The new wave of US ESG investing: case studies in impact – prison education and herbal teas

How profit and impact investment can combine

A lot has changed in ESG investment since Mark Grovic, now founder and general partner of New Markets Venture Partners, was at Calvert in 1993. 

“At Calvert, I worked in a small PE [private equity] department where Ben & Jerry’s and Anita Roddick from the Body Shop were all involved and I saw these people becoming financially successful by doing really good work.”

Back then, responsible investment was ‘all screens’: firearms, tobacco, South Africa. No one would have thought then that educating prisoners and parolees and selling herbal teas would bring profits as well as impact.

Tripp Baird, managing partner of Builders Fund, had a similar experience to Grovic at Calvert during his days running Partnership Capital Growth, a merchant bank he founded and later sold to Piper Jaffray in 2013.

“Looking backward, in the early 2000’s,” he said, “I was anecdotally seeing purpose-driven businesses, especially at the emerging growth stages, winning in the marketplace, and wanted to understand why this was happening. What we found was that there was a profound shift in the way companies had to market themselves, driven by shifting demographics on the one hand and ubiquitous access to information via the internet and social media on the other, such that brands could no longer fully control their messaging. So, if you wanted to be seen as authentic, you actually had to behave authentically or someone would simply call you out on it.”

“Part of what is wrong with society today is we’ve effectively accepted sociopathic behaviour in business as socially acceptable” – Tripp Baird

Baird told RI in an interview that this authenticity was “the first leg of the stool for Builders’ focus as a firm”. The second leg was an alignment with and between employees and customers which allowed firms to hire and retain the best employees and, consequently, provide the best customer service experience. Customer service, Baird noted, is a “primary driver of customer loyalty, which improves margins and drives growth”.

Builders Fund’s belief in ESG led the firm to adopt the B Corporation model for all its investments. Certified B Corporations are legally required to consider the impact of their decisions on their workers, customers, suppliers, community, and the environment.

With B Corp status, he said, “The company is viewed then as a long-term value generating platform for all stakeholders, rejecting short-term and extractive behaviors for the sole benefit of shareholders that have created so many of the social/environmental challenges we face today.”

The B Corp impact assessment the fund uses allows it to engage with the management of companies it invests in to understand impact and ESG factors.

“We shouldn’t lack the moral imagination to integrate our values into our business,” said Baird. “Part of what is wrong with society today is we’ve effectively accepted sociopathic behaviour in business as socially acceptable.”

Grovic added: “We’re just industry experts and that just makes us invest better whether the industry is education or the environment, social industries, or some non-social, traditional industry.” Asset managers have moved beyond the impact thesis being a barrier because, he said, “there are enough managers who are doing well enough that they [the asset managers] can invest in people who are aligned with their mission and not sacrifice returns.”

Before joining Calvert, Grovic studied microlending banks that had gone from not-for-profit to for-profit and were listed publicly. These banks were producing 35% return on equity for shareholders with “loans to 27,000 successful female cooperatives and a 99% repayment rate, bringing people out of poverty and making a lot of money”.

Grovic took this experience and established New Markets, which is focused on investing in solutions to the education and employment problems in the US. “Every company that we invest in,” he said, “has empirical data from third parties that they improve educational and employment outcomes on a scalable level. Political instability in the US has caused global instability, and that has been caused by failures in the US economic and employment systems.”

Case study 1: American Prison Data Systems

“We’ve been invested in American Prison Data Systems for three years,” said Grovic, “and have had two rounds of investment, brought in a great CEO and a technology team and we are looking at the acquisition of a competitor. And it’s shown a statistical reduction in recidivism [when convicted criminals reoffend] for people going through the programme.”

American Prison Data Systems (APDS) is an education job training firm for incarcerated individuals, of which there are 3 million in the US with a further 9 million on probation. It provides degree-level education as well as credentials, job training and placement, social and emotional learning and substance abuse counselling through a technology platform.

Grovic told RI that most of New Markets’ investors were foundations, but ADPS has grown by about 150-200% over the last three years, becoming one of the key contributors to New Markets’ top quartile returns. So, how does ADPS make money?

“Political instability in the US has caused global instability, and that has been caused by failures in the US economic and employment systems” – Mark Grovic

“There are a number of different funding sources – which is good, so they are not dependent on just one. Inside the [prison] institutions there are budgets for education, safety, guard training programmes, technology, re-entry [into society], and there’s a parole budget and a release budget.” ADPS taps into each of these existing funding sources so it can provide training to prisoners without charging them.

“And at the state level there are workforce training and education programmes,” he added, “subsets of those are allocated to incarcerated individuals. And there are some prison pilots for Title IV funding [student loans for accredited college programmes]. These are just in the pilot stage but hopefully will expand to a full service for those seeking higher education.”

Grovic also described the movement towards prison reform, with an increasing number of states focused on reform and rehabilitation as a clear mandate rather than punishment. “Any state that cares about prison reform has a pretty nice budget for what we do,” he added.

Case study 2: Traditional Medicinals

Baird’s leading impact investment was Traditional Medicinals, the largest medicinal and organic tea company in the US with a nine-figure revenue [the company is private and detailed financials are not available]. It has been around for over 40 years and is the third largest bagged tea company in the US after Twinings and Bigelow, with well-known brands like Throat Coat and Smooth Move, and 70,000 distribution points around the country, including Walmart and Amazon. “As a fund we are targeting a 2.5 multiple on invested capital and Traditional Medicinals is one of the two most successful economic investments from Fund I [the fund’s first round of fundraising],” said Baird.

“It is the definition of a responsible company,” he added, “they produce everything in California using 100% renewable energy, and it has an internally funded foundation/CSR [corporate social responsibility] team that has been investing in their supply chain from the early years of the company.”

Baird described how, at the beginning of the business, the two founders “went to see where their herbs were coming from and found that they were all too often coming from emerging markets that were unstable and extractive. About 70% of drugs in the western world are still plant-based/plant-derived and roughly 70% of those are still picked in the wild, typically in emerging economies and typically by women.”

The company invested in sustainable agriculture and development, not just because it was the right thing to do, but also with self-interest in mind. “For example, they’ve increased the efficacy of the senna they put in their Smooth Move tea by helping their farmers grow better which lowers their costs,” said Baird. “They’ve built schools in India and water catchment systems in the Rajasthan desert, medical caravans in Egypt and Georgia, and dental clinics in Bosnia, all of which builds more stable supply communities and is generating deep impact in emerging economies that you wouldn’t normally see in a tea company.”