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Achieving sustainability goals through Corporate Impact Venturing

May 2014

UK companies must rediscover the lost arts of innovation, argued the PwC annual CEO survey earlier this year. In fact, companies everywhere are under pressure to adapt to the double whammy of global competition and tightening sustainability requirements, write Maximilian Martin.

Megatrends such as the $5 trillion Base of the Pyramid (BoP) market, the$546bn global virtuous consumer segment, green growth and the rise of the circular economy, as well as a modernizing welfare state are all creating new market opportunities that combine profit and impact. But seizing them requires new products and services that combine profit and impact.

With a growing number of people expressing interest in buying sustainably, the 2010s have unsurprisingly been described as the decade of the corporate ascent to sustainability. The corporate ethics and compliance bar is being raised on a regular basis; the tightening requirements on supply chain compliance as per the UK Bribery Act and the US Foreign Corrupt Practices Act are just two illustrations of the intensifying efforts underway. Larger companies running global value chains in particular are increasingly recognized as de facto actors of development with more clients in developing countries than even large development agencies. Regulators as well as consumers increasingly expect these companies to deliver positive outcomes for groups of stakeholders that reside at the different stages of their supply chains.

Generally speaking, this is good news. High ethical, environmental, and social standards are part of Western Europe’s social contract and have produced impressive progress throughout the twentieth century. The transformational power of extending such dividends to emerging markets could be equally staggering. But higher standards also mean extra costs for companies. In the industrialized world, this approach has protected social peace and enabled high productivity. But rising competition from emerging markets, in some cases from companies that are not held to similar standards, has raised the question of how to succeed in the face of international competition, while also maintaining high standards. This is to say little of the fact that many executives reported (as recently as 2013) that they are stuck on their climb to sustainability. The way corporate social responsibility is practiced today is more conducive to aiding companies to meet some of their responsibilities than it is to acting on emerging opportunities.

To stay in the game over the long haul, companies need a way forward to identify and on-board the innovations needed to compete, while also systematically raising their social and environmental performance in the core business. CSR’s contributions to this quest are valuable, but limited; its days are counting (if not fully counted), and a clear roadmap for achieving business transformation has been missing. To help address this need, Impact Economy—a global impact investment and strategy firm—has just issued “Driving Innovation through Corporate Impact Venturing: A Primer on Business Transformation.” The goal of the report is to help businesses to innovate quickly in order to serve the BoP, green growth and the other markets of tomorrow mentioned earlier, and to build new sources of comparative advantage that are relevant to their core business.
This need should not be underestimated.

Take a company such as IKEA, the world’s largest furniture retailer. It plans to generate €45-50bn in turnover in 2020, up from €27 bn in 2012. Business growth as usual will not cut it. The company is actively seeking to update its business model to remain competitive in the wake of growing consumer demand and changing consumer expectations, rising raw material prices and more stringent ecological footprint as well as social performance requirements. This changing operating environment is motivating a need to innovate—yet this would be difficult to fully achieve in practice by only using existing resources and business innovation mechanisms.

Shared value
Many companies like IKEA are converging on a need to create “shared value” in response: the process of generating value for shareholders and stakeholders alike. This is a powerful idea. To deliver on it in scale, though, we will need efficient mechanisms to locate the right ideas and execute on them. Corporate Impact Venturing (CIV) provides one such mechanism. CIV marries corporate venture capital and positive social and environmental outcomes.

Creating new ventures and investing in existing ones with sustainable value creation logic can boost innovation, equip corporates for growing competition, and help achieve ambitious sustainability targets. Until now, the missing part of the solutions puzzle has been using venture capital to this effect.

Large corporations often find it difficult to bring innovations to market, even if their industry expertise enables companies to identify many trends and business ideas before anyone else. The mouse was invented at Xerox—and later brought to market by newcomer Apple.

Corporate venturing emerged as early as the 1960s to boost innovation capacity.

Setting up an internal corporate venturing group that invests off balance sheet, creating a dedicated external corporate venturing fund, or becoming a limited partner in one or several venture funds that follow investment strategies that are relevant to the corporation, gave corporations a way to better execute on innovation rather than see their former employees turn ground-breaking business ideas into blockbuster successes elsewhere. Yet, sustainability is now increasingly driving value, and new pathways are needed for sourcing business innovations; the logical next step is to engage in CIV.

Some companies who aim to build franchises around sustainable products are already doing this. In the clothing and footwear industry, Patagonia, a sustainable outdoor apparel pioneer, launched an internal venture fund (ie “$20 Million & Change”) last year to invest in start-ups focused on clothing, food, water, energy and waste. Launching an investment fund was “a logical step to reach out beyond the framework of the apparel and outdoor industries to do business more responsibly,” according to Patagonia founder Yvon Chouinard.

With sustainability megatrends all encompassing, Corporate impact venturing can now be applied on a broad front. Adapting to achieve compliance requirements in the face of tightening regulation is prudent, but compliance is merely a necessary condition to succeed, not a sufficient condition to create value. Marrying the logic of investments and impact, CIV is a powerful pathway to systematically engage in corporate opportunity without neglecting corporate responsibility.  

UK & NI Ireland | Sustainability


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