The fallout from the high-profile Domino’s underpayments and visa fraud case in 2017 was major and continues to have many ramifications across the franchise sector.

While the impact on brand, reputation, customers, staff, franchisees (both existing and future) and the sector at large was clear, the fallout then spread into a perhaps less obvious area – that of investment.

According to reports by Fairfax Media, a superannuation fund questioned investment in franchise businesses due to the allegations of underpayment of staff and contractors, potential visa fraud and underlying franchisee profitability issues. These ethical concerns were raised on environmental, social and governance (ESG) grounds.

ESG is a now a mainstream philosophy used to screen investments. The environmental criteria looks at a company’s impact on the natural environment; the social criteria examines a company’s relationships with its employees, suppliers, customers and communities; and the governance criteria deals with a company’s leadership, executive pay, audits and internal controls and shareholder rights.

The super fund that raised concerns about franchise investment, First Super, pointed out that over the long term companies that adopt best practice ESG deliver better returns and have lower risks. First Super, according to the news reports, sees an emerging investment risk in franchising and wrote to the Australian Council of Superannuation Investors, which has 29 member funds managing more than $450 billion on behalf of eight million super members, asking it to put concerns over the franchise business model on its agenda.

The fact that investors are starting to question the viability of investment in franchise businesses on ESG grounds extends the fallout from the Domino’s case, and the number of similar cases that preceded it, into new territory.

The impact on big publicly-listed franchise groups, with major institutional and super fund investors, is obvious. However, all franchise groups of all sizes should take note of this continuing issue.

Almost all franchises will require capital at some stage to grow their network. Their shares may not be publicly traded on the stock exchange, but they will still seek funding from sources such as private investors, venture capital, banks, financiers or joint venture partners.

Ethical investment, based on ESG criteria, was once the domain of socially-conscious investors but has now matured into a mainstream investment philosophy. Investors of any kind are now more critical in their analysis of potential investments, beyond just the financial figures. The ‘triple bottom line’, encompassing social, environmental and financial considerations, is commonly used at all levels of the investment community.

We have seen other industries and businesses, particularly those whose products are seen to have a negative impact on peoples’ health or the environment i.e. tobacco and coal, subjected to much more rigorous analysis by potential investors, while some investors now just steer clear of them all together.

This provides a warning for the franchise sector to take heed of. There is the potential for the perceived investment risk in franchising to be considered higher and franchise groups of all sizes should be aware that investors now take a much broader view of companies they are looking to invest in. Their risk management approach is not just confined to the figures, but also all other social, environmental and governance aspects of a business.

Investors do not want to run the risk of their own reputational damage by association with companies that are seen to be ‘not doing the right thing’. More importantly, they know those companies that are doing the right thing deliver better returns with less risk over the long term.

There are many choices out there for investors to put their money and if a perceived risk takes hold it will be up to franchises businesses to show they have the systems in place that make them a viable, ethical and sustainable investment option.