Many organizations have a clear vision for sustainability. But the daily reality is also that strategic, tactical and operational decisions are approached only financially. Difficult decisions are often postponed because insufficient “impact” information is available. And this causes decision-makers choice stress. In this article, we advocate an integrated view of scenario analysis in which organizations not only calculate financial future scenarios, but also quantify their other important impacts and then factor them into their decisions. With a more complete picture, executives can make better quality decisions.
By: Martin de Jong and Roel Drost
Impact thinking
Globalization and capitalism have brought us enormous benefits: efficiently operating markets, prosperity and innovation. This does come at the expense, for example, of the environment. Many agree that the system has some serious shortcomings. In our current system, optimization takes place primarily along the financial dimension. And now that we are dealing with a strongly growing world population and we are slowly but surely eating up planet earth, our 1-dimensional economic model is “out of date. We are therefore slowly but surely moving more and more towards a new economy in which ‘multi-capitalism’ is central: in such a situation, impact thinking is central and looked at more broadly than financial value.
Many organizations have been working on the topic for years. They are expected to have a positive impact on their environment. More and more organizations have a social “purpose” for this reason. A few years ago we saw that purpose thinking was limited to social enterprises, but nowadays we see that many multinationals are moving in a similar direction. This leads to organizations also increasingly wanting to have insight into their non-financial value creation, the actual effect of their purpose.
In many organizations, this is still in its infancy. While finance departments are calculating with many people and resources, social impacts are “estimated” by a few. The effect is that social impact is approached like compliance. Risk, laws & regulations and reputation are then the components of the societal element in their future scenarios. Externalities such as the effect of climate change on the organization are often not even considered. At best, social impacts are expressed as an additional qualitative indicator, as part of the advice to directors. With this, organizations are missing a great opportunity to be able to steer much better on the social effect in both decision and implementation. Within management and boards this is often felt, but not acted upon. The result is decision stress, especially for the major decisions that are taken only a few times a year.
Impact scenarios as a decision model
The traditional business case therefore deserves an important update: for better quality and future-proof decisions, it is necessary to add the social dimension. This means that organizations must get to work on calculating their social and environmental value creation and make it part of the decision criteria. Some possibilities:
- Operational environmental costs and benefits: in what way is the best eco-optimization achieved? This also provides additional insight into risk analysis. Examples of organizations that apply this (in part) are: Philips, Bam and Nike.
- Impact scenarios are often used for external accountability on a project or policy. It is also used in reputation management and stakeholder management, for example, to substantiate specific issues. Examples of organizations applying this alongside governments are: Solidaridad, Heineken and Vodafone.
- More and more public interest organizations required to report on sustainability are moving to reporting on social impact and scenarios. This has begun the next maturity phase of sustainability reporting. Examples of organizations applying this (in part) are: NS, AkzoNobel and Schiphol Airport.
Using future scenarios to inform decisions is already fairly common within many organizations. Sometimes as scenario planning, sometimes as options or sometimes simply as advice. And more and more often we see the expected social effects, both positive and negative, as part of a scenario. Often as advice to include in the decision, qualitatively and risk driven. But also sometimes as a ‘traffic light’ model where Red, Orange and Green show the expected social effect. The Social Cost and Benefit Analysis (SCBA) carried out by governments for major, often infrastructural, decisions is an example of this. Still too often as a qualitative model and if quantification is used at all, it is general and difficult to compare to base decisions on.
Monetize
We advocate the next step. Monetization of social and environmental impact is indispensable in our view: this involves expressing future positive and negative impact in euros. With the great advantage that problems can be viewed integrally, with a language very well understood: money talks. An example is a recent project we carried out for a clothing company. This company wanted to get serious about sustainability and circularity. But it wasn’t sure where and how to start. The first thing we did with the company was a hot spot or center of gravity analysis (their current footprint): this provides clarity on where your impact is now: is it in the chain (producing the raw materials), own production, or is it in the use or waste phase? And which steps or materials are responsible for that? After you have that understanding, you can move on to creating scenarios. These focus on addressing the key impacts. For this clothing company, we focused on calculating four solutions, each with its own level of impact. With such scenarios -and also their cumulative impact- you can get an impression with what you can realize in the future (what is the footprint potential). Below is a graphic clarification.
Another great example comes from SAP. This organization developed internal impact measurements on and expressed in Euros. Instead of just measuring the result, the company developed what is called: ‘Cause-and-effect chains’. Most of these chains relate to HR topics. The interesting thing about the method is the link to relevant business KPIs. For example, more women in management leads to higher profits, this is part of the cause-and-effect chain for the Business Health Culture Index (BHCI). Internal policies were created to increase the impact on this cause-and-effect chain, based on real data to support the policy, with real data.
Begin with the end in mind
Ultimately, the goal of “impact thinking” should be that the finite nature of societal resources becomes as relevant as the finite nature of financial resources and is an essential criterion in all important decisions. The availability of internally valid data will be a problem for many organizations. Financial records are calculated, recorded and externally audited to 3 decimal places. Social administration, on the other hand, is still in its infancy for many organizations. Philips is showing leadership in this: since 2017, it has had its environmental profit & loss statement audited at the same level as the financial information. Not because it has to, but because Philips considers the impact information as important as the financial information.
Getting Started
Once organizations get the basics right, the battle can be made to with creating scenarios using social data. Some organizations are already doing this in reality: internal CO2 pricing, for example, is already becoming more common. Including social effects in the scenarios is ultimately a management decision. Practicalities aside, it is primarily the organization’s purpose and strategy that can inform such a decision. With a narrower but appropriate scope, support for such a decision will be found more quickly. So choose.
The choice stress that decisions bring can never be completely solved with more and better information and insights. But in strategic decisions, understanding economic effects is no longer enough. The social and environmental effects must not only be qualified, but rather quantified and monetized. To make a better decision that fits the social challenge of all organizations and their boards.
This article was previously published at: https://www.duurzaam-ondernemen.nl/roel-drost-ecochain-en-martin-de-jong-empact-minder-keuzestress-met-impactscenarios/
About the Authors:
Martin de Jong is founder of Empact, impact consultancy and works for (international) clients on CSR Strategy, ESG and Impact Valuation. He is former Director of Social Value VodafoneZiggo and Sustainable Business Manager Vodafone PLC. He is also a guest lecturer at several universities in the field of sustainable business.
Roel Drost is chief value officer at Ecochain Technologies. He works with Ecochain’s clients on providing insight into and reducing the environmental impact of products and organizations. Previously he worked at EY in the ‘climate change & sustainability team’.