INVESTING EXPLAINED: What you need to know about companies with a social purpose – one that serves customers and is generous to shareholders
In this series, we break down the jargon and explain a popular investment term or theme. Here they are companies with a social purpose.
What are they?
Definitions vary. Some say a company with a social purpose should exist for no other reason than to make the world a better place in some way, such as mitigating climate change or improving a local community.
Others have a more flexible view. They argue that a company can have a social purpose while also serving customers and being generous to shareholders.
In fact, most large companies’ strategies now encompass a series of (often vague) social goals. Pursuing such goals is not necessarily at odds with making a profit.
It is argued that a social purpose can make a company more profitable because it forces it to be more innovative.
Flexible: It is argued that a social purpose can make a company more profitable because it forces it to be more innovative
Examples of big names?
Californian outdoor clothing chain Patagonia is the poster boy.
The founder has transferred ownership to a trust and non-profit organization that will distribute the $100 million (£78 million) it receives each year from Patagonia for environmental causes.
Planet Earth may now be the “sole shareholder.” But tough questions have been raised about wages in the factories where the clothes are manufactured.
Why are we hearing this?
The crisis in the water sector has led the PvdA to draw up plans for a new regulator.
Labor leader Sir Keir Starmer is also under pressure to renationalise companies privatized in 1989. The £14 billion debt crisis surrounding Thames Water is so great that renationalisation is a possibility, even under the current government. Severn Trent boss Liv Garfield has suggested to her colleagues that setting up companies with social goals could be a solution.
What exactly does she represent?
Garfield wrote in an email: “An idea that we think might appeal to the Labor leadership is the repurposing of utilities and utility networks into a new breed of social purpose companies – which remain privately owned, which absolutely can (and must) make a profit. but those who have a special duty to look long term.’
How does this work in practice?
As social entities, the water companies would, among other things, offer social rates for vulnerable customers, give employees a say in strategic decisions and make a positive contribution to the environment.
The latter can be difficult: companies have paid millions in fines for pollution. This week Thames Water was fined £3 million for pumping sewage into rivers in West Sussex.
What would happen to investors?
It seems likely that dividends could be jeopardized unless social purpose status transforms water companies, allowing them to, er, pour out profits.
But the payouts are already in jeopardy.
Only three remain listed: Pennon, owner of South West Water, Severn Trent and United Utilities.
But the government wants to tie dividends to performance standards.
If these groups are re-nationalised, the return to shareholders may not necessarily be automatic.