Climate Change, Digital and Shared Value. Why They Must Weave Together?

Revenues from the world’s largest 500 companies are almost one third of global GDP. Globally today, almost every industry is dominated by a few players: oil, mining, auto manufacturing, technology, media, automobiles and home appliances are some examples. Further, telecommunications, electricity generation and banking are industries where monopolies or oligopolies exist within each nation/state border. With so much power in the hands of a few, these businesses have immense ability to spur-on change, for better or worse, and therefore immense responsibility. In this post I touch on why it is imperative for businesses to lead the way for the better, why 2015 is the perfect time to start, and how pioneers are blazing a path that works.

There are two burning platforms facing businesses and society today that are demanding a shift from the status quo. First, the evidence is clear that the earth is warming up. While there is debate about the causes of this phenomenon it is generally accepted that the transition to a warmer world has the potential for tragic and devastating events. Past attempts at a coordinated global movement has been unsuccessful. The UN attempted this with their Millennium Development Goals (MDGs) in 2000. However, as Porter & Kramer (2011) noted “The MDGs have failed to be met, with governments and civil society often exacerbating societal problems by attempting to address social weaknesses at the expense of business, with presumed and institutionalised trade-offs between economic efficiency and social progress.” With this experience the UN are releasing their next attempt at a coordinated global effort towards what they call ‘Sustainable Development Goals’ (SDGs) in 2015 noting “business is part of society, you can’t move towards and achieve sustainable development without business playing its part.” (Head of UNDP, Helen Clark).

The second burning platform for businesses has emerged from the adoption of digital technologies and business models across industries. The drive to digital is almost always accompanied by a transition towards a near-zero marginal cost industry (meaning once the fixed costs are accounted for, an extra unit of a product costs nearly nothing to produce). These industries are as varied as telecommunications (e.g. Skype), media (e.g. iTunes), manufacturing (e.g. 3D printing), power generation (e.g. solar power) and education (e.g. Coursera). For these industries the price war or ‘race to the bottom’ is well underway, which drives out profit. Recent attempts to build new ‘moats’ to protect the traditional business models, such as pay walls for media companies, are short-term stopgaps.

As earnings evaporate, forward-looking firms in these industries are realising there is another source of value that could become their lifeline. This next source of value is societal value (i.e. benefit to society). With generation of societal value at the centre of their business model, pioneering firms are demonstrating there is economic value to be gained. Examples include car-share companies such as Bla Bla Car (reducing carbon emissions for long distance travellers), home-share companies such as airBnB (increasing utilisation of empty homes which now boasts more rooms for rent worldwide than the Hilton group of hotels), as well as start-ups such as TOMS which pioneered the One-for-One business model (a for-profit shoe company that gives one pair of shows to children in need for every pair it sells).

So what could the change look like? First, business must take more responsibility in humanity’s effort to slow climate change. Given that the large global firms are responsible for either the extraction of the earth’s resources, and/or the way those resources get used or disposed off, it is vital that they play a central role in ensuring the following three conditions are met more consistently:

1. They operate with increasing sustainability. With sustainability defined as the relative steady state in which the use of resources to sustain the human population does not exceed the ability of nature to recycle the waste and replenish the stock.
2. Operate with increasing efficiency. All economic activity comes from harnessing available energy in nature – in material, liquid or gaseous form – and converting it into goods and services. At every step of the value chain energy is lost, which economists are calling entropy (a term adapted from thermodynamics). A study in the US, found that the energy efficiency of the US economy has levelled off in the 1990s at about 13% - or in other words, 87% of the energy used is wasted!
3. Operate with future generations in mind. While this takes many forms, the two more obvious examples are: environmental degradation (some scientists claim the destabilisation of ecosystem dynamics around the world is pushing us into the sixth extinction event of the past 450 million years. Each of the last five events took 10 million years to recover the lost biodiversity) and financial debt burden (household and government debt in most western countries has ballooned to the point that it will take multiple generations to work out of debt).

The second change that is required is a different definition of value. Financial value in the form of profit and shareholder returns is the raison d’etre for business today. However, there is momentum building for the concept of bringing together profit and social benefit; Shared Value is the concept attesting that these two ideals are not mutually exclusive. According to Porter & Kramer, “the principle of shared value involves creating economic value in a way that also creates value for society by addressing its needs and challenges. Businesses must reconnect company success with social progress. Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. It is not on the margin of what companies do but at the centre.” Shared value, then, is not about personal values or charity. Nor is it about “sharing” the value already created by firms in a redistribution approach. Instead, it is about expanding the total pool of economic and social value.

This year at the 2015 World Economic Forum in Davos, economic growth and social inclusion was highlighted across the program. One session in particular questioned ‘Should Business Lead the Social Agenda?’ highlighting how the shared value principle is a powerful way forward in which business can work with society and be a part of the new social agenda, solving social problems and making a profit.

The emerging thought is that not only can shareholder value and social benefit be achieved together, they are compulsory for businesses over the next 10-30 years (depending on the industry the business is in). Making the transition to the shared value business model is especially urgent for players in industries that are already operating at a near-zero marginal cost. Admittedly, the 10-30 year timeframe is infinitely longer than the usual quarterly forecast and guidance driven planning horizon for most businesses. While ‘planning horizons’ as a topic warrants further reflection within the context of shared value, it will not be discussed deeply in this post. The key point to note is that the Wall St driven cadence is meeting some pushback from businesses such as AT&T, Ford, Berkshire Hathaway and Google as these businesses refocus on longer term planning. As this becomes more accepted by investors, more businesses will have licence to plan for the long-term; to create both shareholder value and societal benefit at scale.

Firms that are operating in a near zero marginal cost industry need to transition to the new system to ensure their survival. For those firms that are not operating in an industry at near zero marginal cost, there is still benefit to leading the transition. As discussed, this transition involves positioning societal benefit at the centre of the business model. A good example to consider is that of a vertically-integrated electrical utility company that has power generation, distribution and retail operations. As the cost of solar power continues to drop, homes and businesses will increasingly consider it as an option for their electricity supply. The home/business owner’s business case becomes a ‘no-brainer’ if they can sell their excess energy back into the grid at moment-by-moment dynamic market rates. This allows them the control to reduce their usage at peak times using smart electrical appliances and maximise the amount of energy they sell back to the grid. The typical response by electrical utilities has been to strongly lobby against the opening up of the central grid to dynamic pricing. A (as yet hypothetical) utility that places social benefit at the centre of their business model, would understand that consumers who produce their own electricity and can lower their usage during peak times is a benefit for society. The firm would further rationalise that this as a sound business decision; a way to reduce their expenditure on ageing infrastructure such as power generation and back-up supply used only during peak times.

So it seems that, with a long enough horizon, the interests of businesses and broader society tend to merge. The question then becomes, how best to manage the transition to this world. The unfortunate prospect is that the clock is ticking. Due to climate change, the horizon to achieve this change in order to avoid catastrophic events is closer than ever.

It is clear that the problems are diverse, complex and intertwined, which is all the more reason to believe that the business community holds the silver bullets. Businesses are accustomed to operating efficiently, effectively and at scale within complex environments. The variable that is most likely to affect the timeline of the transition towards widespread adoption of shared value strategies is; courageous leadership. Courageous leaders will make the hard decisions that could incur short term-pain for long-term gain if they believe that “Shared value offers corporations the opportunity to utilise their skills, resources, and management capability to lead social progress in ways that even the best-intentioned governmental and social sector organisations can rarely match.” (Porter & Kramer).

The challenge for courageous leaders exists on individual, firm, industry, national and global levels. On a global level, the challenge has been accepted by an organisation called the ‘The B Team’ made of business leaders such as Sir Richard Branson (Virgin Group), Arianna Huffington (Huffington Post Media Group), Muhammed Yunus (Yunus Centre), Ratan Tata (Tata Group), Paul Polman (Unilever), Ngozi Okonjo-Iweala (Nigerian Finance Minister) among others. They espouse that global-business leaders need to come together to advance the wellbeing of people and the planet as well as their own companies. The B team has been established to find a Plan B; an evolving roadmap for business that prioritises people, planet and profit. Step one has been to identify 10 challenges that get right to the heart of the issues that cause companies to remain rooted in Plan A – business as usual. Challenge #1? To lead for the long run.

On a firm level, companies as big as General-Electric (Health), Hewlett-Packard, Cisco and Nestle have already started transitioning towards a shared value strategy, however it takes time. Nestle, for example, took 4 years from the time the board first identified shared value as one of its core corporate goals to getting enough buy-in from executives, managers, investors and it’s 280,000 staff. The experience of these companies emphasises the importance of a carefully managed change process across all stakeholders including staff, executives, shareholders, suppliers, regulators and customers. This is critical because the idea of shared value is still counter-intuitive for many people. What is encouraging is that existing business systems, tools and thinking just needs to be slightly tweaked to begin the journey. A study in 2013 found pioneers in this space rely on five mutually reinforcing elements:

• Embedding a social purpose;
• Defining the social need critical to the purpose of the business;
• Measuring shared value;
• Creating the optimal innovation structure;
• Co-creating with external stakeholders.

These elements are part of the existing toolkit for all executives. They do not have to drastically change what they do on a daily basis, just the questions they ask. Governments and NGOs too need to learn how to regulate in ways that enable shared value rather than work against it.

Some examples of how firms are implementing shared value philosophy into their corporate strategies.

• HP is moving beyond simply providing technology to worthy causes and toward an approach that develops technology-based solutions to educational and health problems such as reducing the 700,000 deaths globally each year due to counterfeit drugs.
• GE launched Healthymagination, an integrated corporate strategy that aims to: Lower the cost of health care by 15 percent; Increase access to GE health technologies by 15 percent; Increase the quality of health-care delivered by 15 percent
• Cisco has created over 10,000 Networking Academies in 165 countries with an emphasis on reaching underserved communities. More than 750,000 students are now considered “Cisco certification ready.” Based on 19,000 exit surveys, more than 50 percent of these graduates have found a new job, and 70 percent have attained a new job, a better job, increased responsibilities, or a higher salary.
• Nestle identified the concept of shared value as one if its core corporate goals in 2004.?It selected three priority issues on which to focus: rural development, water use, and nutrition. The first two areas were relevant primarily to the company’s supply chain. The third area focused more on it’s consumers.

2015 is primed to be a watershed year for a globally cohesive movement towards sustainability. In December this year a new agreement to replace the Kyoto Protocol will be reached with a purpose to limit global carbon emissions such that global average temperature increase will be no more than two degrees. Additionally, this year the UN will release their Sustainability Development Goals as an inclusive private-public-people opportunity to align around a coherent set of global issues and goals. Porter & Kramer summarise well, when they say, “Business can’t reach it’s full potential in a society hindered by problems, big or small. The benefit of the SDG’s is that they outline a clear, cohesive list of global issues, in which businesses can identify what intersects with and affects their operations and economic prosperity, and what issues could also provide new business opportunities through being addressed – the fundamentals of shared value that bring business and society back together for all-round prosperity to unleash a new wave of global growth.”

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So what opportunity does your business have to lead the way towards shared value as a smart economic strategy for the long term?

What opportunity do you have to demonstrate the courageous leadership required?

Do you know of other examples of people/organisations leading the way?