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You Cannot Manage What You Cannot Measure

We have continued to explore the question of how companies can translate the idea of Creating Shared Value (CSV) into their corporate strategy and business processes. The question of how you do CSV is top of mind of executives and CSR professionals as came out clearly in our second webinar on the topic last Wednesday (28th September). FSG's Mark Kramer and Marc Pfitzer were joined by Paul Ellingstad, Health Director at Hewlett-Packard’s Office of Global Social Innovation, Jessica Hubbard, Senior CSR Manager from Houghton Mifflin Harcourt, and Paul Snyder, Vice President of Corporate Responsibility, InterContinental Hotels Group (IHG). The panel discussed pertinent questions from the audience about how to implement CSV, including how to create a culture of CSV within the organization and overcome resistance by certain business units and how to select and effectively engage external partners – be it NGOs or governments. However, and not surprisingly, most questions centered on the topic of measurement: What metrics do you use to measure shared value? What is the impact of CSV on shareholder value? How can you reconcile the short-termism of financial markets with the longer-term focus of any CSV strategy given the time it takes to bring about social change?

As Marc Pfitzer wrote in an earlier blog on this page, even Nestlé – a pioneer and leader in CSV – has not yet ‘cracked the code on measuring CSV’. Yet, measurement is at the heart of integrating CSV into business decisions and processes. Bill Hewlett, co-founder of Hewlett-Packard, rightly said "You cannot manage what you cannot measure." In order to decide on the right shared value investments and then align business planning as well as incentive structures accordingly, you need to know what the value of the social or environmental benefit of those investments is for your business. For some CSV strategies, business benefits are easier to measure than for others. For example, IHG’s Green Engage sustainability tool allows the company to precisely measure the cost savings from lower use of energy or water. However, the economic value of IHG’s other flagship sustainability program IHG Academy that provides education, skills training and employment opportunities in the communities surrounding the hotels, is less tangible – how do you measure the value of access to a skilled workforce? No wonder that when these questions came up in our webinar, all three companies said they were still in the very early stages of developing a CSV measurement system.

Being able to measure and clearly communicate the value of CSV investments – both the economic value as well as the societal value – will greatly help in making the case for CSV internally with the business units and externally with partners, and ultimately will allow investors to better understand the portion of company value associated with the societal progress they achieve through their activities, products and external investments. While there are many different methodologies out there of how to measure social impact, not many attempts have been made to link this impact back to the business. The IFC’s Financial Valuation Tool estimates a range for the NPV of a portfolio of sustainability investments, but is currently limited to the extractives industry and mainly focuses on the value of risk mitigation, i.e. avoided cost, rather than societal value that could create opportunities for growth and innovation. And again, it only looks at one side of the coin, this time economic value creation.

It seems like we are still some way off on the journey towards the holy grail of truly integrated measurement and reporting – where ‘integrated’ doesn’t mean listing ESG (Environmental, Social and Governance) indicators in the same report as company financials, but having some key indicators for the economic and societal value created by each CSV investment stream. A promising development is The International Integrated Reporting Committee (IIRC)’s effort to develop a new approach to reporting with a clear focus on sustainable value creation. However, before we can change the way we report on progress, we need to know how to measure it first.