Graphics by Lydia Qu
The BRB Bottomline: In the era of the information-rich and socially conscious customer, many companies are redefining their missions and making their business models more socially and environmentally friendly. The rise of b corps, for-profit companies that are also focused on creating social value, has shown that corporate social responsibility (csr) is no longer a fringe idea, but a mainstream practice. These csr focused companies provide investors with an interesting question: are they just a trend, or are they actually profitable organizations that can become long term investments?
When asked to name a company dedicated to corporate social responsibility, almost everyone will immediately mention Patagonia. Patagonia, an upscale apparel retailer, for years was viewed as an anomaly by both investors and industry experts. The company preaches against consumerism with their “Don’t Buy This Jacket” campaign, where they actively exposed the environmental harm of one of their products. A company that discourages people from shopping could not possibly be successful in the long run. However, over the past decade, Patagonia has defied all odds by quadrupling in profit and reaching a valuation of $1 billion dollars.
Patagonia’s success lies in its dynamic marketing strategy that resonates deeply with its target audience. They not only repeatedly express their core values through marketing material, but they also expose information about company operations to the general public for their scrutiny. Patagonia, a private company, has no obligation to document and share this information online, but by doing so, they prove they are not just talking the talk, but walking the walk. This accountability goes beyond the typical ads that just convey basic messages and posture, but act as a powerful, persuasive tool for the company to attract customers.
However, marketing is useless if it is not targeted to a receptive customer base. In Patagonai’s case, as well as similar csr based companies, this customer base is a recently formed socially conscious customer, who has not only been influenced by vast information on social media, but also the Recession, deterring them from wastefully spending their money. A customer base that has learnt to be more financially responsible from an economic crisis is now committed to spending their money on fewer things that align with their social values. Companies like Patagonia fall into that category as they support their values. However, Patagonia’s future success is rooted in the customer segment that also leads to issues for investors. If new social changes were to happen that would alienate their customer base, Patagonia’s profitability could be short lived, making them an unattractive long term investment. Furthermore, is this customer base even large enough to warrant further large scale growth? Fortunately, in today’s climate, both of these concerns, while they sound serious, are no longer major deterrents. Patagonia’s brand image has been strengthened over the years and its growth was previously unprecedented. Their continued growth is directly correlated to a trend of more socially conscious customers, not fewer. Thus, while these risks exist, their previously-thought extent is not as worrisome. Brand image and customer engagement is the most important.
Patagonia, is proof that you no longer need to be mainstream to be profitable.
Companies like Patagonia represent an interesting case for investors. Patagonia is not an investment accessible for a typical investor as it is privately owned, and falls into the first category of a CSR company. These benefit corps, or b corps, go beyond just profit and focus on creating community vale. As a result, they tend to be private with few investors.. In the case of Patagonia, they have grown into a large scale company by gaining the trust of a niche customer segment. However, they would become of more interest if they file for an Initial Public Offering or IPO. Through the rise of high profile IPOs within the last few years like Uber and Zoom, this is a new possibility for companies like Patagonia that want to grow to the next level and have maxed out private equity. Thus, if a company like Patagonia that is not solely committed to profit decides to go public, is it a good investment option?
It is. Patagonia and similar organizations have strong customer acquisition strategies and a target market that is only growing. By adopting CSR initiatives within their companies to keep operations cost effective, they are bolstering their bottom lines. With both the potential of growth and low costs, these companies can potentially be profitable in the long run. Patagonia is living proof that the assumption that such companies are cost ineffective and lack growth potential is untrue. These companies are viable long term. Thus, in the event of Patagonia’s IPO, it is definitely an excellent investment choice.
Moving into a less well known example, Cotopaxi, an outdoor gear company, demonstrates the second kind of CSR investment available. Cotopaxi is a small startup that is built on similar values like Patagonia, but has not yet grown to its heights. Before they can independently prove themselves, are such companies still good investments, or are they too risky?
Cotopaxi, like Patagonia, is a company that has redefined business by not just focusing on profits. The company was founded with just $3 million dollars against the advice of business lawyers, who believed that a b corp from the get go would be an unattractive prospect for potential investors. Surprisingly, Cotopaxi has grown into a multi-million dollar business and has been able to gain an additional $10.5 million in second stage investment.
Companies like Cotopaxi are profitable as their operations go beyond typical corporate social responsibility notions from the 1980s. In the past, companies were accepted as socially good if they just donated a little bit of money at the end of the year to a charity. However, within recent years, the framework has gone beyond just doing the bare minimum to encompassing a wide range of actions. Cotopaxi is a new kind of business called Digital Native Vertical Brand or DNVB that emphasizes the story, not product. The company donates 2% of its profits annually, monitors the integrity of its supply chain, and provides training and social activities for workers. Through social media, the company is able to communicate its programs to its millennial consumers, and many times can have a powerful effect. For example, in 2014, Cotopaxi’s Questival, or 24 hour bike race in South America, trended on twitter and brought widespread attention to their initiatives helping local wool farmers. In many ways, small companies like Cotopaxi have gone beyond Patagonia by having intimate relationships with their fewer workers that they can effectively convey to customers.
From an investment standpoint, small sized b corps are profitable. The rise of social media and a customer base dedicated to social good has reduced the threat of small scale operations, allowing companies like Cotopaxi to rapidly grow in a short while. When investing in small companies, the fear of not growing hinders investors who prefer to take safer bets. However, CSR based companies are unique as they are able to build strong customer bases. Everyone is aware of Target, but they not all shop at Target. Awareness does not always translate to sales, but strong brand image does; it converts more people directly into customers. Thus, companies like cotopaxi have more opportunity to grow from the beginning.
Furthermore, the b corp structure that forces them to go through independent impact audits makes information more readily available for investors and helps them hold companies accountable more easily. This increased accountability gives investors more leverage in stakeholder discussions and can help guide the companies to success. Thus, DNVDs or small scale b corps are many times good investments due to their strong brand image and internal structure.
The final type of socially responsible is the large, multinational organization that started out solely focused on profit, but over time incorporated socially conscious practices into their operations and management. One of the best known examples is Levi’s, a denim apparel company, whose blue jeans have been a clothing staple for the past 150 years. Within the past few decades, Levi’s has expanded its mission in an attempt to reduce their carbon and water footprint. While this is great from an environmental standpoint, investors worry these programs will just be a costly burden for the company.
In 2008, after conducting an impact study on the life cycle of their jeans, Levi’s found out that the cotton required to make one pair of jeans would use up more than 2500 liters of water. Thus, the company adopted a strategy to use recycled cotton and make their jeans washable in cold water, which has reduced water consumption by 28%. However, Levi’s new, radical initiatives are not only environmentally friendly, but are also bolstering their bottom line. By adopting strategies that reduce water and energy consumption, the company saves on those utilities; their first water management system test run in one factory resulted in the company saving $1 million dollars. Furthermore, after adopting it fully, the cut costs by 5 cents per unit, which is a large amount for low cost jeans.
Levi’s strategy of adopting a more responsible strategy opens up the brand to a new demographic. Levi’s new initiatives are a form of marketing that improves brand image and strength. By utilizing technology, Levi’s is able to break free of the typical brick and mortar store constraints that focuses on product, and is able to sell the story of the jeans. Like other smaller companies, this message is effect for Levi and helps them cultivate a loyal customer, boosting retention and sales.
From an investment standpoint, large companies like Levi’s that are transforming their missions are good choices as cost cutting new programs and more loyal customers boosts profit. Initial fears lie with the possibility of alienating the original customer base; however, customers are rarely put off by companies becoming more environmentally friendly. Moreover, the success of Levi’s efforts lies in its investor acquisition strategy. For most large companies, their stock price is an indicator of success, but Levi’s strategy aims to ignore the day to day changes. The financial crisis redefined the focus of Fortune 500 companies, shifting their gaze to the long term. Sustainability efforts go hand in hand with that kind of long term investor and customer strategy. Thus, with Levi’s IPO in 2019, their share prices increased by 30% in just one day as investor realize it is a safe bet as its mission gears up Levi’s to be successful in the long term.
Therefore, large companies that are adopting csr strategies are preparing themselves for the long term by cutting costs and making them accessible to a new type of customer, which makes them ideal investments.
Thus, companies that are now focusing on corporate social responsibility and environmental friendliness are good investors, regardless of size or type. CSR initiatives help companies market their products, expand and cement their customer base, cut costs. While previously thought of as an expensive error, csr is actually the way of the future for investors.
Varun is a junior in the Global Management Program at UC Berkeley, double majoring in Business and Statistics with a minor in Conservation Resources. His interests in emerging markets and the changing investment landscape led to join BRB’s investment column, which he hopes will continue to become a thought leader by publishing unique articles. Outside of class, you can find Varun sleeping on the glade, dancing with AFX on Sproul, or hiking by the BIG C.