Sustainable Development

Doing good the right way can grow your business. Here’s how

The hand of a farmer is pictured as she harvests rice on a field in Lalitpur, Nepal October 26, 2016. REUTERS/Navesh Chitrakar - D1BEUJDUFBAB

Integrating social impact into the business model creates sustainability Image: REUTERS/Navesh Chitrakar

Wendy Woods
Vice-Chair, Social Impact, Climate and Sustainability; Managing Director and Senior Partner, Boston Consulting Group (BCG)
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Sustainable Development

In my decades as a strategy consultant, I’ve seen companies grapple with everything from cutting costs to finding new sources of growth. I’ve also helped them in their efforts to tackle challenges such as poverty and climate change, often channeled through CSR programs. Yet CSR will never be enough to make a real dent in big global problems. Only when companies harness their core business assets will they be able to make a measurable difference—both to society and to the success of their businesses.

The problem with a CSR program is that it remains just that—a program. It often comes with extra costs and its growth is limited. It may be the first thing to go when the going gets tough. Pursuing social impact through a CSR program, however well intentioned, also restricts the benefits that can be fed back into the enterprise.

Helping core assets

Integrating social impact into the business model has a very different effect. When a company uses its core assets—supply chains, manufacturing processes, or distribution networks—the game changes. Fully integrated into corporate strategy, social impact enhances operational efficiency and creates the ability to expand into new markets or to acquire new customers and segments.

Take PepsiCo. Its global supply chain includes the smallholder farmers who provide the commodities—such as potatoes—essential to many of the company’s products. Without these farmers, PepsiCo has no consistent supply of high-quality raw materials. So when it helps farmers increase their yields and earn more, PepsiCo is also strengthening its agricultural supply chain.

This is the thinking behind the company’s Sustainable Farming Initiative, which promotes agricultural best practices, workers’ rights, and environmental sustainability. PepsiCo’s goal is to reach more than 7 million acres by 2025, representing 75% of its agricultural spending.

Mutual benefits

For PepsiCo, social impact and business success are inextricably linked. When farmers thrive so does PepsiCo. It’s something that at BCG we call Total Societal Impact (TSI). TSI encompasses all the ways in which a company influences society and the environment.

My team at BCG and I recently conducted a comprehensive study of how companies in five industries—consumer packaged goods, biopharmaceuticals, oil and gas, retail and business banking, and technology—are integrating the pursuit of societal impact into their strategies and operations. Our research included a quantitative analysis of more than 300 organizations, using metrics on company performance in environmental, social, and governance (ESG) topics.

We found that nonfinancial performance in certain ESG areas had a statistically significant impact on company valuations and margins. All else being equal, companies that outperform others in critical social and environmental areas achieve higher valuations and higher margins, while also building sustainable economies and strengthening local businesses and communities.

Business benefits

The benefits of embracing TSI are considerable. In our research we found, for example, that in the consumer goods industry, top performers on TSI when it comes to inclusive supply chains had gross margins 4.8 percentage points higher on average than for median performers. In the biopharmaceutical sector, the strongest TSI performers demonstrate a 12% premium on their valuation compared to their industry median, and those that do most to expand access to medicines have an EBITDA margin premium of 8.2 percentage points. This is where TSI meets TSR (Total Shareholder Returns).

Of course, TSI means different things to different companies. And if a business tries to address problems in a way that is not linked to its commercial operations, it cannot do much to solve those problems. For example, an insurance company that wants to tackle poverty lacks the capabilities to improve nutrition in poor communities. On the other hand, it could develop micro-insurance services for the smallholder farmers in those poor communities, helping them increase yields and afford better food for their families.

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Relevance is key

There is no one-size-fits-all solution here. Companies must start by selecting a small group of areas relevant to their industry and business model to which they can apply their expertise and assets to achieve a meaningful, positive impact.

It makes sense, for example, for Microsoft as a leading technology company to focus on digital inclusion by increasing Internet access. As part of its Rural Airband Initiative in support of closing the nation’s rural broadband gap by 2022, Microsoft is directly supporting projects to bring broadband access to 2 million rural Americans.

Closing the gap will not be easy. It will take a range of technologies, from fiber and fixed wireless to satellite and TV white spaces (a technology that leverages unused spectrum in the UHF television bands). However, if Microsoft brings innovation, technological knowhow, and seed capital to this problem, it can help fix it more quickly. Meanwhile, with more Americans becoming potential customers for Microsoft’s products and its employees gaining new skills and insights, the company benefits. This is not about adding cost—it is about doing business in a smarter, more innovative way.

This is not adding cost — it about doing business in a smarter, more innovative way

Today, as it becomes clear that governments and nonprofits cannot alone solve big global problems, TSI could represent a powerful force for good. By the same token, however, companies cannot act alone. Partnership and collaboration are critical. Partners offer complementary capabilities such as market knowledge and strong relationships with local governments. They also provide a credible voice when it comes to communicating the company’s impact.

Widespread adoption of TSI cannot come fast enough. Big global challenges are simply not going to disappear while we take a business-as-usual approach. But when the private sector—working with NGOs, governments, and civil society—brings its skills, expertise and operational know-how to bear on a problem, solutions will emerge more quickly. And when companies view the world through a TSI lens, their social and environmental performance will not only benefit people and the planet—as the data demonstrates, TSI is a powerful driver of business value.

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