Socially & Environmentally Responsible Corporations & Investing: The Opportunity

There is a coming paradigm shift around the purpose of investment and businesses.  The last decade has seen growing pressure on corporations to consider the environmental, social, and governance consequences of their investment and management decisions.  This more holistic view of the corporation is a necessary and positive development.  Corporations do not exist in a vacuum; the societies in which they conduct business are indispensable sources of their success and vitality.  Accordingly, corporations have duties to both their shareholders and the societies in which they are embedded.  By incorporating these other considerations into their decision-making corporations will not only provide many societal benefits but will enhance profits at the same time.

Increasing numbers of Canadians are coming to believe that companies should stand for something more than profit.  Over half of Canadians now lean towards purchasing products from businesses that align with their worldview.  Some of this change is likely being driven by the values and interests of millennials and gen-z who make up a growing share of the population.  A recent survey by Deloitte provides interesting and important insights into the priorities of these two generations.  When asked to identify the three issues they believed to be most important, health care and disease prevention, climate change, unemployment, and income inequality all ranked higher than economic growth.

There are signs that the private sector may be shifting towards more holistic governance models.  Many companies are attempting to align their brands with shifting consumer preferences and nascent corporations embrace socially and environmentally conscious business models.  In Europe, over two-thirds of the start-ups at the Slush 2019 conference were classified as purpose driven companies, defined as corporations that include one or more of the United Nations Sustainable Development Goals as an integral component of their operations, an increase of about 7% from 2014.

However, actions taken by the state can help to accelerate the shift towards corporations with a defined social purpose.  By creating the right regulatory and policy frameworks, government can incentivize socially responsible investment.  One step in this direction is the BC Government’s recently announced regulations around benefit companies.  Canadian corporate law does not have a formal doctrine recognizing shareholder primacy.  However, the new legislation and corresponding regulations will empower corporations to continue addressing pressing social and environmental issues as they scale their operations and make it easier for investors to choose companies that align with their values.

In the future, another avenue that the province could consider promoting to encourage investment with the potential to generate positive social returns are community investment co-ops (CICs).  CICs are capital pools that provide residents of a specific region or locality with the opportunity to invest some of their money in local businesses.  Individual investors typically elect the fund managers themselves to ensure that the investments made through the vehicle are consistent with their priorities and values. Through CICs, residents can become directly involved in economic development projects within their communities.

Ample capital already exists within the province which could be harnessed by CICs.  Each year, millions of dollars exit British Columbia to be invested in other jurisdictions.  If the province established a structure designed to incentivize investments into CICs, some of this capital could be redirected into local businesses.  At a time in which rural regions in BC are experiencing economic stagnation, CICs could be used to reinvest money generated through regional economic activity into local corporations and start-ups, helping to stimulate rural economies.

Several CICs already exist within BC including the Vancouver Island CIC, the East Kootenay CIC, and the West Kootenay Boundary Investment Co-Op.  Some have already received financial support from the government.  However, there are a number of legislative and regulatory changes open to the government which could be used to make these investment vehicles more attractive to British Columbians.  Some options include creating a tax credit for investors and amending the securities act to make it easier for CICs to generate larger capital pools for investment.

The adoption of a legislative and regulatory framework designed to popularize CICs would not be without precedent.  Other jurisdictions have successfully introduced programs centered around social finance, including other Canadian provinces.  In 1993, Nova Scotia introduced the Equity Tax Credit which allows residents to claim a tax credit on investments made into provincially based businesses.  Six years later, the province created the Community Economic Development Investment Funds (CEDIF) program in an attempt to encourage wider adoption of the tax credit.  The program offers a streamlined application process for those seeking to establish a CEDIF and allows investors to claim an income tax credit on their investments in the vehicle.  By 2013, Nova Scotians had established 47 CEDIFs which had contributed over $56 million in financing to local businesses, some of which were mission-oriented corporations dedicated to social and environmental causes.

When provided with the opportunity to pursue business models that have the potential to generate positive social and environmental outcomes, many individual investors and nascent corporations will choose to do so.  As society begins to redefine its expectations of corporations, the province has the chance to become a world leader in the movement towards socially responsible business.  The recently introduced legislation and regulations around benefit corporations represent a positive step in this direction but the province should not stop there.