Positive Impact. What does it mean and how can we make it possible?
Following the Positive Impact Summit 2017, Eduardo Tugendhat and Alexandra Britton from Palladium's Thought Leadership Team explore the major themes and systemic approaches we need to consider to realise economic and social value for businesses and society.
There is a growing recognition that solutions to business and development challenges are inextricably linked. One the one hand, we’ve seen that no single country, institution or organization can address them on their own. Challenges like growing inequality, widespread poverty, and limited access to health and education are threats to the global market system and arguably undermine the fundamental beliefs in market-based global growth and capitalism. Corporations are beginning to tackle these challenges, not because development institutions have failed, but because their own legitimacy, growth and shareholder value depend on it.
While most regions have experienced overall economic growth and the number of people in extreme poverty has declined remarkably in recent decades, large population segments are being left behind and often marginalized. This is a pervasive issue in emerging and advanced economies alike, where we see high levels of income inequality, decreased social mobility, and the decline of the Middle Class in the US, Latin America, and East Asia. Since inequality dampens investments and intensifies financial and political instability, it is even more important for corporations to step in and help develop long-term solutions to these challenges. The most enduring Positive Impact solutions will generate transformative economic and social value creation for those in greatest need while also providing measureable returns to the companies, governments and financial institutions that co-invest in them.
Large-Scale Development and Business Challenges
Palladium’s Positive Impact Summit reviewed specific major development issues which also represent vexing business challenges when seen through commercial lenses. One such example was the “paradox of the starving farmer”. From the development perspective, many of the poorest and most undernourished people in the world actually work on farms or as landless labourers. In Uganda, for instance, over 70% of the population depends on agriculture, usually eking out a precarious subsistence from tiny plots of land. Despite growing food crops such as maize, about 10.7 million people or approximately 30% of the total population suffer from severe undernourishment. In sectors like cocoa, the average farmer in West Africa is 51 years old in a region where average life expectancy is 60 years old. From the perspective of food companies, sustainability of theirs supply chains may have started as a way to enhance their brand image. However, they are beginning to realize that sustainability starts with a sustainable farmer and a system that incentivizes the most efficient use of land and water while minimizing waste and environmental damage. Unless the system changes fundamentally in ways that all actors benefit, the supply chain for huge companies like Mars and Barry Callebaut will crumble while farmers continue to be trapped in a cycle of poverty.
An estimated 4 billion people have less than $3000 USD/year in local purchasing power, many of whom live in rural, difficult to reach locations. Inadequate distribution systems prevent supplies and services, especially in health and finance industries, from reaching these populations, contributing to an underserved market and ongoing social, health, and economic issues.
Another pervasive issue is the market gap between supply and demand for labour and skills. Companies, especially in fast-growing developing country markets, complain their growth is constrained by the difficulty and cost of finding qualified human capital. Simultaneously, students and unemployed individuals struggle to identify viable job opportunities and turn to the informal economy in areas like Latin America and South East Asia.
Challenges Present Market Opportunities for Companies
These seemingly intractable problems also represent business opportunities for companies looking to capitalize on the economic value (for all actors) from addressing systemic inefficiencies. At the Summit, we heard from chief sustainability officers, experts, and CEOs from various industries who all agreed on one key point: new approaches are needed to pursue and effectively implement these opportunities. Professor Robert Kaplan’s keynote speech emphasized both the need for systems-based solutions to delivering Positive Impact in order to transform an inefficient, dysfunctional equilibrium into a new, sustainable ecosystem that offers increased social, economic and environmental value for all actors. Shared Value is a generally accepted concept, but many organization have struggled with effective execution and scaling. Implementation of enduring and measureable Positive Impact is where Palladium excels. The question is how?
Delivering and Scaling Positive Impact
All Palladium projects generate Positive Impact. What we are working to advance is how Palladium engages the enormous resources, know-how and market access offered by the private sector. We are developing two approaches to enhancing the effectiveness of working in multi-actor systems that involve the private sector: 1) business-led systems and 2) Positive Impact partnerships and alliances.
Both approaches provide viable paths to intentionally create enduring social and economic value for all actors in the system. As Mark Gunton, CEO of the Clinton Giustra Enterprise Partnership, said during the Summit, “To make Positive Impact really work you need to be able to scale and replicate.” In the past, companies have struggled to implement and sustain Shared Value strategies for a variety of reasons, including but not limited to:
- Pre-competitive coalitions (especially in pharma and chemical industries) establish rules of the game, but don’t create enduring social and economic benefits for local citizens;
- Companies cannot obtain third-party funding and don’t want to absorb all the risk involved in improving an ecosystem when they won’t receive all the benefits;
- Insufficient trust and understanding among actors in the system.
An important distinction in these approaches is long-term versus short-term thinking. Unlike traditional donor or corporate social responsibility projects, there is no end in sight. Rather, the value co-creation represents a transformation that is both self-sustaining and embedded within the system’s underlying incentives. By identifying opportunities to transform inefficient local equilibria into Positive Impact ecosystem, we are, in effect, addressing the first barrier to sustainable change.
Financing, Governance, and Measurement
Both of these approaches involve designating a third-party “Catalyst” to build relationships/linkages for the new system, secure co-financing, and sustain the ecosystem through measurement, monitoring and governance, all vitally important building blocks for success.
Seed funding and blended finance can catalyze scale by de-risking ventures and new systemic approaches, ultimately helping private sector capital flow more quickly into market gaps. By bringing in a third party, neutral Catalyst (such as Palladium), we can establish an economic model that works for all actors in the ecosystem, an essential and new component in this field. Additionally, the Catalyst can establish linkages among actors, identify third-party capital, and lead the co-creation of the shared agenda to build trust and understanding among all the stakeholders.
Governance structures are also key to establishing mutual accountability and transparency, ultimately building trust and shared understanding of goals among different actors in a system. The Catalyst can oversee and enforce these mechanisms to ensure alignment and foster buy-in from all actors.
As for measurement systems, Professor Mark Kramer said “I can’t stress enough how important shared measurement is. The only way you can learn and improve is to look at the same measurements.” In developing practical metrics and indicators, it is vital to move away from beneficiary-focused indicators of past donor or Shared Value projects and measure commercially relevant indicators that quantify costs and benefits to all actors. Similar to the ecosystem itself, impact measurements are interdependent. With Syngenta’s Good Growth Plan, for instance, the economic value created for smallholders (e.g. increased total sales, increased farm yield, increased gross margins) actually becomes the social value Syngenta is creating.
Delivering Positive Impact in Practice
Business leaders are beginning to recognize the need to integrate Positive Impact principles into the core of their strategy to maintain their social license to operate in the future. Palladium’s systemic approaches provide a way to turn this into a reality in both emerging and advanced economies. Now is the time, as Kaplan said, “to be clever and find where inefficient equilibria are.”
For a deeper insight into how Palladium makes Positive Impact possible and transforms inefficient equilibria into sustainable and functioning ecosystems, take a look at our Positive Impact case studies: