Capturing Value vs. Profit
Review of every day of the session by Fellow Linda Mohapel
Fellow Linda Mohapel (far left) during group work session at the seminar Value vs. Profit Day 1: Reviewing The Landscape: The Business of Producing Social Good
Sustainability is a trend word originally stemming from an environmental context. The nowadays much-used term “the triple bottom line” expanded the focus of financial returns to environmental and social concerns. Nevertheless, the three pillars are not yet equally weighted. Although accounting concepts are being adapted to explore the wider effects a company has on its surroundings (e.g. GRI, ESG standards…), we find ourselves in the incremental phase of changing a system which has worked for centuries.How is the concept of sustainability understood by society?
Value is created by every market participant, and value goes beyond monetary results. In fact, it is much debated what impact corporations really have on society and the environment. The many inconsistencies in terminology about value and sustainability pictured sustainability more recently as new disciplines such as Corporate Social Responsibility (CSR), Philanthropy, or Environmental Management. But is sustainability really a discipline? The environmental challenges that we are facing concern ‘the one planet we have’, and can only be effective if countries collaborate across borders. Also, the escalating inequalities of life between the rich and the poor, and the increasing connectivity of global businesses appear to make sustainability rather a macroeconomic topic than an isolated discipline of one department in a company.Who is responsible for what?
The question of responsibility and action taking is key position in this debate. The corporate world, governments, NGOs and independent research bodies, universities and entrepreneurs all have a part to play. Some questions were raised in addressing the issue of value versus profit:
•How can we move away from short-termism and promote long-term perspectives in investing and operations?
•Can new incentive structures bridge the way to producing increased social good?
•Does the agent theory distort the idea of responsibility and induce risk adversity?
•Is the informal economy key to change?
•Is our focus on metrics blinding our understanding of complex processes?
•Which role does education play in an era of change and how can we agree on which values to follow in an ever more globalized world?
•How can we change deeply-rooted behavior (leadership and enablers)?
•Should we start questioning the basis of doing business - the concept of capitalism?Day 2: Business as a Driver of Social Good
There is no doubt that social good is created on different levels. But of all market actors, what role do companies play in the creation of social good? And do companies realize that public good is one of the biggest potentials for growth?The idea of shared value is one concept companies are starting to pursue. The central premise behind creating shared value is that the competitiveness of a company and the health of the communities around it are mutually dependent. Compliance and ecological sustainability can be seen as immediate risk mitigation. Shared value, in contrast, builds on long-term security of business activity by sustaining the health of the company and the surroundings it operates in. Nestlé, for example, focuses their shared value creation on Nutrition, Water, and Rural Development, as these reflect their core competencies focusing on operational improvements i.e. the supply chain.
Importantly, shared value can be created intentionally and unintentionally. Though it seems to be a natural concept that companies provide products society desires, the traditional way of doing business has ignored its harmful externalities for ages and presents no longer a win-win situation. And yet there is no doubt that business growth happens in line with social value creation.The Western Union Company recognizes every social problem as a business opportunity. There is no trade-off between profit and social good, they announce. To anchor this vision within the company, employee´s performance is linked to sustainability metrics and so is the incentive scheme. Customer focus was also pointed out as being critical for producing social good. Placing the creation of social good at the heart of business operations is proclaimed to work for some companies. But what are some of the trade-offs between investment decisions and sustainable development? Should companies be obliged to off-set unsustainable practices in the future?
More transparency in business operations, risk mitigation, and investment portfolios would help to better understand the real effects a business has on society and the environment. PHINEO, a German not-for-profit corporation, aims to strengthen the social sector by building bridges between social investors and nonprofit organizations. As a service agent it offers a unique concept of impact analysis to improve the reporting and legitimacy of NGOs/NPOs, which is not only in the interest of donors, but also creates essential learning capacity for the organization.The real impact of a business can only be determined by its net impact, which can only be assessed by a holistic analysis of all effects the business has on its surroundings; positive and negative, direct and indirect, short-term and long-term, intended and unintended.To assess ever more complex and far-reaching impacts we need to have the right information at the right place. There is certainly no shortage of information: 90% of the world´s data was created in the past two years. We now need technology to structure these data to supply meaningful information to diverse user groups. Markets For Good is an example initiative which aims at improving the system for generating, sharing, and acting upon data and information to strengthen the social sector.Day 3: The Power of Investors & Policy – Lengthening Investment Horizons
Investors do not yet understand the additional value of impact investments and struggle to position the new products in their investment portfolios, panelist suggested yesterday. Despite the strong Environmental, Social, and Corporate Governance (ESG) movement, impact investing and investments in sustainability are not yet regarded as secure and profitable as traditional investment options.Impact investments are capital ventures with the intention to generate measurable social and environmental impact alongside a financial return. This may require longer investment horizons as impacts are longer-term outcomes. The investment community, however, is propelled by a short-term return cycle and increasing returns. That return is fundamental to an investment is out of question (else it would be classified as donation), but the timeframe from the initial investment to first returns may deserve more attention.Following a trend in the food industry, labeling of sustainable investments could help to provide more clarity and to build trust within the investment community. But does impact investing have the potential to become a mainstream product? And if so, how can we accelerate the share of impact investments on the market?
New policies are demanded, e.g. an obligation to carry a certain amount of impact investments in the portfolio, to leverage the development of ‘social good’. Simultaneously calls are being made that only a change in attitudes, stimulated by good leadership, can continually drive sustainable development. Although the current investment landscape often seeks the ‘quick-back recipe’, impact investing is no longer unknown and becoming more transparent. New forms of impact investment may delay returns, but similarly to a venture capital firm assisting a start-up in the early-stages of growth, the corresponding upside through growth and further spin-offs is enormous.
