A new purpose-led economy is in the making, with purpose anchored in corporate statutes, board and leadership accountability, and business strategy. The missing link, and the ultimate proof-point of a true transition in market systems towards equity and resource regeneration, will be the ability to manage the economics of impact, and systemically, actively, and transparently connect and reconcile the financial and societal objectives of the company. This is needed not just in management and internal decision-making, but to create the basis for collaboration with those most affected by inequities and resource depletion, and for reporting effectively to a rising tide of impact-oriented investors.
In the midst of a global pandemic and unprecedented recession, purpose-led companies have the enormous potential and responsibility to advance equity and reverse deepening disparities and inequality. We have seen multiple businesses making pledges to advance more equitable markets. These are companies like a life science manufacturer with a renewed focus on health equity and access to “improve and extend lives for all patients,” or an energy company seeking to protect the environment and well-being of all populations by “producing the energy to power the global economy and improve standards of living.”
But commitments are easy to make and hard to keep. Promises to improve societal outcomes and advance equity are often abandoned in favor of maximizing shareholder returns. To truly become a purpose-led company over the long run, companies must understand how products sold, their operations and associated costs, and yes, therefore profit, close or widen inequities in our societies.
In a previous blog, we introduced the principles of managing the economics of impact, which enable companies to understand the relationship between their portfolio of activities and their financial and societal performance. This relationship can be measured through hybrid metrics that link the measurement of key societal outcomes with core financials. Disaggregating hybrid metrics by sub-population gives companies the insights to exploit positive synergies and to confront and harness trade-offs through innovation and collaboration to more profitably and effectively deliver on their societal purpose and advance equity.
Based on our work with leading companies across the globe, it has become increasingly evident that using hybrid metrics to manage the economics of impact will be essential for companies that are committed to reducing inequities and creating a purpose-led economy that creates profit and equitable outcomes for all. In this blog, we share our latest reflections on why managing the economics of impact is needed for companies to advance equity and authentically live into their corporate purpose.
The first step in managing the economics of impact is to link financial and societal outcomes in order to gain transparency on how the business currently balances potential “win-wins” or trade-offs. You cannot manage or change what you do not measure. Consider an energy company that has two core societal objectives embedded in its purpose: to lower GHG emissions from power generation (from renewables) and to provide access to energy to as many people as possible. Two principal hybrid metrics can guide that purpose: the company’s carbon-intensity of profit (CO2/profit) and the profitability of energy provided to new population segments, including marginalized groups (profit/kWh by socioeconomic groups and other forms of segmentation). Energy companies that can most profitably lower their GHG emissions and extend energy access to more people across population segments will outcompete others in their sector.
As with any company with a societal purpose, however, understanding current hybrid performance will likely surface an open secret: very little is invested towards reaching low-income groups (if at all), and doing so often comes at low or no profit. Disaggregating hybrid metrics by sub-population—be it around extended access to energy, improved health outcomes, or increases in wages paid in agricultural supply chains—will systematically show where the frontier of win-win outcomes breaks down, and where trade-offs between profits and purpose must be managed to avoid creating, maintaining, or widening inequities.
With the exception of a growing field of impact investors, corporate governance and corporate finance continue to practice a well-engineered avoidance of trade-offs. Without confronting and harnessing trade-offs, however, corporate attempts to address societal inequities will fall short, perpetuating the status quo, failing marginalized communities, and, at its worse, deepening inequities. The same is true for environmental goals, which are becoming ever more urgent as the climate crisis deepens and disproportionately affects already marginalized populations.
The road to busting trade-offs is well known, even if too rarely traveled. Businesses must abandon short-termism and be willing to ride longer cycles of investment and returns. Companies must discipline themselves to first understand and embrace trade-offs, not resist them. Once they are embraced, trade-offs must be subjected to two potential levers: innovation that changes the economics of providing the desired outcomes; and collaboration that distributes such economics amongst cross-sector partners who share a financial and/or societal interest in the equitable outcomes for all population groups.
The second step in managing the economics of impact is to understand the outcome-profit relationship and the factors that drive the status quo. Take the example of a life science company creating innovative, life-saving products, with clinically confirmed health benefits. A core hybrid metric of any company in the health care sector is how profitably it delivers on health outcomes (e.g., quality of life or quality-adjusted life-years/profit). Such a company will likely discover vast differences in performance by sub-population: products may be sold profitably to one segment but without achieving the same health outcomes it achieves in other (more affluent) segments. Or the company may be donating products (at a loss) to achieve positive outcomes for marginalized groups.
From that understanding, the company can surface the most important drivers of (non)performance, embedded either in company practice or in the health system it depends on to deliver its products. Internally, products may be ill-designed for specific populations (e.g., lack of epidemiology research in sub-groups; gender-biased product R&D); or distribution capacity lacking in key segments (e.g., no relationships with providers and health centers serving marginalized communities, no sales force operations in territories eliminated by internal algorithms for their lack of revenue potential). Externally, the health system may be failing in equally informing, diagnosing, treating, or following up with specific population groups, lowering the potential impact of products. The reasons for lack of capacity and disparity in coverage are likely rooted not just in visible policy decisions or funding choices but in deeply embedded and structural forms of discrimination.
The third step of managing the economics of impact is to invest to break trade-offs and embrace win-wins through innovation and collaboration. This implies quantifying the true cost of change and identifying the most efficient and effective strategies to achieve it. Surfacing trade-offs and their underlying factors will help companies confront the internal and external causes of inequities, focus innovation resources, and most importantly, create the basis for collaboration—building trust, relationships, and solutions with all system partners, from regulators to marginalized communities that do not benefit equally from the company’s activities and products. Working through the economics of changing the internal and external factors behind trade-offs will provide the basis for intentional planning, (long-term) investing, decision-making, and stakeholder communication on financial and societal commitments and results.
Managing the economics of impact through core hybrid metrics is an emerging and powerfully authentic practice. It has the potential to underpin the transition to a more equitable and regenerative economy that effectively leverages business for social innovation while addressing areas of trade-off. Over the coming months, we will be developing case studies to further illustrate what we are learning. If you are interested in supporting this work or being part of our study, contact our team at email@example.com.