Sustainability and total impact just as crucial as profit
23 January 2015
In recent years the world has seen a dramatic change in society’s view of corporate and social sustainability, with a growing emphasis on creating sustainable economic growth to the benefit of society at large. Below, Frederik Dahlmann, Assistant Professor of Global Energy at Warwick Business School discusses capitalism’s new direction.
In 1972 Milton Friedman wrote, “The social responsibility of business is to increase its profits.” His article warned against diverting managers’ attention away from making profits for their owners by promoting desirable social ends or “building personal empires.” Instead, managers should focus their efforts on maximising shareholder wealth.
Since then the world has changed significantly and a growing chorus of scientists, campaigners and politicians are demanding companies’ executives do more to address “global mega-challenges”. Climate change, resource shortages, security risks and inequalities are just some examples of an increasingly fast-paced, complex and multi-dimensional business environment causing widespread concerns.
As a result, societal expectations of how firms integrate stakeholder views into business management and create sustainable economic growth have steadily risen. Increasingly, a number of trends suggest that managers may need to move towards pursuing more broad-ranging contributions of their companies to society.
Changing our Understanding of Capitalism
Not least since the global financial crisis people from around the world have been calling on politicians to implement tough actions designed to address some of the weaknesses of a capitalist free-market economy. Many of these frustrations are based on a list of political, social, economic, emotional, ethical and religious arguments.
The recent emergence of social movements such as "We are the 99%" and Occupy, as well as ideas, debates and conferences such as Inclusive Capitalism, Responsible Business, New Growth Models, The Share Economy, The Post-Capitalist Economy and Combining Purpose With Profits demonstrate that these debates are widespread and growing. Academics and policy makers, for their part, are searching for new ways of accounting for and promoting economic activity beyond GDP growth.
Yet many of these efforts go beyond companies’ immediate short-term financial considerations and may even challenge their existing economic logic. Some therefore suggest that companies should publicly redefine their purpose and highlight what contributions they make to our prosperity by transforming ideas into products and services that solve society’s problems.
New Organisational Forms
While it is tempting to see such debates as largely a problem for existing businesses and politicians to deal with, many new enterprises are already displaying a fundamentally different attitude towards these issues. In future, the fiercest competition for companies is likely to come from startups whose entrepreneurs are well aware of these global sustainability challenges and which they seek to address through innovative products and services.
For example, a growing community of so-called Benefit Corporations, or “B Corps”, have been certified as meeting rigorous standards of social and environmental performance, accountability, and transparency. These more than 1,000 B Corps from 33 countries and over 60 industries are working together toward one unifying goal: to redefine success in business. Their mission is to be of benefit to all stakeholders, not just shareholders. Elsewhere, social enterprises are a similar example of organisations focusing mainly on solving environmental and social issues, often particularly in developing countries.
These new types and variations of enterprises represent an interesting and slowly accelerating trend. Many of them are tapping into the wider sustainability agenda by redefining organisational purpose and success.
New Key Performance Measures
Faced with pressures to accept the wider role of stakeholders and responsibilities, companies largely responded by publishing Corporate Social Responsibility (CSR) or sustainability reports. This required challenging efforts of measuring, reporting and verifying non-financial data. Whether such activities are genuine attempts to communicate companies’ wider performance or merely serve as “greenwashing” has been the subject of intense debates.
But many of these processes appear to be changing too. Reporting firms’ social and environmental performance is increasingly becoming more standardised and rigorous, much like reporting firms’ financial accounts. For instance, the International Integrated Reporting Council (IIRC) has made it its mission to embed “Integrated Reporting” into mainstream business practice for both public and private organisations. Both the UK and the EU have also introduced legislation requiring large companies to disclose environmental data such as greenhouse gas emissions and other non-financial information.
Elsewhere, the professional services firm PwC published its first ever efforts to account for the company’s “total impact”. In fact, “impact” may become a key concept to watch as there has been an explosion in activities designed to invest in and measure impact beyond financial returns. New forms of Sustainable and Responsible Investment including Impact investment, Green Bonds and Social Impact Bonds have seen strong growth in recent years.
Towards Maximising “Total Impact”
Taken together these examples are all signals of a trend towards a more “mixed economy” where the dividing line between private and public activity, financial and non-financial gains is increasingly becoming blurred.
Managers in existing businesses need to decide whether they believe that managing sustainability should be left to these new organisations or whether they want to adapt to this changing environment.
The debate over companies’ purpose continues and many will favour retaining the simpler metrics surrounding shareholder wealth. Yet changes in investment trends also reflect the underlying social shifts where younger generations of investors (“The next generation of wealth”) appear to be increasingly interested in and concerned with investment outcomes beyond financial results. Measuring impact beyond financial returns is notoriously difficult. PwC’s efforts, as well as metrics provided by others, serve as useful starting points for understanding the vital role that business organisations can play as part of serving our wider society. Whether this will be enough to transform companies’ attention to maximising total impact in future depends on managers and investors working together.
Originally seen on European Financial Review.
Dr Dahlmann teaches Sustainability and the Low Carbon Economy and Strategic Advantage on the Global Energy MBA. He also teaches Business, Politics, Society and Behaviour on the Full Time MBA.