The three key elements of an impact strategy

The purpose of business is to solve the problems of people and society profitably and not profit from causing problems (Principles for Purposeful Business | The British Academy). Unfortunately, there are very few businesses meeting this definition. Our economies are still organized in a way that companies that cause less problems than others are called “impact businesses” or “social enterprises”. The absurdity is that these businesses need to go through considerable effort and expense to prove that they are less harmful than others through certification and compliance schemes. An overhaul is long overdue: the cost burden should be inversed and put on those who cause the greatest damage.

Although efforts are underway to regulate a reversal (most notably in the EU) the major shift required will take considerable time. Time that we do not have. So, until regulation catches up, how can you as a business leader play your part and carve out a competition beating impact strategy? Here’s our three-step process.

Measure your negative externalities

We’re still in a situation where “impact” means doing less environmental and social damage than the industry average. It’s great to speak in positive terms but there’s little point in sugar coating our current situation. So, if you want to craft a successful impact strategy, the starting point is knowing what exactly your negative externalities are. Obviously, carbon emissions are the one that most businesses focus on, but have you considered issues like degradation of land, biodiversity and ecosystems, the use of scarce (finite) resources, the lack of a decent living standard or occupational health and safety issues in your value chain?

I emphasize value chains here, because that is what counts: we need to drive down externalities of entire value chains and not just single links. Being an exemplary business in terms of impact, but with an out of view and dirty upstream supply chain just won’t fly. Apart from the ethical considerations, the European supply chain act forces large companies to ensure that all stakeholders in the value chain meet standards. If not, they can expect fines and are liable for legal action by victims for damages.

Measuring the negative externalities of entire value chains is not an easy thing to do. Thankfully a standard exists that will help you do just that: the True Price Standard (True Price Foundation – We create standards for the adoption of True Prices). The True Price standard is a method to calculate the negative environmental and social externalities across dozens of factors and convert them into a per unit externalities price. For example, if a cup of coffee is currently sold at price X and the environmental and societal external costs for that cup of coffee amount to Y, then the price of that cup of coffee should actually be X+Y = the true price. Makes sense, no?

Now, the purpose of an impact strategy is not to just raise prices and offset your negative impacts. I hear you about plummeting market shares because you’ve priced yourselves out of the market. That is not impact. They key issue is that you want to work on preventing negative externalities and this is where the True Price standard is hugely helpful. The beauty of the standard is that each externality factor is monetized, allowing you to identify what your biggest negative impacts are. This provides an objective, quantitative method to create awareness of your biggest challenges. Once you measure, you can take much better decisions on where to focus attention and reduce your negative externalities.

Analyse and focus!

Once you have a clear view of your negative externalities, it is time to bring focus to transition efforts. As with most things in life, the 80/20 rule will allow you to quickly zoom in on where most impact can be realized. About 80% of your negative impact will be caused by 20% of factors. These are the ones you will want to focus on.

Until regulation catches up, there is no level playing field for companies that focus on minimal negative externalities. Just internalizing them will put you at a cost disadvantage. The trick is crafting a strategy to derive some competitive advantage from reducing your externalities until regulation starts to shift. Despite the additional costs that come with more sustainable business, there are several drivers of profit that you can use for your impact strategy. These are the five that we have successfully used ourselves in developing sustainable value chains:

1. Premium prices and market share. Market niches exist where customers pay premium prices for a more sustainable product. Certain clients will only accept to buy from suppliers that have their sustainability practices in order or that go beyond certification.
2. Engaging the best talent (and productivity). Sustainable businesses attract better talent, driving productivity improvements.
3. Lower risk profile. Clients engage in longer term contracts with sustainable sources instead of opportunistic buying. You’re no longer a commodity. The business is also less exposed to changes in sustainability regulation and legislation.
4. Lower cost of finance. Both equity and debt.
5. Lower cost structure. Innovative use of waste streams through upcycling and recycling. Energy and resource efficiency.

Depending on your activities and the countries you operate in, some elements may be more appropriate to include in your strategy than others. We have had great results in generating price premiums for our products and gaining market share as well as a better risk profile through less exposure to market volatility. We’ve also had consistent interest from (impact) investors wanting to finance the business over the years.

Let’s put the two dimensions that we discussed above (impact and economic drivers) into a model:

With environmental and social impact on the vertical axis and economic potential on the horizontal axis we get four quadrants. Keeping in mind the externalities as measured through the True Price method as well as the key drivers of a profitable impact strategy we can plot possible interventions in one of the following four quadrants:

• Short term traction: High impact, high economic returns. This is the low hanging fruit. An example could be to transition towards organic products that also fetch better prices. In this quadrant you would seek economic drivers that offset or even surpass the additional costs of creating impact.
• Long term strategic focus: High impact, low economic returns. Interventions and projects in this quadrant will build the credibility of your impact strategy: you’re willing to take some economic pain or substantial risks to reduce your most important negative externalities. Ideally projects in this quadrant have the potential to transition towards high economic impact in the future. Examples could be the development of an innovative product based on your waste streams. Most innovation takes place in this quadrant and so first mover advantage could also be a possible driver of future profitability. If there is little potential for financial upside, then ideally, you’d have some additional upside in the short-term traction quadrant projects, or you make a conscious decision to live a happy life knowing that you’ve substantially decreased your negative externalities and were willing to pay for it.
• Green washing risk. The low impact, high economic return quadrant. This is what most of your competitors will be focussing on. Of course, it’s fine to chase the economic return as long as you make sure that it doesn’t add to your negative externalities. But if you don’t make substantial efforts in the high impact quadrants, you risk falling into the greenwashing trap. A focus on this quadrant without major balancing activities in the high impact quadrants is insincere and has no place in an impact strategy.
• Ignore quadrant: low impact and low economic returns. Best to ignore projects that fall within this quadrant.

Align your organisation

Once you have clarified your long- and short-term priorities with the help of the matrix and crafted a compelling strategy it is time to move towards execution. They key is to ensure that impact takes as much importance within the organisation as financial results.

1. The starting point for this is to update your company’s purpose and values. Clients, employees, suppliers and other stakeholders should understand what you stand for and which standards you hold yourself accountable to. Build a compelling narrative.
2. Key performance indicators for your organization and staff need to reflect the importance of impact. Make sure that everyone has at least one impact indicator. Your TruePrice analysis will provide great inspiration to set targets. Impact should be as much a part of performance reviews as financial ones. This is the CEO’s job. If it’s delegated to anyone else, it does not get equal importance as the financial metrics: in effect the end of your impact strategy.
3. Set your transition projects in motion and reduce your negative externalities. Find the (external) technical expertise to help overcome obstacles and drive innovation. Mobilise sufficient resources to manage the change within the organisation.

Conclusion

The three steps for an effective impact strategy:

1. Measure your negative externalities.
2. Forget about a level playing field: Identify projects for maximum impact while providing competitive advantage. Avoid the green washing trap.
3. Manage organisational change and execute your transition projects.

Persist in your efforts and you’ll be part of the group of companies that drive the transition towards an economy compatible with our planetary boundaries.

If you liked this article, head over to our blog at https://p3rsist.fr/blog/ where you’ll find more articles on impact strategies, sustainable business and the challenges of running operations in complex environments.