot of capital available.”
Schneider is even working on a pilot project to use electric school buses as mobile batteries to help balance electricity supply and demand. The buses are in use in the morning, then mostly idle until school gets out in the afternoon. “You have big batteries on wheels. You could move them to peak areas,” Lagarrigue said.
By optimizing for positive externalities, he says, “You start seeing business opportunities like this. You create jobs and wealth for the stakeholders. And you get impact on the planet.”