There is now a huge interest in the creation and development of sustainable businesses, driven by climate change, the Covid-19 pandemic, rising inequality, and the global competition for resources.
This debate has recently gone mainstream, ignited by Larry Fink’s letter to Blackrock Investors.
The reaction to this has been mixed, ranging from the positive to accusations of ‘green-washing’; a more challenging response about what changes this letter might catalyse has come from B Lorraine Smith in this blog-post.
While this debate is interesting, the more predictable responses have come from those who have seen this as an opportunity to re-badge their investment priorities; for example, see this post about ESG ETF Funds and Trackers.
While there is clear recognition that businesses can be the primary engines of economic growth, the interest in sustainable growth has sadly not been matched by the availability of strategic, tactical and operational tools of the quality required to systematically tackle the challenge.
Current responses to this challenge can be summarised as follows:
The UN SustainableGoals provide a useful overall perspective on the challenge but the broad statements of policy intent cannot easily be translated into practical delivery because many of the measures overlap with each other and there is insufficient detail for practical measurement and execution.
‘Re-wiring’ of policy goals into the roles played by key actors. For example, the approach developed by CISL is based on turning the 17 broad (and overlapping) goals into the activities of three key actors: government, business and finance, but this high-level approach still conflates the key variables and it is hard to unravel the dependencies explicitly.
‘Doughnut Economics’ is a powerful contribution to this challenge based on the idea of two limits: an ‘inner’ limit based on social sustainability and an ‘outer’ limit based on an ecological ceiling, with the idea being that sustainable development needs to focus on the area in the ‘doughnut’ between these two limits. This argues for a new ‘renegade economics’, requiring a paradigm shift which is likely to take some time.
The Triple Bottom Line approach has been around for some time, with an emphasis on three key drivers: Social (People), Environmental (Planet) and Financial (Profits) - but the problem is that most accepted metrics only cover the Financial Bottom line, and the other two drivers are still dealt with qualitatively.
Impact Investing, which has attracted many players, takes a financial capital-centric view of sustainability: it covers all asset classes (including venture, private equity, conventional lending and grants) with an explicit focus on ‘social enterprises’ (which occupy the space between traditional philanthropy and traditional business funding models). Social enterprises have been further segmented by impact investors into three classes:
‘Self-sustaining’ social enterprises where the inputs and the outputs are matched so that no new investment is required beyond the initial injection of resources.
Social Businesses where all profits generated are re-invested in the enterprise.
‘Mission’-driven propositions where lower rates of financial return are justified by the social and environmental goals of the mission.
In practice, of course, these three models only reflect specific points in a continuum of different business models; the problem is that in virtually all cases, the quantitative rationale depends on the financial metrics because the broader set of meso-economic vectors are not explicitly built into the analysis.
Our new, comprehensive and data-driven approach to tackling sustainability and resilience reflects the rigorous treatment for growth we have developed over the last decade, based on the diffusion-theory based Triple Chasm Model and the definition of a Meso-economic Vector Model for growth. Using this framework, we can apply sustainability metrics and biases explicitly to each of the 12 vectors, so that the notions of sustainability and resilience are embedded at the heart of the treatment rather than treated as an add-on. This approach works as follows:
We assess 4 External Vectors covering the following:
Market Space Definition: we define market spaces and market-space-centric value chains incorporating sustainability considerations ‘at source’
Proposition Framing: we apply sustainability lenses (with metrics) to propositions which explicitly recognise the positive and negative sustainability impacts for each component in the value-chain
Customer Definition: we apply sustainability considerations which can shape the behaviour and number of customers
Go-to-Market Drivers: we explicitly apply sustainability biases to all the key go-to-market criteria, so we can clearly see the impact of bias at this level
We assess 6 Internal Vectors covering the following:
Contingent Technology Deployment: we explicitly apply sustainability biases to the deployment options, which may change strategic priorities
IP Management: we explicitly apply sustainability biases to the IP choices and priorities
Product or Service Synthesis: we explicitly apply sustainability biases to the overall shape of the product or service, which may radically re-shape a product
Manufacturing and Deployment: we explicitly apply sustainability biases to the manufacturing and deployment variables, for example supply chain management
Human Capital: we explicitly apply sustainability biases to the key variables, including team composition and culture
Financial Capital: we explicitly bias the sources of funding, for example the financial trade-offs associated with different types of funding, looking more directly at investor motivations rather than any ‘window-dressing’, as discussed earlier
We assess 2 Trade-off Vectors covering:
Commercialisation Strategy: we explicitly apply sustainability biases to all 12 vectors based on the explicit ideological stance which governs the overall commercial considerations
Business Models: we apply any sustainability biases which can change business model priorities
Our new approach to defining, measuring, and assessing sustainable growth provides the first systematic treatment which addresses the sustainability challenge head-on: in particular it allows SMEs, investors, large corporations and policy makers to address the real issues without being influenced by ‘window-dressing’ or ‘greenwashing’.
Crucially, given the questions about investor bias and real priorities in the debate about greenwashing, we have extended this structured approach to address sustainability in Portfolio Management. We apply the notion of ideological stance in two ways to tackle this:
To understand the impact on the overall shape of the Product Portfolio for a single company
To understand multi-company Portfolios managed by Investors, intervention agencies and Corporate M&A teams.
We believe that we now have a unique approach to tackling sustainability in a systematic and rigorous way which can tackle any accusations of window-dressing or greenwashing head-on.