New business models: Shared value in the 21st century

New business models

1 © The Economist Intelligence Unit Limited 2014

Contents

Foreword 2

About the research 3

Executive summary 4

Part I Sustainability: Still seen as linked to financial performance 6

Box: Sustainability gains ground in developing economies 9

Part II The challenge of measuring and reporting sustainability indicators 10

Box: A new way to track environmental impact 12

Part III The early emergence of new business models 13

Box: An evolving role for NGOs 17

Conclusions 18

Appendix: Survey results 19

References 31

New business models


Six years after the onset of the global financial crisis, sustainability concerns are continuing to work their way into the mainstream of business. Despite continued uncertain economic conditions, most companies remain persuaded that there is a strong causal link between their financial performance over a 5-10-year time horizon and their current commitment to improving their environmental, social and governance performance. Against this background, a number of business leaders are reviewing their approach to sustainability, weighing new corporate strategies and new business models in efforts to ensure their long-term sustainability.

New business models for the 21st century is an Economist Intelligence Unit (EIU) report that

discusses companies’ views on sustainability measures, the challenge of measuring and reporting sustainability outcomes, and the prospects of business models focusing on long-term sustainability. (Sustainability is defined as “meeting the needs of the present without compromising the ability of future generations to meet their own needs”.) The research was commissioned by the Enel Foundation. The EIU bears sole responsibility for the content of this report. The findings and views expressed in the report do not necessarily reflect the views of the Enel Foundation. Christopher Watts was the author of the report, and Aviva Freudmann was the editor.

October 2014

Foreword

New business models


About the research

In September-October 2013 The Economist Intelligence Unit surveyed 285 senior executives, mostly in Asia-Pacific, Europe and North America, on their approaches to corporate sustainability, their experiences in measuring and reporting sustainability outcomes, and their plans to explore new business models to ensure long-term sustainability. This briefing paper is based on the results of this survey and a comparable survey conducted in 2011. The research also includes a programme of in-depth interviews, as well as desk research on the topic of corporate sustainability.

More than half (58%) of the 285 respondents to the latest survey are executives at C-level or above; approximately 60% are responsible for strategy and business development at their companies. Around 37% of those surveyed represent businesses with US$500m or more in annual revenue. Companies in the professional services, financial services and manufacturing sectors have the strongest representation in the survey. Approximately 58% of respondents to the latest survey are based in developing countries.

These demographic characteristics are similar to those of the survey taken in 2011. In that survey, the sample of 282 respondents was also at a senior level, with 74% at C-level or above. Approximately 74% of respondents to the 2011 sample were responsible for strategy and business development at their companies. About 43% represented companies with US$500m or more in global annual revenue. Professional services were strongly represented in the 2011 sample as well, and approximately 53% of respondents were based in developing countries.

Five of the survey questions asked in 2011 were also asked in the latest survey. This allowed a comparison of changes

in company views over time in those areas, for example views of the link between commitment to sustainability goals and financial performance; the main obstacles to incorporating sustainability principles; how companies report their performance in sustainability measures; and their top priorities in environmental, social and governance sustainability.

In addition to the online survey, The Economist Intelligence Unit conducted a programme of eight in-depth interviews with senior business executives and other experts in sustainability. The insights from these interviews appear throughout the report. The Economist Intelligence Unit would like to thank all survey respondents, as well as the following executives (listed alphabetically by organisation name) who participated in the interview programme:

l Mark Kramer, founder and managing director, FSG, US

l Ernst Ligteringen, CEO, Global Reporting Initiative, Netherlands

l Kate Gibson, vice president of corporate responsibility, and Paul Snyder, vice president of corporate responsibility, InterContinental Hotels Group, UK

l Wim Bartels, global head of sustainability assurance, KPMG, Netherlands

l Beroz Rumie Gazdar, senior vice president, group sustainability, and Vishwesh Palekar, senior vice president, innovation and emerging markets, Mahindra & Mahindra, India

l Gladys Naylor, environmental manager, and Lora Rossler, group head of corporate affairs, Mondi Limited, South Africa

l João Paulo Ferreira, vice president, Natura Cosméticos, Brazil

l Justin Bakule, executive director, Shared Value Initiative, US

New business models


As growing numbers of companies embed environmental, social and governance (ESG) sustainability issues into the core of their businesses, a range of challenges is emerging. Not least among these is the perception that sustainability practices are becoming part of the business mainstream—thereby, paradoxically, diminishing the perception that an individual company stands to gain an advantage over its immediate competitors by adopting such practices. Against this backdrop, a small number of business leaders are reviewing their approach to sustainability and considering fresh corporate strategies and alternative business models. These new approaches are aimed at improving their own companies’ long-term fortunes, as well as those of the communities and the environments in which they operate.

This briefing paper is based on an online survey of 285 senior executives and on eight in-depth interviews with corporate executives and other experts in sustainability, complemented by extensive desk research. These research components provide the basis for the discussion of current approaches to sustainability among companies in both developed and developing economies; the challenges of measuring and reporting sustainability; and the emergence of alternative business models.

Here are the main findings of the research.

The perceived link between sustainability efforts and long-term profitability remains strong. In the latest survey, 66% of managers say there is a strong causal link between sustainability and long-term financial performance, a figure largely similar to the 70% who said so in 2011. On the other hand, 11% of respondents now see no such link—an increase from 6% in 2011. Meanwhile, more and more managers say they are facing obstacles to embedding sustainability principles in their businesses, with 52% saying that immediate financial goals are currently more urgent.

Despite uncertain financial times, companies continue to promote sustainability. The survey shows that more managers now understand the wider importance of sustainability and are stepping up their efforts to embed sustainability principles into their strategies. The increased willingness to act could stem in part from tightening regulation in the environmental, social and governance spheres.

Sustainability is gaining ground more in developing markets than in developed markets. Survey responses among business managers in developing markets indicate a strengthening commitment to sustainability; indeed, the

Executive summary

New business models


majority of the expansion of sustainability practices in the past two years appears to have come from developing economies. The reason for these countries’ strong commitment may be their relatively heavy dependence on natural resources requiring conservation, as well as their tightening regulations.

More developing-market firms are reporting their sustainability performance. Amid growing regulation, 20% of firms now publish sustainability goals and performance at least once a year, similar to the 18% who reported doing so in 2011, while 15% of survey respondents state that they regularly publish an integrated report combining financial and sustainability results, up from 11% in 2011. The results from developing economies show an increase in reporting, with 24% of such companies now publishing sustainability reports, compared with 19% two years ago.

Companies are focusing on measuring core indicators. Businesses are tending not to develop and report new metrics. Many are focusing on core measures such as resource efficiency (39%), workplace accidents (32%) and waste (30%). Experts interviewed for this report emphasise

that external reporting is only part of the picture; embedding sustainability indicators in internal processes and systems is just as important.

Almost two-thirds of firms are reviewing their sustainability strategies. While 28% of respondents are dissatisfied with their existing environmental, social and governance sustainability strategies, 32% doubt that these strategies will stand the test of time. Almost two-thirds (63%) of firms say they are reviewing new strategies or business models to ensure long-term sustainability.

Most companies have yet to revise their overall strategies based on such reviews. In efforts to ensure their long-term sustainability, a small number of firms are considering alternative business models, such as the concept of creating shared value, which aims to identify business opportunities that address social issues, creating value for the firm and for society around it. For now, uptake of the shared value approach remains low. While 21% of managers say they have drawn up new strategies or business models with a specific focus on creating shared value, 16% say they have not reviewed the case for shared value and do not intend to do so.

New business models


The link between introducing sustainability-oriented policies and bolstering long-term profitability appears to be well anchored in corporate thinking. Our survey shows that around two-thirds (66%) of respondents believe that there is a strong causal link between a company’s commitment to embed environmental, social and governance (ESG) sustainability goals and its long-term (5-10 years) financial performance. “There are immediate gains, but having commitment to sustainable development brings long-term gains,” asserts Gladys Naylor, environmental manager at paper and packaging group Mondi Limited. “These gains translate into cost savings across a wide range of areas including risk mitigation measures.”

One company that has established a link between its commitment to environmental and social goals, on the one hand, and its bottom line, on the other, is Brazilian cosmetics company Natura Cosméticos. It introduced the Crer para Ver (“To Believe is to See”) product line in 1995, earmarking the earnings from these products for the Natura Institute, a corporate body that funds education projects. Since 1995 the institute has invested R15.5m (€5.1m) in local elementary schools. The company says that its overall focus on sustainability issues has helped drive

annual revenue to R6.3bn, from R429m in 1995. “Since Natura started including sustainability in its business model, its financial results have improved significantly,” says Natura vice president João Paulo Ferreira.

In seeing opportunity in sustainability, Natura is not alone. Some companies believe that environmental improvement programmes or social betterment initiatives help them bolster their reputations, differentiate themselves from competitors and/or achieve cost efficiencies. Others say simply that such programmes help them meet their regulatory obligations. In any case, a growing body of research suggests that sustainability can give firms a financial advantage. Not least, research by Deutsche Bank concludes that “there is overwhelming academic evidence ... that firms with high ratings for corporate social responsibility (CSR) and ESG factors have a lower (ex ante) cost of capital in terms of debt (loans and bonds) and equity”.1 One reason for this may be that firms committed to sustainability are relatively less risky. “Companies that are preparing for a resource-constrained future are companies that are strategically well run,” says Justin Bakule, executive director of the Shared Value Initiative, a US-based non-profit strategy consulting firm.

Sustainability: Still seen as linked to profitability 1

1 Sustainable Investing: Establishing Long-Term Value and Performance, Deutsche Bank, June 2012. Available at: https://www.db.com/cr/en/docs/Sustainable_Investing_2012---Establishing-long-term-value-and-performance.pdf

Strong

Weak

No causal link

Don’t know

16

36

40

8

(% respondents)

In your view, how strong, if at all, is the causal link between a company’s financial performance and its commitment toenvironmental, social and governance goals? - Short term (1-2 years)

New business models


Although the majority of respondents believe in the link between sustainability and long-term profitability, there has been a slight decline in this majority: the figure has fallen by 4 percentage points from the 70% recorded in a comparable survey in 2011. However, 11% of the survey panel state that they see no long-term connection, up from 6% in 2011. And only 16% of the survey panel see a strong causal link between a company’s short-term (1-2 years) financial performance and its commitment to ESG goals.

Growing numbers of businesses act to promote sustainabilityThe corporate perception of a link between commitment to sustainability goals and improved long-term financial performance tracks the sentiment on sustainability practices as a source of competitive advantage. In the latest survey, 48% of respondents say that sustainability practices are a source of competitive advantage—roughly comparable to the 51% who said so in 2011. As sustainability practices become mainstream—owing to regulatory requirements or for other reasons—there may be less of a perceived competitive edge to be gained by any one company vis-à-vis its competitors by adopting such principles,

since the competitors may be adopting similar principles and practices. “Sustainability is becoming less of a competitive advantage now that many companies have moved into it,” explains Wim Bartels, global head of sustainability assurance at KPMG. “Many of these companies want to follow the leaders.”

However, it appears that sentiment in favour of the idea that such practices help companies improve their own performance—relative to their own previous performance, if not relative to the performance of their competitors—continues to be strong. According to the latest survey, 70% of respondents believe that having a sustainability strategy is a prerequisite for their company’s long-term growth; this compares with 76% who said so in 2011. Here, the steepest decline is evident among companies in developed markets (65% in the latest survey, versus 71% in 2011).

That said, it is not always easy for companies to embed sustainability principles in their systems and daily practices. Sustainability-oriented practices may have their internal corporate champions, but they also have their detractors. Uncertain financial and market conditions may play a role here as well. In the survey, 44%

Strong

Weak

No causal link

Don’t know

66

14

11

9

(% respondents)

In your view, how strong, if at all, is the causal link between a company’s financial performance and its commitment toenvironmental, social and governance goals? - Long term (5-10 years)

Strongly agree Agree somewhat Neither agree nor disagree Disagree Strongly disagree Don’t know

ESG sustainability strategy is a pre-requisite for my company’s long term growth

ESG sustainability is currently a source of competitive advantage for my company

Sustainability issues are important in my geographic region

Sustainability issues are currently important in my sector

Sustainability issues are relatively unknown in my sector but are becoming more important

1

1

2

1

3

491638

619272720

91939

33

32

416223127

1023183411

(% respondents)To what extent do you agree with the following statements? Please select one answer for each statement

New business models


of respondents—who are overwhelmingly in strategy, business development and general management functions—describe the absence of a compelling business case for sustainability as an obstacle to incorporating sustainability principles into their company’s strategies and practices. This figure represents a major increase from the 27% who said so in 2011. Meanwhile, 52% of respondents claim that immediate financial goals are more urgent, up from 44% two years ago.

The survey shows that a growing proportion of executives appear to understand the importance of sustainability as a concept. About 70% of

respondents say that sustainability is important in their region, about the same as the 66% who said so two years ago. Among respondents in developed markets, this figure is 71%, about the same as the 69% who said this in 2011, but in developing economies the figure is now 70%, up markedly from 63%. (See box: Sustainability gains ground in developing economies.)

Similarly, companies’ efforts to incorporate sustainability into their businesses appear to be gathering pace, in spite of the obstacles. For example, 54% of respondents say that their firms have drafted new strategies or business models in the past three years in

Immediate financial goals are more urgent

Absence of a compelling business case for sustainability

Lack of consensus on ultimate goals of a sustainability programme

Inadequate budget

Insufficient clarity concerning responsibilities in the company

Lack of clarity on legal or regulatory obligations to meet sustainability standards

Need for more transparency in operations or practices

Other, please specify

Not applicable—we have no obstacles to implementing sustainability principles

Don’t know

52

44

31

30

27

26

10

3

9

1

(% respondents)

Which, if any, of the following are the main obstacles to incorporating sustainability principles into the company’s strategiesand practices? Please select up to three

Our company has set more demanding social goals for itself (vis-à-vis employees and surrounding communities) within the past three years

Our company has set more demanding environmental goals for itself within the past three years

Our company has set more demanding governance goals for itself within the past three years

Our company has not focussed on ESG objectives but plans to do so in the next three years

Our company plans to incorporate new environmental, social and/or governance goals into new business models during the next three years

Our company has incorporated new environmental, social, and/or governance goals into an entirely new business model during the past three years

Our company is not focussed on ESG objectives and has no plans to do so in the next three years

Our company has created a new business model to deliver both profit and ESG objectives

29

28

28

22

20

17

16

14

(% respondents)

Which of the following statements describes your company’s policies on setting environmental, social and governance (ESG)goals? Please select all that apply

New business models


efforts to ensure long-term sustainability. And approximately 29% say their businesses have set themselves more demanding environmental and social sustainability goals within the past three years, the highest proportion being among respondents in developing markets.

Part of the reason for this stepped-up activity may be the growing volume of new sustainability regulation being introduced by governments and other stakeholders. For example, India’s Perform, Achieve and Trade scheme, targeting energy efficiency, is being rolled out progressively across the country’s heavy industry. In addition, sustainability disclosure requirements have been growing steadily in the past decade;3 the proportion of such initiatives that are mandatory has risen to 72%, from 58%

in 2006.4 To some extent, such initiatives are driving the adoption of sustainability principles, even among managers who are sceptical that their business will benefit.

For many companies, incorporating sustainability principles means reviewing their strategies and business processes with environmental, social and governance sustainability principles in mind. A case in point is Natura of Brazil. “Our strategic planning cycle provides for annual reviews and adjustments based on external and internal assessments,” says Mr Ferreira. “Sustainability provides guidelines for the company’s business strategy. We are constantly reviewing our positioning regarding sustainability, as well as our business strategy.”

Responses to a variety of survey questions indicate that sustainability is gaining ground in developing markets more than in developed markets. Why? Here are three possible reasons.

l First, sustainability regulation in developing economies is becoming heavier. One example is energy efficiency regulation in heavy manufacturing industries such as iron and steel, chemicals and cement, which typically account for a greater proportion of economic activity in developing markets than they do in developed economies.

l Second, many developing countries are dependent on natural resources; people in these countries may have a sharper sense of what is at stake if sustainability issues are

not addressed. One recent report2 calls this the “lens of proximity”, which it describes as a “heightened perception of sustainability issues when their impacts are close by and immediate”.

l Third, in some developing economies traditional values relating to conserving resources and minimising waste remain deeply entrenched, whereas they may be less engrained in the consumerist societies of the developed world. Beroz Rumie Gazdar, senior vice president of group sustainability at Mahindra & Mahindra, an India-based industrial concern, says: “As Indians, we were always taught to conserve things, not to waste.”

Sustainability gains ground in developing economies

2 The UN-Global Compact CEO Study on Sustainability 2013: Architects of a Better World, Accenture, September 2013. Available at: http://www.accenture.com/Microsites/ungc-ceo-study/Documents/pdf/13-1739_UNGC%20report_Final_FSC3.pdf

3 Trends in Sustainability Disclosure: Benchmarking the World’s Stock Exchanges, CK Capital, October 2013. Available at: http://static.corporateknights.com/StockExchangeReport2013.pdf

4 Carrots and Sticks: Sustainability reporting policies worldwide – today’s best practice, tomorrow’s trends, KPMG Advisory, the Global Reporting Initiative, and the Centre for Corporate Governance in Africa, 2013. Available at: https://www.globalreporting.org/resourcelibrary/carrots-and-sticks.pdf

New business models


While corporate managers’ conviction that commitment to sustainability delivers tangible benefits appears moderately weaker today than it was in 2011, their companies are increasingly subject to scrutiny from external stakeholders, including governments, non-governmental organisations (NGOs) and investors. In response, growing numbers of businesses are putting in place sustainability targets, measuring their performance against these targets using a variety of indicators, and publishing information about the progress they are making in reaching their sustainability goals.

The survey results are clear on this point. Some 20% of managers state that their firms publish their sustainability goals and their progress towards meeting them at least once a year, about the same as the 18% who did so in 2011. The clearest advances in sustainability reporting are evident among firms in developing markets (24% in the latest survey, versus 19% in 2011), owing in part to the growing volume of sustainability

The challenge of measuring and reporting sustainability indicators2

disclosure requirements there. The reporting requirements introduced by the Shanghai Stock Exchange in 2008 are resulting in more widespread sustainability reporting in China, for example.

As sustainability reporting is gaining ground, so too is the tendency to combine financial results and sustainability measures in a single integrated report. According to the survey, 15% of respondents say their firms regularly publish a report that integrates financial results and sustainability performance, compared with 11% in 2011. Again, it is clear here that firms in developing economies account for the bulk of the increase: 19% now publish integrated reports, an increase from the 14% of developing-country firms that did so in 2011.

The indicators that countAt the same time as sustainability reporting is becoming more widespread, so is commentary

We publish our ESG sustainability goals, and our progress toward meeting them, at least once a year

We do not publish such an integrated report, but plan to do so within the next two years

We have an ESG sustainability communications strategy that is part of our group communications strategy

We regularly publish a report which integrates our financial results and our progress toward ESG sustainability goals

We have a separate communications strategy for ESG sustainability issues

We publish our ESG sustainability goals, and our progress toward meeting them, on an ad hoc basis

We do not publish any information about our sustainability practices or goals

Don’t know

20

18

17

15

15

10

39

5

(% respondents)

How, if at all, does your company report its performance in environmental, social and governance (ESG) sustainability?Please select all that apply

New business models


on companies’ sustainability practices from external observers. Not all of that commentary is constructive. “You get the sense that many issues that the socially responsible investment communities are looking at really aren’t material either to the economic performance of the company or to the overall social and environmental impact of the company,” says Mark Kramer, founder and managing director of US-based consulting firm FSG. “It is shocking that the most common criteria [that they look at] are whether the company does business in Sudan and other repressive regimes, followed by CEO compensation and board governance. While these are all important issues, they are not the most material social or business factors for most companies.”

Which sustainability indicators do companies use to track the environmental, social and governance outcomes that they consider important? The most popular indicators, according to survey results, are those related to energy or natural resource efficiency (used by 39% of firms), followed by the number of workplace accidents or injuries (32%) and the level of waste production and means of its disposal (30%). There is a reason why these indicators are at the top of the list, says Mr Kramer: “When it’s about external reporting about shared value, you’ve got to focus on the

very few issues that really are material to your business and to your competitive positioning within the industry.”

A few other indicators of progress on sustainability goals also rank high on corporate lists. For example, 23% of respondents say their firms track the percentage of women in senior positions. This is more evident among larger firms (28%) than among smaller ones (20%). Bribery or corruption incidents are measured by 17% of companies. Carbon emissions levels are tracked by just 17% of firms, with larger firms more likely to say they measure emissions (27%) than smaller firms (13%).

Progress towards other sustainability-related goals—for example, contributions to community welfare—may be harder to measure. (See box: A new way to track environmental impact.) Furthermore, such issues may be subject to external influences that are beyond the control of any single company. In all, says KPMG’s Mr Bartels, “we see few [new] indicators being developed, and a lot of hesitation to really implement these indicators and report on them.”

While companies tend to focus on certain core indicators of sustainability performance, some are extending their measurement to include the activities of suppliers, and even the impact of

Energy or natural resource efficiency

Number of workplace accidents or injuries

Level of waste production/means of disposal

Percentage of women in senior positions

Bribery or corruption events

Carbon emissions levels

Level of pollutants in air, water and soil related to your company’s activities

Presence of ethical/SRI (socially responsible investment) funds among the company’s shareholders

CEO pay as a multiple of other employees’ pay


39

32

30

23

17

17

15

12

5

13

(% respondents)What metrics does your company use to measure environmental, social and governance outcomes? Please select up to three

New business models


some of their products. Puma and Wal-Mart, for example, track the environmental performance of their suppliers. Unilever and Philips track resources used during the consumption of their products, with a view to making the products more resource-efficient.

Experts interviewed for this report emphasise that companies should go beyond mere measurement and reporting and embed such metrics into their management systems and processes. Paper and packaging group Mondi put

impact, Puma calculated that its supply chain accounts for 94%; over half (57%) is associated with the processing of raw materials such as leather, cotton and rubber; two-thirds (67%) accrued to the Asia-Pacific region. The firm’s footwear division accounted for almost two-thirds (66%) of its total environmental impact.

Puma’s parent group, Kering, appears to be encouraged by the results of the E P&L experiment. The group now plans to roll out the E P&L concept to brands in its Luxury and its Sport & Lifestyle divisions by 2015. These include clothing names such as Gucci, Alexander McQueen, Brioni and more.

Many managers are focusing on tracking and reporting a range of core indicators–such as resource efficiency–and in some cases applying these measures to suppliers and customers too. Fewer appear to be developing new measures.

One exception is Jochen Zeitz, the former chairman of German sportswear maker Puma. Under his guidance, the company released its first so-called Environmental Profit and Loss Account (E P&L) in November 2011, which placed a cost on Puma’s greenhouse gas emissions, water use, land use, air pollution and waste in its operations and supply chain for the year 2010.

The result? Costs were assessed at €145m million (US$200m). Of this total environmental

A new way to track environmental impact

in place a sustainable development management system in 2007. “The objective was to ensure that sustainability became integrated into our business management processes,” explains Lora Rossler, group head of corporate affairs at the company. Its management uses a dashboard of metrics that include, for example, monthly energy usage relative to earlier periods and relative to targets. “The better entrenched sustainability is within our business systems, policies and philosophies, the better chance we have of being able to deliver against it,” says Mrs Rossler.

New business models


As managers step up their efforts to incorporate sustainability into their businesses, some are questioning their own approach to sustainability and are pushing through fundamental changes. While the data on sentiment for or against new business models related to sustainability are inconclusive, a small number of companies are drafting new strategies or business models that highlight their sustainability ambitions.

One reason is that many managers are not entirely happy with their current approach to sustainability. In the survey, 28% agree with the statement that “the firm’s ESG strategy is falling short of our stated expectations”, while 38% agree that “the firm’s ESG strategy is meeting or exceeding our stated expectations”.

Similarly, while 52% of respondents believe that their ESG strategy is sufficient to meet sustainability goals in the long term, nearly one-third (32%) say that their sustainability strategy is not sufficient to meet long-term sustainability goals. This mixed result may reflect perceived

weakness in their current strategy, but it may also signal expectations of tighter regulation in the future.

A handful of companies are taking action to deal with perceived shortfalls. A majority of respondents (54%) say that they have drafted new strategies or business models in the past three years in efforts to ensure long-term sustainability. Companies that have set new strategies or business models are most likely to be in developing economies (61%), notably in the Middle East and Africa (67%). Among developed markets, fewer (44%) say they have set new strategies or business models, with the figure being lowest in North America, at 42%.

In addition, 63% of respondents say their companies are currently reviewing new strategies and business models to ensure long-term sustainability. These firms are more likely to be in developing economies (70%) than developed markets (54%). Fully 68% of firms expect to set new strategies or business models in the next

The emergence of new business models3


The firm’s ESG strategy is falling short of our stated expectations

The firm’s ESG strategy is meeting or exceeding our stated expectations

The firm’s ESG strategy is sufficient to meet sustainability goals in the long term

The firm’s ESG strategy is not sufficient to meet sustainability goals in the long term

In the past three years our firm has set new strategies and/or business models to ensure long-term sustainability

Our firm is reviewing new strategies and/or business models to ensure long-term sustainability

In the next three years our firm will set new strategies and/or business models to ensure long-term sustainability

592434216

6372810 316

4317243616

6102222248

4518203519

447224222

636164127

(% respondents)

To what extent do you agree with these statements about your firm’s approach to sustainability?Please select one answer for each statement

New business models


three years to ensure long-term sustainability. Again, firms in developing markets appear to be leading the way (74%), ahead of those in developed markets (61%).

There are already a few well-known examples of companies that have placed certain sustainability goals at the centre of their business strategies. Consider Philips of the Netherlands, which has made sustainability a central pillar of its

corporate strategy since 1994. Since then, with significant investments in researching and developing environmentally friendly products—€509m (US$702m) in 2013 alone—the company has been able to drive sales of “green” products to 51% of its total revenue.

That said, few firms appear to be introducing fundamental strategic change. “Are all companies truly transforming their business

Increasing energy efficiency

Improving employee health and safety

Improving local community relations

Ensuring compliance with laws and regulations, eg anti-corruption laws

Fostering accountability and transparency to all stakeholders

Promoting diversity and inclusion in the company’s work force

Offering environmentally sound products and services

Reducing other environmental pollution

Reducing CO2 emissions

Improving transparency in board member selection, and in board operations

Increasing transparency concerning board members’ compensation

57

43

35

30

24

23

21

17

16

5

3

(% respondents)

Thinking about your company’s environmental, social and governance goals over the next three years, which of the followingrepresent the company’s top three priorities? Please select up to three












47

36

32

32

30

28

25

22

16

6

2

(% respondents)

Thinking about your company’s environmental, social and governance goals over the next five to ten years, which of thefollowing should represent the company’s top three priorities? Please select up to three

New business models


models in a deep and meaningful way? I have not seen that evidence,” observes Ernst Ligteringen, CEO of the Netherlands-based Global Reporting Initiative, a not-for-profit organisation that promotes sustainability reporting.

Indeed, survey respondents say that offering environmentally sound products and services—for many businesses a central pillar of a sustainable business model—has fallen lower on their list of short-term priorities. In the latest survey, 21% say that offering “green” products and services is among their top three priorities for the next three years, ranking this option seventh; in 2011, this was among the top three priorities for 28% of respondents, placing it fourth. Still, 32% say that green products should be among their company’s top three priorities in the next 5-10 years, ranking third on the list.

As business managers contemplate a shift in strategy or business model, many are focusing on gaining specific, and sometimes short-term, advantages from doing so. The most popular motivation for any shift in corporate strategy or business model, cited by 42% of respondents, is to differentiate the company from its peers and to allow the company to market itself as an environmental leader. Meanwhile, 36% of respondents say that a top motivation for a shift in strategy or business model adopted over the past three years was that it offered the potential to improve company earnings.

The case for shared valueIn efforts to ensure their companies’ long-term sustainability, a handful of business managers are looking beyond customary approaches to sustainability and considering an alternative approach to the role of business within society, namely to “create shared value”, as outlined by Michael E Porter and Mark R Kramer in an article published in the Harvard Business Review in early 2011.5

As described in that article, the shared value concept is based on “policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates”. In practical terms, the concept focuses on identifying business opportunities that address social issues—creating value both for the company and for society around it. Not all of society’s issues can be turned into a compelling business case; nor can business tackle these issues single-handedly (see box: An evolving role for NGOs).

Although they are distinct from one another, the principles of creating shared value and ensuring sustainable corporate practices overlap to a considerable extent. “The sustainability agenda is a very broad agenda that encompasses all of a company’s social and environmental performance, and is very much about reporting,

5 Michael E Porter and Mark R Kramer, “Creating Shared Value: How to Fix Capitalism and Unleash a New Wave of Growth”, Harvard Business Review, January 2011. Available at: http://www.hbr.org/2011/01/the-big-idea-creating-shared-value

The new approach enabled/will enable us to differentiate ourselves from our peers and market ourselves as environmental leaders

The new approach offers/will offer the potential to improve company earnings

Our existing approach delivered/will deliver strong results and led/will lead us to seek further ways to embrace sustainability

Our existing approach was/is not adequate in reaching our sustainability targets

The new approach enabled/will enable us to find ways out of the current economic slowdown


We have not implemented any shift in our strategy and/or business model in the past three years and do not plan to implement any in the next three years

Don’t know

42

36

26

24

18

2

19

5

(% respondents)

With sustainability in mind, what are your motivations behind any shift in strategy and/or business model that your firm hasimplemented in the past three years or plans to implement in the next three years? Please select up to three

New business models


disclosure and accountability, and about minimising the harm within the company’s day-to-day activities,” explains Mr Kramer (who is the co-author of the article in the Harvard Business Review). “Shared value is much more about corporate strategy; it’s about identifying the issues that are truly material both to the company’s economic performance and to the social and environmental impact.”

One example of a corporate application of the concept is Coca-Cola’s Coletivo initiative in Brazil. The firm runs a training programme in favelas (shanty towns) to provide training to impoverished youths and to place them in jobs. The company measures four metrics every month to gauge the success of the programme in the favelas—employment and self-esteem among trainees, affection for the Coca-Cola brand, and Coca-Cola’s sales. “The company finds a very positive correlation between its sales, reputation and the initiative’s social impact,” says Mr Kramer. “That is a great example of measuring shared value; unlike most companies that would just assume a reputational benefit from philanthropy, Coca-Cola is measuring both the social and the business benefits rigorously and making regular improvements to the programme to increase both social and business benefits.”

The shared value idea has generated some buzz, but business managers interpret the phrase “shared value” in a variety of ways. For now, take-up of the concept of shared value, as promoted by Mr Porter and Mr Kramer, appears limited. In our survey, 28% of business managers state that their firm has reviewed the case for shared value and implemented changes to incorporate it into their existing strategies or business models; 21% say they have reviewed the case for shared value and have drawn up new strategies or business models with a specific focus on shared value.

Meanwhile, 13% of survey respondents say they have reviewed the case for shared value and did not find it more compelling than their current ESG approach; 17% report that they have not reviewed the case for shared value but intend to do so in the next three years; 12% say that they have not reviewed the case for shared value but intend to so in the next year; a further 16% say they have not reviewed the case for shared value and do not intend to do so; and 18% of business executives state that shared value has not appeared on their company’s agenda.

Even if take-up of the shared valued approach is limited for the time being, it may be that

issue is and how their products and services can connect to it, in order to gauge the size of the business opportunity”. This is where NGOs can help—possibly working together with private companies.

Many NGOs have solid, on-the-ground expertise in numerous countries across the world—as do private companies. To capitalise on the opportunity presented by shared value, some NGOs—including Save the Children—are already drawing up strategies to assess the scale of social needs in co-operation with companies. “They are positioning themselves to work much more actively with companies in this arena,” points out Mr Bakule.

A core element of the shared value approach is making a business case for addressing social needs. Yet business cannot be expected to tackle society’s issues single-handedly, notes Justin Bakule, executive director of the Shared Value Initiative, an organisation that promotes the concept of shared value. “It speaks for the ongoing importance of the role of both profit and non-profit efforts in helping address social issues,” he says.

Mr Bakule sees a growing role for non-governmental organisations (NGOs) in creating shared value, labelling them “a critical part of the equation”. For example, he points out that companies planning to invest in healthcare in rural India “needs some mechanism of understanding how big the social

An evolving role for NGOs

New business models


the concept is proving to be influential. “The concept is already having an influence,” remarks Mr Ligteringen of the Global Reporting Initiative, “because I see a broader acceptance of the notion that a company cannot only look at shareholder value in isolation from the value it is generating for other stakeholders.”

One company that has embraced shared value is Mahindra & Mahindra, an India-based industrial concern. One of the group’s subsidiaries has overhauled its business in order to provide

financing to farmers, many of whom have limited access to finance. “[That is an example of one of Mahindra’s] businesses that [is] carved out of a shared value model,” points out Vishwesh Palekar, the group’s senior vice president of innovation and emerging markets. The shared value approach holds promise, he concludes: “There are many businesses—particularly in the context of India and countries like India—where the concept of sustainable growth of customers is a business opportunity in itself.”

We have reviewed the case for shared value and implemented changes to incorporate it into our existing strategies and/or business models

We have reviewed the case for shared value and have drawn up new strategies and/or business models with a specific focus on shared value

We have not reviewed the case for shared value but we intend to in the next three years

We have not reviewed the case for shared value and at this time we do not intend to

We have reviewed the case for shared value and did not find it more compelling than our current ESG approach at the current time

We have not reviewed the case for shared value but we intend to in the next year


The shared value approach has not appeared on our agenda

Don’t know

28

21

17

17

13

12

0

18

6

(% respondents)

Which of the following best describes your company’s approach to creating shared value – that is, creating long-term valuefor various stakeholders in addition to shareholders? Please select up to three

New business models


Conclusions

l Sustainability is gaining ground in developing markets faster than in developed markets. Sustainability principles are becoming more deeply entrenched among businesses in developing markets, according to survey results; take-up of sustainability in developing countries is faster than in industrialised ones.

l Take-up of the shared value concept remains at an early stage. Managers attach varying meanings to the phrase “shared value”, and it appears that the concept has yet to gain traction. However, a few companies are experimenting with the shared value approach. In time, more companies may consider the concept as part of efforts both to ensure long-term profitability and to contribute to the sustainability of the environment and the communities in which they operate.

Despite a continued unfavourable economic climate across the globe, more and more companies are embedding sustainability principles into their businesses. As they do so, however, the proportion of business executives who expect sustainability to boost competitive advantage and financial performance appears to be declining somewhat. Many are reviewing their sustainability strategies and business models; some are going further, considering new corporate strategies and alternative business models in efforts to ensure their long-term sustainability.

The experiences and viewpoints of those business managers and experts included in this report—both those within the survey sample and those included in the interview programme—provide a number of insights.

l Perception that sustainability strategies and programmes are a source of competitive advantage remains strong. A rising number of businesses are embracing sustainability principles and practices in the environmental, social and governance spheres. Some newcomers are doing so to comply with regulations rather than out of conviction.

New business models


Appendix

Our company has set more demanding social goals for itself (vis-à-vis employees and surrounding communities) within the past three years

Our company has set more demanding environmental goals for itself within the past three years

Our company has set more demanding governance goals for itself within the past three years

Our company has not focussed on ESG objectives but plans to do so in the next three years

Our company plans to incorporate new environmental, social and/or governance goals into new business models during the next three years

Our company has incorporated new environmental, social, and/or governance goals into an entirely new business model during the past three years

Our company is not focussed on ESG objectives and has no plans to do so in the next three years

Our company has created a new business model to deliver both profit and ESG objectives

29

28

28

22

20

17

16

14

(% respondents)

Which of the following statements describes your company’s policies on setting environmental, social and governance (ESG)goals? Please select all that apply


ESG sustainability strategy is a pre-requisite for my company’s long term growth

ESG sustainability is currently a source of competitive advantage for my company

Sustainability issues are important in my geographic region

Sustainability issues are currently important in my sector

Sustainability issues are relatively unknown in my sector but are becoming more important

1

1

2

1

3

491638

619272720

91939

33

32

416223127

1023183411

(% respondents)To what extent do you agree with the following statements? Please select one answer for each statement

New business models


Strong

Weak

No causal link

Don’t know

16

36

40

8

(% respondents)

In your view, how strong, if at all, is the causal link between a company’s financial performance and its commitment toenvironmental, social and governance goals? - Short term (1-2 years)

Strong

Weak

No causal link

Don’t know

36

42

13

10

(% respondents)

In your view, how strong, if at all, is the causal link between a company’s financial performance and its commitment toenvironmental, social and governance goals? - Medium term (2-5 years)

Strong

Weak

No causal link

Don’t know

66

14

11

9

(% respondents)

In your view, how strong, if at all, is the causal link between a company’s financial performance and its commitment toenvironmental, social and governance goals? - Long term (5-10 years)

Immediate financial goals are more urgent

Absence of a compelling business case for sustainability

Lack of consensus on ultimate goals of a sustainability programme

Inadequate budget

Insufficient clarity concerning responsibilities in the company

Lack of clarity on legal or regulatory obligations to meet sustainability standards

Need for more transparency in operations or practices


Not applicable—we have no obstacles to implementing sustainability principles

Don’t know

52

44

31

30

27

26

10

3

9

1

(% respondents)

Which, if any, of the following are the main obstacles to incorporating sustainability principles into the company’s strategiesand practices? Please select up to three

New business models


The CEO’s office

The finance function

The marketing function

The business operations themselves

A separate unit devoted to ESG issues

There is no single unit; ESG issues are spread throughout the organisation


47

4

6

12

10

15

7

(% respondents)

Within your company, which among the following departments is most likely to be in charge of setting and reachingenvironmental, social and governance goals?












57

43

35

30

24

23

21

17

16

5

3

(% respondents)

Thinking about your company’s environmental, social and governance goals over the next three years, which of the followingrepresent the company’s top three priorities? Please select up to three

New business models













47

36

32

32

30

28

25

22

16

6

2

(% respondents)

Thinking about your company’s environmental, social and governance goals over the next five to ten years, which of thefollowing should represent the company’s top three priorities? Please select up to three

We publish our ESG sustainability goals, and our progress toward meeting them, at least once a year

We do not publish such an integrated report, but plan to do so within the next two years

We have an ESG sustainability communications strategy that is part of our group communications strategy

We regularly publish a report which integrates our financial results and our progress toward ESG sustainability goals

We have a separate communications strategy for ESG sustainability issues

We publish our ESG sustainability goals, and our progress toward meeting them, on an ad hoc basis

We do not publish any information about our sustainability practices or goals

Don’t know

20

18

17

15

15

10

39

5

(% respondents)

How, if at all, does your company report its performance in environmental, social and governance (ESG) sustainability?Please select all that apply

New business models


Energy or natural resource efficiency

Number of workplace accidents or injuries

Level of waste production/means of disposal

Percentage of women in senior positions

Bribery or corruption events

Carbon emissions levels

Level of pollutants in air, water and soil related to your company’s activities

Presence of ethical/SRI (socially responsible investment) funds among the company’s shareholders

CEO pay as a multiple of other employees’ pay


39

32

30

23

17

17

15

12

5

13

(% respondents)What metrics does your company use to measure environmental, social and governance outcomes? Please select up to three


The firm’s ESG strategy is falling short of our stated expectations

The firm’s ESG strategy is meeting or exceeding our stated expectations

The firm’s ESG strategy is sufficient to meet sustainability goals in the long term

The firm’s ESG strategy is not sufficient to meet sustainability goals in the long term

In the past three years our firm has set new strategies and/or business models to ensure long-term sustainability

Our firm is reviewing new strategies and/or business models to ensure long-term sustainability

In the next three years our firm will set new strategies and/or business models to ensure long-term sustainability

592434216

6372810 316

4317243616

6102222248

4518203519

447224222

636164127

(% respondents)

To what extent do you agree with these statements about your firm’s approach to sustainability?Please select one answer for each statement

We have reviewed the case for shared value and implemented changes to incorporate it into our existing strategies and/or business models

We have reviewed the case for shared value and have drawn up new strategies and/or business models with a specific focus on shared value

We have not reviewed the case for shared value but we intend to in the next three years

We have not reviewed the case for shared value and at this time we do not intend to

We have reviewed the case for shared value and did not find it more compelling than our current ESG approach at the current time

We have not reviewed the case for shared value but we intend to in the next year


The shared value approach has not appeared on our agenda

Don’t know

28

21

17

17

13

12

0

18

6

(% respondents)

Which of the following best describes your company’s approach to creating shared value – that is, creating long-term valuefor various stakeholders in addition to shareholders? Please select up to three

New business models


The new approach enabled/will enable us to differentiate ourselves from our peers and market ourselves as environmental leaders

The new approach offers/will offer the potential to improve company earnings

Our existing approach delivered/will deliver strong results and led/will lead us to seek further ways to embrace sustainability

Our existing approach was/is not adequate in reaching our sustainability targets

The new approach enabled/will enable us to find ways out of the current economic slowdown


We have not implemented any shift in our strategy and/or business model in the past three years and do not plan to implement any in the next three years

Don’t know

42

36

26

24

18

2

19

5

(% respondents)

With sustainability in mind, what are your motivations behind any shift in strategy and/or business model that your firm hasimplemented in the past three years or plans to implement in the next three years? Please select up to three

New business models


United States of America

India

South Africa

Brazil

United Kingdom

Russia

Mexico

Singapore

China

Italy

Australia

Canada

Germany

France

Hong Kong

Portugal

Spain

United Arab Emirates

Finland

Greece

Nigeria

Pakistan

Romania

Sweden

Other

11

11

7

7

7

6

5

4

3

3

2

1

1

1

1

1

1

1

1

1

18

2

2

1

1

(% respondents)In which country are you personally based?

New business models


Asia-Pacific

Western Europe

Latin America

North America

Middle East and Africa

Eastern Europe

26

24

15

13

13

9

(% respondents)In which region are you personally located?

New business models


United States of America

India

United Kingdom

South Africa

Mexico

Brazil

Russia

Canada

Germany

Australia

France

Hong Kong

Netherlands

Italy

Singapore

Sweden

Portugal

United Arab Emirates

Argentina

China

Finland

Greece

Nigeria

Pakistan

Spain

Other

21

10

7

5

5

4

4

3

3

2

2

2

2

2

2

2

1

1

1

1

1

1

1

1

1

15

(% respondents)In which country is your company’s global headquarters located?

New business models


Western Europe

North America

Asia-Pacific

Latin America

Middle East and Africa

Eastern Europe

27

24

20

12

11

6

(% respondents)In which region are your company's global headquarters based?

Professional services

Financial services

Manufacturing

IT and technology

Energy and natural resources

Entertainment, media and publishing

Healthcare, pharmaceuticals and biotechnology

Education

Construction and real estate

Logistics and distribution

Automotive

Government/Public sector

Consumer goods

Retailing

Transportation, travel and tourism

Agriculture and agribusiness

Telecoms

Chemicals

22

14

10

2

2

1

9

6

5

5

4

4

4

3

3

3

3

3

(% respondents)What is your primary industry?

New business models


Less than $100m

$100m to $500m

$500m to $1bn

$1bn to $5bn

$5bn to $10bn

$10bn or more

47

17

9

11

8

9

(% respondents)What are your organisation's global annual revenues in US dollars?

CEO/President/Managing director

CFO/Treasurer/Comptroller

CIO/Technology director

Other C-level executive

SVP/VP/Director

Head of business unit

Head of department

Manager

Other

5

43

4

2

5

13

9

7

10

3

(% respondents)Which of the following best describes your title?

Board member

New business models


General management

Strategy and business development

Marketing and sales

Finance

Operations and production

Customer service

Human resources

Information and research

Risk

R&D

IT

Legal

Procurement

Supply-chain management

Other

63

60

24

18

16

12

9

8

8

7

7

5

5

5

3

(% respondents)What are your main functional roles? Select all that apply

Male

Female

89

11

(% respondents)Gender

New business models


The Economist Intelligence Unit consulted the following sources when preparing this report:

l The UN-Global Compact CEO Study on Sustainability 2013: Architects of a Better World, Accenture, September 2013

l Trends in Sustainability Disclosure: Benchmarking the World’s Stock Exchanges, CK Capital, October 2013

l Sustainable Investing: Establishing Long-Term Value and Performance, Deutsche Bank, June 2012

References

l Measuring Shared Value: How to Unlock Value by Linking Social and Business Results, FSG, 2012

l Carrots and Sticks: Sustainability reporting policies worldwide – today’s best practice, tomorrow’s trends, KPMG Advisory, the Global Reporting Initiative, and the Centre for Corporate Governance in Africa, 2013

l “Creating Shared Value: How to Fix Capitalism and Unleash a New Wave of Growth”, Michael E Porter and Mark R Kramer, Harvard Business Review, January 2011

While every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd. nor the Enel Foundation can accept any responsibility or liability for reliance by any person on this white paper or any of the information, opinions or conclusions set out in this white paper.

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New business models: Shared value in the 21st century

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Transcript of New business models: Shared value in the 21st century