What are social purpose companies? Investing Explained

In this series, we bust the jargon and explain a popular investing term or theme. Here it’s social purpose companies. 

What are they?

Definitions vary. Some say a social purpose company should exist for no other reason than to make the world a better place in some way, such as limiting climate change or improving a local community.

Others take a more flexible view. They contend that a business can have a social purpose, while also serving customers and being generous to shareholders.

Indeed, the strategies of most major corporations now include a range of (often nebulous) social purpose commitments. Pursuing such aims does not necessarily run counter to making a profit.

It is argued that a social purpose can make a business more profitable because it is forced to be more innovative.

Any big name examples?

The Californian outdoor clothing retailer Patagonia is the poster boy.

Its founder has transferred ownership to a trust and a not-for-profit organisation which will distribute the $100m (£78m) it receives every year from Patagonia to environmental causes.

Planet Earth may now be the ‘only shareholder’. But difficult questions have been asked about levels of pay in factories in which its clothes are manufactured.

Why are we hearing about this?

The crisis in the water industry, which has led to the Labour Party drawing up plans for a new regulator.

Labour leader Sir Keir Starmer is also under pressure to renationalise companies privatised in 1989. Such is the crisis surrounding Thames Water, with debts of £14billion, that renationalisation is a possibility, even under the current Government. Severn Trent boss Liv Garfield has proposed to her peers that setting up social purpose companies could be a solution.

What exactly is she suggesting?

Garfield wrote in an email: ‘One idea we believe might be attractive to the Labour leadership is repurposing utilities and utility networks into a new breed of declared social purpose companies – that remain privately owned, who absolutely can (and should) make a profit, but ones that have a special duty to take a long-term view.’

How does this work in practice?

As social purpose entities, the water firms would do things like offering social tariffs for vulnerable customers, give workers a say in strategic decisions, and make a positive contribution to the environment.

The last of these could be difficult – companies have paid out millions in fines for pollution. This week a £3m penalty was imposed on Thames Water over the pumping of sewage into rivers in West Sussex.

What would happen to investors?

It seems likely that dividends could be in jeopardy unless social purpose status transforms the water companies, enabling them to, er, gush out profits.

But the payouts are already at risk.

Only three remain listed on the stock exchange – Pennon, owner of South West Water, Severn Trent and United Utilities.

But the Government wants to link dividends to performance standards.

If these groups are renationalised, compensation to shareholders would not necessarily be automatic.