3 Reasons Businesses Should Focus on Social Impact
By Jamie Lee | June 5th, 2018
- There is increasing demand for businesses to make an impact
Businesses are currently facing increasing pressure from stakeholders to think more about how they can address social and environmental issues. First of all, employees, especially millennials, want to experience a greater sense of purpose in their work and make an impact on society. Customers are becoming more intentional with their purchases and seek companies that make an effort to drive social change. Investors are becoming more cognizant of the long-term benefits of implementing social change into the core business model. Investing for a purpose is becoming more popular as people seek to invest in opportune areas such as clean energy.
2. Businesses can bridge the gap to achieve SDGs
The UN has 17 Sustainable Development Goals (SDGs) that include ending poverty, providing quality education, and combatting climate change. These goals are seemingly unattainable, and probably are without the involvement of the private sector. In fact, the annual gap between achieving these SDGs and the current available funding could be up to $2.5 trillion – an amount that can only be satisfied if addressed by the private sector. Traditionally, businesses have prioritized the maximization of shareholder returns and have regarded societal challenges as a problem best left to the government and NGOs. Business involvement in contributing to social change has been limited and focused primarily on corporate giving and CSR initiatives. However, these methods of tackling societal issues are not sufficient in truly achieving the SDGs.
When businesses push social impact to the CSR department, they make social contributions seem like an expense rather than an investment that will yield returns. As a result, CSR initiatives are not sustainable or scalable. Instead, businesses can integrate social impact into their core operations; for example, by making changes in their supply chain or even leveraging their current core capabilities.
3. Embedding social impact into core business can be beneficial in the long-run
Embedding social impact into core strategy will not only lead to scalable and greater societal impact but also greater shareholder returns in the long-run. For example, social impact can be measured using Environmental, Social and Governance (ESG) Criteria which are used by socially conscious investors to screen investments by looking at the firm’s ethical impact and sustainable practices. In BCG’s study on Total Societal Impact, they looked at the link between a firm’s performance in certain ESG topics and their financials in different industries. In each of the industries they studied, they found that, all else equal, top performers of specific ESG topics were rewarded 3% to 19% higher valuation multiples than median performers. In addition, in some ESG topics, top performers even had margins that were up to 12.4 percentage points higher than median performers. The link between ESG performance and financial performance is an indication of the benefits of embedding social impact into the core business model. However, there are also other benefits that are not included in financial performance such as access to new markets, increased innovation, reduced costs, decreased risk in supply chains and brand loyalty.
One way to embed social impact into a firm’s core strategy is by integrating it into its supply chain. Doing so can help to reduce costs and dependency on select distributors and suppliers. For example, Mars Incorporated is a leading food manufacturer with a portfolio of brands including M&Ms and ALTERRA Coffee. Mars is confident in the sustainability of its cocoa supply because they partner with NGOs around the world that work with small shareholder farmers. These NGOs work with farmers to help them improve crop yields, receive a fair wage, address human rights issues in supply chains and minimize the effects on the environment. This approach is beneficial for local farmers, the environment, and Mars – since it decreases risk in their supply chain.
On the other hand, H&M is an example of a company that has neglected to consider the social impact of its business strategy and supply chain. This fast fashion giant focuses on low-priced and low-quality clothing that is often quickly disposed by customers once the new trend arrives. The emphasis on maintaining a fast supply chain has led to both environmental deterioration as well as sheer negligence. For example, H&M recently released an image of a young black boy wearing a hoodie that read “coolest monkey in the jungle”. This mistake was met with great backlash, forcing H&M to remove the image from their website and the item from their stores, illustrating how disregard for social impact is no longer acceptable. In fact, H&M’s negligence is catching up with them- its stock price dropped by over 40% in the last six months, it is closing an astounding 170 stores this year.
Thus, firms need to consider rethinking their core business to determine how they can use their key competencies to make a positive impact in order to satisfy increasing demand for purpose, bridge the gap between the public and private sector, and even reap benefits in the long run. It is critical that the private sector shifts away from the CSR mindset in which businesses are removed from social causes. Instead, businesses must embrace the problems that matter most to them and develop scalable ways to do good business. After all, there is nothing wrong with profiting while doing good.
 United Nations Conference on Trade and Development, World Investment Report 2014: Investing in the SDGs: An Action Plan, 2014.
By Jamie Lee: Jamie is a student in the Rotman Commerce program at the University of Toronto. She hopes that once earning her business degree, she will be able to make an impact in the education sector to provide an opportunity for all young minds to flourish. She loves meeting new people, travelling and learning about different cultures and languages.