How Doing Good Can Sometimes Be Bad

A quick note: The SNW Impact Strategy is entering its third year this month. To highlight the Strategy, over the course of 2019 we will be periodically sharing thoughts and observations from the team responsible for the research and ratings. These pieces are intended to share the context of how the ratings are derived, the philosophy behind ESG and impact ratings, and how the industry is currently positioned. They may feature entities that we do not currently invest in.

The Law of Unintended Consequences

Every action results in both intended and unintended consequences. No action—good, bad, neutral or mixed—is exempt. As human beings, we lose sight of this when we feel we are doing what is right, but even a good action can result in negative consequences. And these consequences can outweigh the benefits of that good action. This is true for nonprofits, governments, individuals and private corporations.

Negative consequences, especially those that outweigh the positive benefits of an action, are something we certainly want to avoid as ESG product managers and investors.

TOMS Shoes: A One-for-One Giving Model

TOMS Shoes offers perhaps one of the most familiar examples of a good action creating unwanted and unintended consequences. At one point, for every pair of TOMS shoes bought, the company donated a pair of shoes to a child in a developing or undeveloped country. Many agreed that this was not just good for humanity, but also good for business. Using this system, TOMS gave away more than 35 million pairs of shoes between 2006 and 2015.

Unfortunately, TOMS’ one-for-one giving model was harmful in ways the company had not anticipated. In recipient communities, local producers were put out of business or struggled to make a living, thus disrupting the local economy.

TOMS and its founder came under fire for what was widely seen as a short-sighted and overly simplistic approach to corporate social responsibility (CSR). Although this is an older example, we use it to illustrate how a company can take a more nuanced approach to corporate social responsibility. After receiving intense criticism, TOMS retooled its CSR strategy. TOMS still operates on a one-for-one model, but now the one-for-one system is leveraged to build thoughtful partnerships and improve access to safe drinking water, reduce birth-related fatalities through training, provide medical care for vision-related issues, and address bullying through training and prevention programs.

USDA and Crop Dumping

The United States Department of Agriculture (USDA) often sells surplus crops abroad below market prices, or gives them away for free as a form of foreign aid, ostensibly to countries and communities in need of these crops. It seems like the perfect solution: surplus crops do not go to waste, and poverty- or disaster-stricken communities receive much-needed food.

But there is another side to this coin. Critics of the system often refer to it as “crop dumping.” In 2016, the USDA sent 500 metric tons of peanuts to Haiti despite a coalition of approximately 60 aid groups in the country arguing against it. This sudden infusion of peanut crops into the Haitian economy undermined the country’s peanut industry and the local economy, thus perpetuating and deepening existing economic issues. This type of foreign aid also has the potential to increase dependence on the aid, making it more difficult for communities and countries to prosper independently.

Affordable Housing in Low-Income Neighborhoods & Transit-Induced Gentrification

It makes sense to build more affordable housing units in low-income neighborhoods, but is there a point of diminishing returns? While low-income communities certainly need affordable housing, an increased number of available affordable housing units can actually lead to gentrification. In low-income and working-class neighborhoods, the addition of affordable housing can invite low-income creative and entrepreneurial populations who are looking not only for affordable places to live, but places where they can make a mark.

Both populations tend to engage in placemaking and spur revitalization efforts, which makes low-income neighborhoods attractive to middle- and high-income populations. And this, of course, can lead to displacement of the original low-income residents. Transit-oriented development can also lead to gentrification and displacement by appealing to young professionals and upwardly mobile populations who are increasingly wary of car ownership and attracted to areas with good public transportation.

Gentrification is a sticky subject, a complex phenomenon that engenders strong opinions. But any public planning, private development or community investment project targeting low-income neighborhoods or populations must consider both the short-term and long-term implications of that project, including whether it will lead to gentrification and displacement.

Why CSR and Public Programs Such as These Don’t Work Every Time

There are a few reasons why many corporate responsibility programs, public projects and nonprofit initiatives sometimes get it wrong when trying to do right:

  1. Many problems are multi-faceted and complicated. Giving a pair of shoes to a child, though commendable, does not fix the systemic issues causing that child to be shoeless in the first place. Just as governments cannot print money to fix an economy, giving donations, whether clothing items or food items, does not address the cause of the problems they are meant to fix.

  2. Citizens and governments of developed countries do not necessarily know what is good for a developing or undeveloped country. And companies such as TOMS, though well-meaning, come from a position of western privilege and rarely have a true understanding of the social, political and geopolitical issues causing or affecting critical situations in these countries and communities.

  3. Communities ravaged by environmental disasters or poverty know what they need, but their input is rarely part of the equation when it must be. A lack of input from community members and stakeholders is a blind spot that even the best-intentioned are susceptible to.

Doing Good in an Informed and Deliberate Way

We all want to feel like we are doing good in the world, whether that means serving food at a soup kitchen or investing in a company with a strong corporate social responsibility program. These are by all accounts good things. But doing good is about more than making a gesture; it is about taking the time to understand the true costs and benefits of an action, and either doing what is in the best interest of the community you are trying to help or best serving long-term environmental goals.

We must be especially careful about not investing in bandages when we should be investing in cures. For us, this means evaluating investments with an understanding that surface good may not be good enough, and that to make positive social and environmental impacts we as a society must cultivate a deeper understanding of cause-and-effect. We must be informed and deliberate in our actions.

With this in mind, our approach to evaluating investment opportunities for the SNW Impact Strategy is a holistic approach based on realistic and pragmatic inputs. We go beyond just the use of proceeds in the immediate term to evaluate what the medium- and long-term positive social or environmental impact may be. With many of the credits we invest in, the projects have been completed and we are able to look at the outcomes with real certainty. With projects and issuers that are new to the market, our evaluation is predicated on known data and conservative projections. Our aim is to identify those investments with the clearest net positive social or environmental impact, to ensure that we avoid good intentions leading to bad outcomes.