Do Companies That Engage in BoP Markets Outperform the Market?
Thanks to Dana Krechowicz, Associate, Markets and Enterprise Program at WRI, for providing the background on Socially Responsible Investing.
In April of this year, The Opportunities for the Majority Office of the Inter-American Development Bank (IDB) and Innovest Strategic Value Advisors (Innovest) announced the completion of a groundbreaking project–to create the Opportunities for the Majority (OM) Index of publicly traded national and multinational firms operating in the Latin American and Caribbean (LAC) region that are engaged in BoP activity.
In Latin America and the Caribbean, the majority of people, estimated to be over 70 percent of the population, lives on less than $3,260 a year (about $9 per day). The Opportunities for the Majority program was launched to engage the private sector in addressing the needs of this population. According to the IDB, in Latin America and the Caribbean, this market represents a combined purchasing power of $500 billion USD per year.
The IDB’s partner in creating this index, Innovest, is a financial advisory firm with substantial experience in what it calls “sustainability-enhanced” and “community investment” indices.
Although the new OM Index is not a fund that you can invest in today, it attempts to create a benchmark for comparing large-scale companies that claim to be serving and engaging with BoP markets.
The index is in its initial phase, but its eventual goal is to generate awareness around those companies that are heavily involved in BoP markets, determine a framework for what it means for them to be truly serving and co-creating with the BoP, and then measure their financial performance to see if there is a correlation between BoP market engagement and financial success.
These initial steps are very similar to the beginnings of the Socially Responsible Investment movement, which has taken off over the last decade. According to the Social Investment Forum, SRI assets in the U.S. have risen more than 324 percent from $639 billion in 1995 to $2.71 trillion in 2007. During the same period, the broader universe of assets under professional management in the U.S. increased less than 260 percent from $7 trillion to $25.1 trillion.
The OM Index is trying to capitalize on the changing demands of many in the investment community. According to the OM report, “Global sustainability indices such as the Dow Jones Sustainability Indexes (DJSI) and the FTSE4Good Index have proven effective in shifting capital flows into more sustainable companies?The DJSI has resulted in a shift of USD 3 billion to companies rated as ’sustainable’ in the index.” This index aims to similarly shift capital into companies in the LAC region with BoP strategies.
In selecting companies for inclusion in the OM Index, seventy-five companies were interviewed and then analyzed within the OM framework to benchmark their performance. This index is clearly targeted only at large multinational and national companies involved in with BoP. The top companies are listed here:
When looking at the list of companies that rose to the top, I was skeptical at first, thinking that these were probably companies that simply employed a “selling to the poor” mindset. However, after reading the in-depth final report on the index, I realized that Innovest and the IDB were really speaking the language of BoP practitioners. They had sought feedback from numerous BoP experts, including those at the recent Business with Four Billion: Creating Mutual Value at the Base of the Pyramid conference in Ann Arbor, MI, to refine their framework.
Despite the rigor that went into creating this initial index, it is certainly the first of hopefully many versions. The IDB realizes that the eventual goal is to create an investable OM Index to:
?maximize investment flows to superior performers while simultaneously incentivizing laggards. An investable OM Index could prove extremely attractive to institutional investors already strongly interested in emerging markets and seeking an “information edge” and differentiated approach. Innovest and the IADB are currently planning this next phase.
The outcome of this first step is readily available to the public, and the data set, which includes a BoP benchmark framework that attempts to compare apples to apples in terms of BoP activity, can hopefully be used by researchers and analysts who are looking further into the correlation between serving the BoP and financial success.
While it is important to seek out this correlation, we have to consider that if a correlation is found, and funds are developed to invest in BoP enterprises, other companies may then haphazardly adopt BoP programs to attract capital.
As money has moved into SRI, while much good has been done, there are certainly companies that have tried to cover their tracks with glossy CSR reports and campaigns that can be called little more than green-washing. Hopefully the OM Index will continue to keep the standards high, and be very discerning about what constitutes a true BoP engagement, and in turn hopefully investors will realize that simply adding a BoP initiative to an exiting business model will not result in better financial performance, just as adding a social or environmental initiative may not affect the bottom line.
It is the forward-thinking companies who take BoP as a serious market, and give it adequate visibility and resources within the company, that deserve to have the distinction of this and subsequent indices.