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Are socially virtuous business practices compatible with shareholder capitalism?

Earlier this year, Save the Children formed Save the Children Global Ventures (SCGV), an in-house team supporting the Save the Children offices around the world access innovative finance and scale new technologies that benefit children.

Our investment thesis is that if we invest in companies closely aligned to Save the Children’s mission – improving children’s health, education and protection, the three thematic areas where we have deep technical expertise and global networks – we could help start-ups have much greater social impact, faster, as well as making strong financial returns.

An example of this working in practice is when we recently helped a portfolio company, Inquisitive, win a A$1.95 million grant from the Australian Government’s Department of Education, Skills and Employment. The grant enables 1,000 schools, 80% of which are in low socio-economic areas of Australia, and over 300,000 students access Inquisitive’s teaching and learning platform. It is a significant step towards reducing learning inequalities exacerbated by the pandemic.

We believe our involvement as an owner in these companies will help to ensure that their activities support Save the Children’s mission.

While the potential of Save the Children’s operations and networks to help socially-minded start-ups seems obvious to us, it’s not always so obvious to mainstream investors. We have also faced skepticism that socially virtuous business practices can be compatible with shareholder capitalism, from both venture capitalists as well as others in the charity sector.

We are not alone in encountering such skepticism. I recently read James O’Toole’s The Enlightened Capitalists. His stories of pioneering business leaders who sought to implement and embed virtuous business practices shows just how difficult it is, over the long-term, especially in publicly traded organisations.

However, a recent article in the Harvard Business Review should help to put that skepticism to rest. It finds that many of the firms that seek to embed social or environmental purpose outperform the market. Patagonia is a recent US example but Danish corporate governance researchers have found that companies owned by charitable foundations commonly have similar performance levels, and in some cases have more stable growth, are less volatile during crises, invest more in R&D, and have a longer lifespan compared with conventionally owned companies.

This is consistent with O’Toole’s findings of ‘consistent high productivity, exemplary customer service, good environmental records, ethical behaviour and long-term sustainability’.

This debate is not philosophical. When valuations and stock prices contracted earlier this year, Global, US and Europe focused ESG equity funds were down less than non-ESG funds in the same markets.

Given the scale of the problems humanity faces, it is critical we harness the power of private enterprise, working alongside government and civil society, to develop and scale sustainable solutions to our biggest planetary challenges. Along the way, it might show that socially virtuous business practices are not only compatible with shareholder capitalism, but also critical to its long-term survival.