Earlier this year, the magazine FastCompany partnered with two San Francisco investment firms to fill a glaring gap in business metrics: there was no single way to measure a company's net impact on people and the planet, much less tie such a metric to financial performance. The result is the HIP Scorecard (Human Impact + Profit), a new way to look at how human impact drives innovation, shareholder value, and the bottom line. SLM sat down with Paul Herman of HIP Investor, one of the developers of the framework, to find out how companies can use this new metric to competitive advantage, and what it means for socially responsible investors.

SLM: What's the "net human impact" of a company and how does the HIP Framework aim to measure it?

Paul: There's a mix of absolute and relative measures. In contrast to an absolute measure "Is this organization carbon neutral?" a relative measure might answer the question, "Given today's average life expectancy, is this medical equipment company increasing or reducing life expectancy through its products?" When you look at the full picture there's a potential for net gain or loss: A piece of medical equipment might have a positive benefit on health but a negative impact on environment due to the toxins that go into a product and the energy user or pollution associated with that product's manufacture. so it's really to start teeing up a more complete framework that not only takes into account all the various social impacts but also to create a framework that allows managers to compare projects to each other, whether it's the business case, a product launch, or innovating a new product.

It also enables managers to compare business units to each other. For example, GE's Jeff Immelt has set a range of greenhouse gas reduction targets for each of the business units and their leaders within the company, and if those departments don't hit their goal managers may not get their full bonus, or they might not get the promotion they were hoping for. That's a way of taking a quantitive result that is not purely financial, adapting inside a management system, and playing off the relationship between the two to help generate new products. I think GE is expected to certify more than $20 billion of its revenue this year which is more than 10% of its total revenue as environmentally sustainable. GE wouldn't be doing it this way if it weren't profitable, so it's a great example of net positive impact driving profit.

SLM: The concept of net human impact seems like a great way to appeal to investors as well. Socially responsible investors recognize that it's nearly impossible for a company to have only a positive impact on the environment, for example. Better to support companies that are at least doing more good than harm. But what about intangibles like reputation? How do you measure them within the HIP Framework?

Paul: What we focus on are quantifiable results and how they can be effectively measured. Reputation, for example, is really built on customer and employee and supplier experience with the operations of the company. So we ask, "What are the results of using this company's products, what are the impacts associated with the processes of the company, and how do both of these drive profit or economic success?" Things that are traditionally thought of as intangible, like environmental impact, can actually be specified by relative measures, for example, "What's your greenhouse gas position compared to your competitors, and across other industries?"

Another intangible is employee satisfaction, which is really a proxy for the physical and mental health of a company. This is quantifiable as well. Executives can look at a small number of performance measures that focus on products that benefit customers, and processes that benefit employees and accommodate suppliers, It's your company's interaction with people that really generates brand reputation.

Right now we only have one side of the coin because companies' only quantitative approach is to ask, "Does it make money or does it lose money? Do I need to invest? How much labor do I need to spend on this?" One thing it doesn't look at is the return on that investment, and that's what the HIP Framework does.

SLM: Let's look at the HIP Scorecard 2006, which ran in FastCompany? What are we seeing here?

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Paul: What this chart does is take the management practices of the company (x-axis) and plot those out based on how focused the company is on aligning incentives and rewards and accountabilities to achieve its sustainability goals. For example, Interface's goal is to be completely sustainable by 2020 and to be restorative by 2021.

The second element (y-axis) represents the performance measures they have in place to benchmark and evaluate their progress. This includes the ways accountability is designed into the organization ("Does this show up at the board or is it buried within the company? Is it the responsibility of the management team?"). It also considers how well these impact elements work into approval of a business case or judging whether new products should come to market. The companies at the far right, such as United Technologies, Herman Miller, and Liberty Property Trust are very systematic about evaluating, managing, and realizing human impact.

SLM: Why are so many companies cluster at the bottom right of the chart?

Paul: The gap to the diagonal line shows where these practices haven't yet been incorporated into all of their business operations and revenue streams. United Technologies, which owns Otis Elevatory, Sikorsky Helicopter, and other very industrial businesses, has an operations revenue that hasn't yet caught up to their responsible practices in terms of being HIP generating health, wealth, and equality on a net positive basis. Compare that with PG&E, which also looks at the environmental, health, and employee satisfaction elements of the business. The majority of their power comes from renewable sources, they have an excellent health and safety record, they have high employee satisfaction. Each of those translates into different profit margins and profit returns; they have a great score because they've been able to get the results.

It's also a source of innovation for companies. When you think about these human impact measures you start creating new products to meet those needs. Wal-Mart just launched a new store value card to serve people who do not have banking services. They tried to become a bank and failed, so now they're getting into the card business, which will allow them deliver access to financial services (spending at Wal-Mart, sending remittances to family members that live outside the country, etc.). That's a product that has a positive human impact and will most likely be profitable for the company, too.

Essentially, the HIP chart represents a way of thinking about net impact on society, how it drives profits, and how a company might organize its management systems and review its progress to achieve strong corporate performance that goes beyond just the financials. That's something you don't hear about on Wall Street.

SLM: So the companies at the bottom of this chart have not yet found a way to translate their responsible management practices into assets that are more sustainable. The assumption is that once they've done this their profits will go up, is that correct?

Paul: Yes, and in fact we're seeing new evidence of this every day. Energy-efficient lightbulbs, for example, are selling tremendously well. The underlying thesis is that companies can help solve human problems not just nonprofits and governments and that companies can make money doing it because customers will not only buy the products but also feel more loyal to the companies that make them.

In addition, employees will enjoy working for those companies. Young employees just entering the workforce say they want to work for more responsible companies, and older employees are also asking that companies be more engaged with society. Employers are feeling the squeeze from both ends of the workforce.

SLM: Sounds like a win-win. But it also sounds like a real culture shift and culture shifts take time, particularly in large organizations. Most of the companies listed on the FastCompany are leaders in their industry, and even those are necessarily taking a long-term approach to driving profits through net-positive human impact. What do these companies say to investors, many of whom might be interested in supporting responsible companies but also demand a more short-term return on their investment?

Paul: We're seeing right now how long it might take. GE began its Ecomagination program as a PR initiative in 2003, and it only took them two years till about 2005 to start selling products that fit the program. In 2006 they certified $10 billion in green-product revenues, and in 2007 it's going to certify $20 billion or more, and in 2010 it expects to certify $50 billion or more. This is a top-three market-cap company that has global operations. Wal-Mart recently hosted its top 300 suppliers at company headquarters in Arkansas and told them they had to measure their carbon footprint or else. Obviously all these companies have embedded financial screens for their investments so they're going to prioritize the ones that are most profitable first.

More than half of energy management projects are profitable, for example, have a payback of two years or less. So there's not much that you have to give up from an investor perspective in the short term. The big payoff comes as you develop new products that appeal to this new generation of conscious consumers. That's when you'll see a tipping point where the majority of a company's products have a positive human impact.

What investors don't have today is a sense of the relationship between companies that are less environmentally sustainable and yet generate tremendous revenues the oil and gas industry, for example. Are these companies truly more profitable? The idea is that, over the long term, they won't be. The companies that are working on the technological innovations that will reduce our dependence on fossil fuels are gaining market share. If you invested in solar technology this past summer you've probably doubled your money by now. It's an interrelated view. It doesn't mean you have to bet all of your money on HIP companies, but you'd be smart to bet a portion of your portfolio on a company that's offers some benefit to society.

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For more on the HIP Scorecard, and to see how 21 major U.S. companies stack up, click here.