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The Economics of Impact | Key insights from Marc Pfitzer

December 9, 2021

Commenting on the role of business in leading the way to address social issues, Marc Pfitzer, Managing Director at global social impact consulting firm, FSG, asserts:

“We can, we should, we must.”

But while organisations are increasingly adopting this view, and “embedding purpose into their corporate strategy – not least of all, through the shared value movement”, how many are adequately linking impact to profitability? Marc says we’re “falling short”.

“We haven’t yet closed the loop on connecting societal measures with the financials of a company. And, if we don’t do this, we just won’t make it.”

Marc’s insights formed part of the Shared Value Project’s recent member session on the Economics of Impact, delivered in partnership with Shared Value Initiative Hong Kong, and featuring premium content from the Shared Value Initiative’s Leadership Summit with Harvard’s Mark Kramer and the World Benchmarking Alliance’s Pauliina Murphy.

The session acknowledged that though rapid progress is being made in improving ESG reporting by focusing on material issues, standardising measurement and monetising impact, without linking financial and societal outcomes we’re leaving significant socio-economic gains on the table; gains which could help to bring us closer to the UNSDGs and Paris Climate Agreement.

“We have a couple of realities: First, we’re not giving up on the premise of financials; and we can talk about impact monetisation and a vision of accounting systems, but right now, and for the foreseeable future, we’re not giving that up,” Marc says. “The second reality is that we have a global emergency on a number of issues; and as a result, the shift towards the strongest engine we have to address these issues – which is business.

“But the objectives we set ourselves in one (business) and the other (societal) are not connected, and it’s a growing tension. We really don’t have a choice [but to change this] if we want to [meet] both these realities.”

Marc recognises this isn’t easy, as referenced in this blog written in collaboration with Mark Kramer and Helge Mahne; as “any disruption and business transformation comes with short and medium-term trade-offs on profits and return on capital. So even if a company adopts an authentic purpose, it is extremely difficult for executives to translate it into a coherent strategy that reconciles societal and financial performance”. This is made more challenging still, without a joint socio-economic measurement system to share with internal and external stakeholders, including investors.

Marc and his colleagues believe that understanding the economics of impact can change this, by capturing how profitably a company is operating in line with its societal goals. Marc offers two practical pieces of advice:

  • Focus on the most material impact your organisation can have ie. don’t try to take on all issues, and
  • Start proactively managing the economics of impact around four profound strategic choices – (i) expanding shared value models, (ii) innovating and collaborating ways out of trade-offs, (iii) embracing trade-offs and (iv) exiting trade-offs

Marc gives the example of Mars Wrigley, a global confectionary manufacturer. A key ingredient for the company is mint, which can be sourced from two locations: North America, which is more expensive but poses few labour and environmental issues; or India, where mint is much cheaper but there are severe water depletion and poverty issues. The company could of course embrace the trade-off, and pay farmers more, but that wouldn’t address the environmental issues. So, they thought about what percentage of their cost advantage they could invest in creating change; raising yields and lowering water usage dramatically. In the first three years, they managed to close the living wage gap by 25% and water usage by 45%, balancing the cost advantage and the social advantages they wanted to create by assessing their performance in both areas along the way.

Marc points out that closing poverty gaps or living wage gaps doesn’t actually cost that much, because there are always profound inequities in systems and untapped productivity opportunities. He adds: “Companies operate in supply chains where different parties are creating value at different points of the chain, and there’s a real rationale for these partners to share in the true cost and true value of change, and to embed that in their terms of trade among themselves; and therefore collectively manage the economics of impact, which becomes incredibly powerful and authentic.”

A topic of great importance for the shared value community, the session generated many questions. For example, what about when companies try to link societal and financial impact and find them to be incompatible; will this discourage them?

“Yes! This is hard,” Marc says. “I think we’ve got a legacy of avoiding and not wanting to know because we know for example that providing healthcare to vulnerable populations in hard-to-reach places is likely not profitable, and so we’re not going to look at it. But when you start breaking it apart and seeing the relationship between [societal] outcomes and profit, you see what the levers are. There are always equations behind it, and when you understand that equation you’re in the position to make choices, and that’s when you have energy again.”

When it comes to the role of government, Marc suggests the economics of impact should start with companies and their investors, but that there’s an immense role for government to level the playing field around externalities that just can’t be innovated around, so that individual companies “don’t have to stick their neck out… when others are free-riding in the system” (in relation to living wages for example). “Embracing trade-offs in advance of legislation is something that requires industry or group power.”

And in terms of the net social and environmental impact of a company, Marc says that while the legal bar of compliance is the baseline, we should shoot for delivering even further on a higher purpose. “You can’t be purpose negative in some areas, and purpose driven in others,” he explains.

As Marc Pfitzer and Mark Kramer continue working with companies to better understand how they can engage in the economics of impact, they’re observing many opportunities to factor social and environmental impact into internal company decisions in a way that leads to better results, without higher costs. At the Shared Value Project, we look forward to sharing their insights and findings with you as this critical thinking evolves.