Investing in socially responsible companies generates higher returns
A recent McKinsey Consulting study has produced some surprising results: over the ten-year period we examined, a portfolio of investments defined as socially responsible generated returns of 8-14%. To determine how large a discount, we gathered information on 110 of the 128 companies financed since the organization?s founding, in 1992. We then used the data to build a portfolio that covered the ten-year period from 1992 until the end of 2001. Instead of analyzing the actual returns of individual investors, we used standard investment and current-valuation data. Our portfolio simulated investments of $72 million?the aggregate amount that the organization?s members had invested – in 95 operating companies as well as 15 venture capital funds, all of which had social missions as part of their charters.
Next, we tested our portfolio under two investment strategies. The tests for the first – buy and hold – looked at the performance of a single initial investment in each company in the portfolio and assumed that these investments were being held for the long term. The holdings were valued at the IPO price of the company (if it went public), at its acquisition price, or at its annual revenue (if it was still privately held). The tests for the second investment strategy, called six-month liquidation, modeled the initial investments plus partici-pation in each additional funding round before an initial public offering or acquisition, as well as an exit six months following the IPO or acquisition.4 The buy-and-hold and the six-month-liquidation strategies generated returns of 8 and 14%, respectively.