CLIMATE SPECTATOR: Missing link to corporate sustainability

Climate Spectator

The concept of shared value – where business helps solve societal problems and increases profits at the same time – has been well received, but not by everyone. John Elkington, for example, is concerned that it elbows aside the sustainability agenda. I disagree with his concern, and believe we will embrace shared value as the vital and missing link between our current model of capitalism and a sustainable future.

Shared value is disruptive

Shared value is a disruptive concept because the pursuit of financial returns doesn't always sit well with social value and community outcomes; it's a bit like mixing oil with water.

Michael Porter and Mark Kramer gained traction with their Harvard paper entitled Creating Shared Value in 2011. They asserted that corporations can gain financial benefits from treating their stakeholders, such as suppliers, governments and communities, as partners instead of adversaries. In other words, manage your stakeholders well and the profits will follow.

In doing so, a business potentially mobilises all of its assets for social impact, compared to more prevalent corporate responsibility practices that are hamstrung by budget allocations.

John Elkington, who in 1994 coined the term ‘triple bottom line' as a way of more formally recognising the environmental and social impacts of business, has raised concerns about the apparent miracle cure that shared value represents. He is also worried that sustainability is being scooped up and dumped in "the bucket of history”.

Who is right and who is wrong? In the heat of the moment – and the disruption that comes with new ideas – it seems we have fallen into the trap of comparing apples with oranges.

We should ask, instead, whether shared value is the missing link between our current model of capitalism and a better way of doing things? Can it help stop or reverse the rate at which our planetary ‘credit card' is being drawn upon and deliver us into a sustainable future?

Sustainability sounds great, but…

With global populations increasing and resource intensity rising, deep down we know that we have no choice but to think long and hard about the sustainability of everything we do.

But that is where the process seems to stop abruptly for most of us. Even if we have lofty ambitions, we still drive cars, catch planes and eat food that is fossil fuel intensive by the time it gets on our plate.

Having headed up a global financial research team for many years, I can confirm that, in financial markets, the yearnings of sustainability enthusiasts fall largely on deaf ears.

When the people making investment decisions, and the executives of the companies they invest in, are rewarded based on one to three year performance, appealing to their ethics or notions of the greater good just doesn't cut it.

The only way to get airtime for sustainability is to establish a solid link between a company's environmental and social activities and improved value for shareholders.

The triple bottom line makes sense from a planetary perspective and we need to create the right conditions for it to take hold, however it is hard to apply it directly to business without introducing an intermediary step.

We don't need to throw out sustainability principles – nor do I think Porter and Kramer are suggesting that – instead, we need to acknowledge that sustainability in business works best when it is linked to (single) bottom line outcomes.

Can we afford to wait for paradigm change?

We are faced with global problems of large proportions. Can we afford to wait for everyone to ‘come around' and start doing the right thing, or should we make a start today?

To get from where we are today to fully sustainable practices is too big a leap to make in one go. It is a wide and difficult river to cross, especially when we lack the stepping-stones to do it.

This is where shared value delivers. It harvests the power of capitalism – namely financial incentive – and marries it with societal benefits. It is the vital stepping-stone, or missing link, that we desperately need.

Let's not wait for the collective "hallelujah” moment where everyone decides to do good, because the vested interests of politics and commerce are so entrenched that such a moment will only arrive when it is too late.

The recipe is simple: take one overcooked capitalist system, shake the best bits out of it and turn it back on itself. For business, shared value is the carrot, not the stick.

It is already working

Shared value won't solve all of our issues overnight. Leading companies are, however, using it to create value for their shareholders. Some are doing it through conscious application and others rely on intuition and good sense.

As a large multi-national food commodity business, Nestle is often in the spotlight for its products and sourcing practices. From the top down, it has re-framed the way it forms strategy, by focusing on three core social issues: community development, access to water and improved nutrition. Having commenced this journey in 2006, it will be interesting to see how its implementation process plays out

Regardless of the challenges it faces, bringing societal issues into the core of the business and positioning them as drivers of shareholder value is a major shift in thinking for the big end of town.

The Australian property developer, Stockland, places environmental and community benefits at the centre of its business model. It builds "communities” – not just properties per se – which involves planning for education, healthcare, retirement living and much more. It took this approach by choice, and receives financial benefits in the form of reduced development times and lower financing costs.

The global pharmaceutical company, Novo Nordisk, sees its mission as eradicating diabetes rather than "maximising shareholder value”. It aligns everything it does with societal interests and its stock price has historically traded at around twice the valuation multiple of its industry average, illustrating that shared value works in theory and in practice.

I've analysed the mission and vision statements of the largest 30 companies in the world, and only three, or 10 per cent, of them fully align their mission with positive societal outcomes. Shared value still has a way to go.

Leading proponents of shared value are capable of putting distance between themselves and the pack. There is no magic switch to flick – it takes time and skill to get it right.

The ‘carrot' for business lies in replication difficulty – because it involves the management of complex interactions and because it also draws upon the strengths of the firm in question.

What's not to like about improving profitability and having a positive societal impact at the same time?

Shared value is the missing link

Shared value is proving to be disruptive in a healthy way. If you are in business, it is smart to be thinking about the opportunities it creates and the problems it can address.

It helps us harness the real strengths of capitalism – for too long we've been focused on short-term and one-sided gains at the expense of longer-term, joint value creation.

No one is going to force or regulate companies to change. It is an option available to all boards and management, who must weigh up the prospective returns as well as the risk of inaction. In time, the quality and consistency of financial results will weed out the successes from the failures – no formal judgment will be necessary.

We should stop quibbling about semantics and recognise shared value for its power and practicality; and how it is the vital stepping-stone, or missing link, that will help transport us from where we are now towards a sustainable future.

Phil Preston is a social innovator who helps businesses engage with community interests for mutual, or shared value, outcomes. He can be contacted on phil@philpreston.co or followed on twitter @philprestontwit.