Climate change, social inequality, privacy, responsible production and consumption are popular themes in the goals and objectives of governments and corporations. In this article, Precious Anyanwu, Schulich School of Business exchange student to ESSEC Business School, explores an idea on how choosing the appropriate community is an integral factor in building the foundation for upholding sustainability.
The Opportunity with Communities by Precious Anyanwu.
Within the past year, in the wake of the COVID-19 pandemic that forced one-third of the global population into lockdown, each of us has grown accustomed to the rigour and ease of interconnectivity. Some common experiences beg the questions—are you calculating time differences? Making breakfast during your 9 am meeting? Is your mic on? Do you have an extra mask?
Before the pandemic, physical interaction and togetherness were the order of the day. But with practices like social distancing, self-isolation and social bubble, there was an explosion in the adoption of digitization initiatives in companies. Prior to this, we could say the effects and range of interconnectivity were relatively understated. COVID 19 revealed how often everyday exchanges occur—be it human movement, trade of goods and services or good ol’ conversations. In this regard, globalization in its entirety was set on the stage. The beauty of globalization lies in this interconnectivity that is characterised by communities, and the importance of recognizing and understanding one’s community, was one of the realizations of the pandemic. As we learn that our choices and actions could affect people other than us, directly and indirectly, community becomes a central focus to the way things work.
As the world resettles into a new normal, there is a burgeoning era of economic reactivation and companies have a choice on the extent to which their communities permeate their organizational strategy and culture. In a period where climate change and social inequality are no longer a nice-to-have but a must-have, it is necessary that each company plays a role in reducing the impacts of these externalities. As companies act on offsetting their negative impacts, recognizing the appropriate communities affected by one’s business objectives becomes paramount—an argument I believe is the key to avoiding green or social washing. However, the question is then “how do you identify the appropriate community?”
Whilst community is society, the boundaries are imprecise, so it is vital to identify this as a starting point. Due to the broad nature of the community, stakeholder theories have emerged that attempt to breakdown the different parts of society and assist managers to pursue business goals more directly. Friedman (1970) argues that shareholders are the main stakeholders whose interests are the only factors important in achieving business goals. Freeman (1984), on the other hand, describes stakeholders as groups and individuals who can affect or be affected by the achievement of an organization’s mission.
While Freeman’s definition does not exclude shareholder value, it attempts to broaden the view of business managers and provide a less limiting outlook on ways a business could succeed. Studies have shown that endorsing stakeholder theories is not mutually exclusive to achieving business goals. For example, Margolis & Walsh (2001) examined the relationship between corporate financial performance (CFP) and corporate social performance (CSP) and found more positive relationships in their studies (as cited in Smith, 2003). However, it is important to understand what is considered as CSP to ensure that companies’ intentions are viewed as relevant from the perspective of CSR critics and researchers, ESG Fund managers and the sustainable finance industry.
Saving Humans, the Planet, and the Business—the Unilever Case
In the present-day context and assuming the common business goal is economic recovery through change, the power of community lies in its position of having social and environmental needs that a company could solve. Some researchers label this concept as “social innovation,” where a company identifies a social need as a business opportunity. One of such examples is the growing investments in electric cars where the specific need is reducing carbon emissions. Generally, the technology industry has various social innovation applications that popularly address convenient social needs. They identify solutions to problems and by understanding the nature of social needs, it might be easier than incorporating a social need into your business. In other words, identifying a social need as a business opportunity does not require the same intricacies as integrating solving a social need, into the core purpose of a business.
Hindustan Unilever’s Project Shakti is a reference to the former:
“Instead of using its customary wholesaler-to-retailer distribution model to reach remote villages, the company recruits village women, provides them with access to microfinance loans, and trains them in selling soaps, detergents, and other products door-to-door.
More than 65,000 women entrepreneurs now participate, nearly doubling their household incomes, on average, while increasing rural access to hygiene products and thus contributing to public health. These social gains have been met by business gains for the company: As of 2012, Project Shakti had achieved more than $100 million in sales. Its success has led Unilever to roll out similar programs in other parts of the world.” (Rangan et al., 2015)
Leveraging the Power of Community
The first step in leveraging the power of community to achieve business goals is to understand which stakeholders are relevant to the specific business goals. Stakeholder salience theory supports this as the fundamental starting point, arguing that to achieve certain goals, or because of perceptual factors, managers pay certain kinds of attention to certain kinds of stakeholders (Mitchell et al.,1997). This is important in today’s world of competing priorities where customer-centric companies could value carbon emissions over customer privacy, or retail corporations valuing philanthropy over its sourcing methods.
The rationale for making these decisions may not relate to materiality where one impacts more people than the other; but that the other directly targets its user or customer base. Some industries such as technology and consumer goods measure and focus only on their carbon emissions mainly from their operations which are referred to as Scope 1 and 2 emissions. In contrast, they may completely ignore the environmental impacts associated with their use of products which is referred to as Scope 3 emissions and in some cases, these may represent the largest proportion of a company’s carbon footprint (Environmental Protection Agency, n.d.).
For companies operating in the consumer goods space, this may include packaging of their products and how the end-user disposes of it. Understanding that there are various boundaries to a company’s environmental and social impact, it therefore becomes important to evaluate the company’s entire value chain, assess the impact of each activity and position the company to actively mitigate negative externalities. The importance of this analysis is to recognize the key points that serve as business opportunities, well enough to establish a measurable connection to its impacts from CFP and CSP perspectives. These assessments could serve as guidelines to companies who truly integrate sustainability as part of their strategy and are seeking to have impactful sustainable strategies within their communities. Hence, adopting value chain environmental, social and governance (ESG) analysis will also serve as a foundation for avoiding any real or perceived green and social washing tactics.
A subsequent process is to maximize interactions amongst members of the consumer community by continued stakeholder engagement. The process can be likened to achieving brand engagement and awareness amongst target markets, but in this case, the business strategy would involve building trust with consumers by promoting transparency about an organization’s operations.
Transparency embraces conversations about the companies’ ESG obstacles as well as the efforts towards reaching the essential levels of sustainable operations. And in these honest conversations that provide unbiased access to information, innovation to problem-solve will occur to meet the challenges. Through these interactions, which have been made easier with faster and broader connection channels, corporations gain insights from their communities into areas of improvement and focus that could support the role of saving humans, the planet, and their business goals.
The role of the growing financial community
While identifying stakeholders and the influence of transparency have been recognized, the importance of the research within the equity and debt markets is a central stronghold to achieving economic reactivation. The conscious investor community from the demand-side has propelled ESG, Impact and Responsible Investing as defensive positions in the stock markets where their investments reflect choosing to do good. ESG Metrics are evolving and relied upon to accurately quantify the social and environmental impacts of a company relative to its peers and industries. Hence, validating the successes of CSP.
To establish a reasonable baseline, I propose a rule of thumb that if you can’t quantify the impact, you didn’t choose the right stakeholders as it should reflect directly on the company’s financial performance. Even the debt markets have been making commendable strides. Sustainable Finance has set out to manage green, sustainability-linked, and social bonds that provide funding to projects deemed to be of the right standard. It is estimated that the green, social, sustainability and sustainability-linked bond market issuances reached US$600 billion in 2020, up 53% from 2019 (Sustainable Bonds Insight, 2021).
As this is indicative of strong investor interest in sustainability, the rise in these types of issuances serves to not only convince communities within the financial sector of the validity of rewards associated with investing in corporations with an impact but encourages more corporations to ethically operate within the sustainability space.
The Opportunity with Communities: The Impact of Interconnectivity
Although we appreciate interconnectivity as the beauty of globalization, we also highlight its risks. However, the risks are mostly seen as limitations when corporations prioritize cost over safety and sustainability. The supply chain, as one of the systems hit the hardest by COVID 19, exposed both the weaknesses and strengths of interconnectivity. It showed how interdependent countries are, but it is important to note that a company or country’s interpretation and stance of interdependence depends on what matters most to them.
Cost, while an important factor in choosing sustainability and safety, follows the theories of demand and supply. If there are more companies specializing in certain areas, such as in sustainable manufacturing, there will be lower costs—a lesson from the over-concentrated global manufacturing system. In the same way interconnectivity led the efforts in COVID vaccine research that is conceivably propelling economies on its path to recovery, likewise a collective action to align business objectives with human and planet protection has boundless possibilities.
“Why do that?” is no longer the question corporations are asking themselves. A deeper understanding of the world economy, trends and key events adequately answer the question. The environmental, social and governance risks are looming with disregard for climate change and social inequality. If companies choose to commit to the “how do you identify the appropriate community” question posed at the beginning of this article, they could achieve the balance between sustainable integration and economic interdependence.
Through the article, I reference the possibility of business goals being achieved when companies’ motives are aligned with the needs and opportunities communities provide. An integral part of achieving the targeted CFP rests on the ability to recognize which communities are best served with the company’s existing resources and mission. And in such a time where companies might have the right intention but no solid direction on how to be sustainable, the recognition process is even more important.
Recent developments have shown that the commendable increase in the number of sustainability programs amongst the world’s largest companies is being matched with an increase in environmental degradation (Barnett et al., 2021). As more companies invest in sustainability initiatives with the sole purpose of profit maximization and good reputation momentum, there is a greater likelihood to miss the social needs that will matter relative to the industry and company.
In most current cases where major environmental and social issues such as the species extinction of life below water and life above land are not being sought after by major companies, it is imperative to re-evaluating the company’s value chain. The importance of leveraging the power of community lies in the chances companies create for themselves to pursue and act on their objectives to combat climate change. The choices could be described as a form of self-regulation which is being increasingly adopted by companies in reaching their sustainability goals. As the fast fashion industry is bound to teach us, increasing green consumer consumption does not directly translate to lower temperatures; the same way recycling cannot be the solution to increased production and consumption.
The opportunity with communities is about choosing a social need that a company is equipped to solve, and by defining a community relative to a corporation’s use of resources, saving humans, the planet and the business becomes possible. Also, the importance of the financial community cannot be understated as they serve to quantify the rewards and impact of CSP to CFP.
As we are experiencing the pros and cons of interconnectivity, we are given the right circumstance to align focus and goals to our communities. Community is made up of the suppliers, employees, customers, investors, governments, and its power has gone beyond the belief of moral obligations to contributing to the bottom line. Each stakeholder has a role to play. Will you play yours?
- Link up with Precious Anyanwu via LinkedIn
- Read a related article Post-Disaster Recovery: The role of CSR in empowering local communities
- Discover ESSEC Business School, France-Singapore-Morocco, and Schulich School of Business, Canada.
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