Tag: SDGs

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REBOOT World View

The Social Contract

“Respect for human rights is not social work; it is not merely an act of compassion. It is the first obligation of government and the source of its legitimacy”, Ronald Reagan

Kate Raworth’s diagram of the Embedded Economy (Figure 3-1), with my adaptation, is a useful framework to think systemically about the global context in which we live and critical interconnections related to our economies, societies and the environment.  This model shows the key components of the global system with the individual in the centre, surrounded by the components of the economy, which sits within a society and reside in the global ecosystem.  This is not a fully closed system as the earth is fuelled by the sun and it also dissipates heat.  There is also consumption of scarce resources by society and generation of waste that goes back into the environment.  This is the framework or macro-ecosystem that we need to get in balance to be sustainable.

Figure 3-1

Our current system is not in balance! In this Anthropocene era, we are increasing the heat of the planet which is affecting the living world. At the same time, we have been changing land use, displacing and causing the extinction of fauna and flora, depleting finite resources and then disposing of waste matter in unecological ways. We have taken the world out of its most stable 12,000 year period, which has been the period of great human development, into an unsustainable cycle.

This model for driving sustainability does not have the state in the centre as in the case of command economies such as Russia and China with individuals as participants in a state led system.  It also does not have free markets and capitalism sit in the centre, as it does currently in the Western world with the overwhelming focus on capitalism and corporates, with the individual or citizen secondary.   This also is not a plutocracy model, which as Nobel Laureate economist Joseph Stiglitz describes America moving to a government “of the 1%, by the 1% and for the 1%”. 

You just have to look at your life to realise that society has not been properly oriented on citizens. There are occasional exceptions, such as war and the current pandemic, with generate some small rebalancing.  A perfect example of this corporate centricity is the public bailout of the financial sectors misdemeanours in the 2008 Great Recession.

This lack of primary focus on the individual is apparent in a myriad of ways.  The unequal delivery of public services such as health and education to individuals. The reduction of services levels, or raising of prices, when public services are outsourced. The use of public funds to bail out failing corporates and financial institutions. The inadequacy of financial and legal consequences for currency manipulation, interest rate manipulation and mis-selling by financial institutions. The weak governmental response to pollution and environmental damage. The declining levels of personal privacy.

The primacy of the corporation over the individual also manifests itself in what appears to be small ways; but, are cumulatively substantial. We have virtually no control over our personal information on the web. We are served terms by websites in order to use them that are unintelligible, onerous and leave us no choice but to accept.    We see subscriptions from companies that cause term based commitments; yet, companies are able to change their terms of the contract throughout the period.  With regulated companies, such as telecoms, we see that it easy to sign up to new services on the web, yet it is incredibly difficult to cancel services and it needs to be done through their understaffed call centers. And the list goes on.  

Proper protections for consumers would not allow this corporate behaviour, and it would provide material enough penalties to the corporates that they would not repeat offend.  The only way to create a sustainable model is to focus how we operate to be citizen centric and not corporate or government centric.

Individuals are consumers, employees, voters, environmental stakeholders and members of communities.  If we are to build a better model of how we operate then we need to define what the social contract that societies should be striving to provide.  This provides the moral compass for where we are trying to get to.  The other components in the society, in particular the state, the market economy and the financial markets need to be aligned and incentivised to deliver against this target social contract.

The target social contract is the “North Star”, it defines that the individual consents to surrender some of their freedoms, participate in and abide by the rules of the society and submit to the authority (in the case of a democracy to the decision of a majority) in exchange for the protection of their remaining rights, personal safety and security, maintenance of social order, access to employment to earn income, and provision and access to public services.  The social contract that I am referring to is the set of expectations that a member of a society should be able to have that is consistent with building a strong, fair and sustainable society for future generations.  

The rights of an individual start with the UN Declaration of Human Rights that was signed in 1948 and was adopted by a vote of 48 in favour, 0 against and 8 abstentions.  Today there are 193 member states of the UN, all of whom have signed on in agreement with the Universal Declaration of Human Rights (UDHR)  by signing at least one of the nine binding treaties influenced by the Declaration, with the vast majority ratifying four or more.  Currently, 79 of the countries have independent National Human Rights Institutions that comply with International Standards.

The rights include 30 basic human rights. The foundation of the Declaration are the principles of dignity, liberty, equality and brotherhood.  Sitting on these principles are the rights of individuals; the rights of the individual in civil and political society; spiritual, public and political freedoms, and social, economic and cultural rights.  

The 17 UN Sustainable Development Goals (SDGs), see Figure 3-2, take these concepts of human rights and add further specificity.  Over 90 percent of the goals and targets of the SDGs correspond to human rights obligations.  These SDGs defined in 2015 and agreed by over 190 countries, have an agenda and targets set for 2030.

Figure 3-2

It is important to note that across many of the SDGs is the key phrase “for all”.  This is a big shift in thinking on what is expected from a society and how the thinking behind the delivery of services is changing.  The shift has been from average and median thinking to heterogeneous thinking and focus on the importance of inclusivity, or the elimination of exclusion, and overall fairness.  A. Philip Randolph captured this when he said, “A community is democratic only when the humblest and weakest person can enjoy the high civil, economic, and social rights that the biggest and most powerful possess”. It is the focus on ensuring that the world we live in is less plutocratic.

Inclusivity and fairness thinking is not socialist thinking and does not exclude wide ranges of income between people.  It does contemplate that everyone has some minimal rights and a right to fair treatment.  SDG’s are not the enemy of capitalism; rather they are foundations of compassionate and responsible capitalism which in the medium and longterm will be dramatically more sustainable than short term zero-sum-gain thinking.  As I showed in my previous blog, the most prosperous countries are also the most well balanced.  Fair compensation, high levels of employment, good health, education and strong social security have multiplier effects on the prosperity of a society.  

The Cambridge Institute for Sustainable Leadership, has linked the SDGs into three broad social ambitions and three environmental ambitions (Figure 3-3).  These social ambitions revolve around basic needs, decent work and wellbeing.  

Figure 3-3

These three needs are vital components of the target social contract; but, there are also additional components required. The pervasive digital gathering and use of data attacks privacy. This capability combined with the proliferation of communications and the ability to personalise and deliver fake news to mislead, misinform and misdirect behaviour is a real societal problem. These real and tangible issues relate to Articles 12 and 19 defined in the 1948 Declaration of Human Rights (Figure 3-4). 

Figure 3-4

At the time these were written it would not have been possible to predict the impact of technology.  As I noted in my first blog of this series, even now it is almost unfathomable how much data on each person is being gathered and how it is being used.  This along with the personalised delivery of communications which can be either true or fake news is creating real cracks in societies.  The 2016 and 2020 US presidential elections have provided a real magnification of what can happen.  How can a country become so polarised and how can 70% of the Republican voters truly believe there has been massive fraud no matter what the courts say or even what the people who have managed the elections say?  The answer is that the information they watch, read and have been fed is different.  In democratic countries with only mass media, it used to be that the truth would rise to the top and there would be a common set of information.  In most countries, there were also rules on the accuracy and balance of information that was provided to voters to help them make their decisions. False information was filtered out by reputable media and there were rules on the truth of advertising messages.  Social media has bypassed this with the ability to push personalised communications that can be either true or fake, and algorithms that reinforce the personalised messages, so there is no longer a common set of facts that all people will see.  Is it possible to maintain an effective and stable democracy without a common set of information and facts from which citizens cast their votes?

There is also a fundamental bias of information driven by both mass media and social media.  We are increasingly seeing that the public view of what is happening in the world is severely distorted from reality.  Figure 3-5 illustrates this distortion perfectly.  If this is the case on a subject such as causes of death, imagine the levels of distortion of reality of other relevant topics to the individual.  If we believe that transparency, data and facts, and truth is paramount to the individual who is a consumer, an employee, a voter and a member of a society, then this is a fundamental social contract issue that must be solved.  

Figure 3-5 

Inevitably the ability to increasingly personalise can be both positive and negative.  Providing more relevant information or advertising more relevant products and services for consumption can have real value to the individual.  However, having information on race, gender, sexual orientation, disability, health, income, etc. can also allow for discriminatory behaviour and pricing for exclusion or to take advantage of an individuals circumstances.  With increasing use of AI, which relies on historical data this can help to reinforce old practices.  We have seen an example of this in 2018 when Amazon was innocently trying to make their recruitment more efficient and found that because of historical data they continued to reinforce gender bias.  The more disturbing use of data is when it provides a company asymmetric knowledge vs. the consumer and they then exploit this opportunity.  Asymmetry of knowledge and power has been an age old problem with financial and pharmaceutical companies exploiting their situation making customer the big losers.  This problem now has arguably crossed the line with how social media companies and other tech giants exploit consumers and their data to enhance their business and keep out competition.  The collection of data is continuing to gather steam and will explode further with the penetration of IoT based devices and the growing levels of information from biotech and neurotech applications.  Privacy control must be one of the fundamental rights of an individual going forward.  

We are seeing the progressive escalation of concern on the power of the large tech companies, in particular the GAFA group – Google, Apple, Facebook and Amazon – with respect to both privacy, anti-trust and misinformation.  The GAFA have between them faced anti-trust challenges and investigations in multiple regions including the US, EU (including individual countries within the EU), India, Canada, Australia, and Japan. Even though fines have been in the billions of dollars this is pocket change for these companies.  The focus on getting the tech giants under control will only escalate. 

Meanwhile some progress has been made with the GDPR (General Data Protection Regulations) that went into effect in May 2018 in the EU and is helping to set the standards that other countries will move towards. The GDPR regulations do have some privacy related rights related to data deletion, previously known as “the right to be forgotten”; but, this is incomplete.  This may be a big step for corporations; but, it is only a small step from an individual’s perspective on rights to privacy.  

So, to conclude there are five categories of components of a social contract to create an individual and citizen centric society that can thrive and prosper going forward.  As identified above by the SDGs and CISL, there are the three requirements of basic needs, well-being and decent work. The basic needs involve minimum levels of availability and access to food, water, shelter, energy, sanitation, communications, credit and transport for all.  It is vital to note that availability and access also included fair pricing.  In terms of wellbeing, there is affordable healthcare and education, and equal access to justice, safety and security.  Healthcare needs to be comprehensive and should not result in gaps as big as 10 years expected length of life differences at birth depending on which side of the street you were born.  The nature of access to education, is about narrowing the gap to affordable and high quality education to provide life and mobility opportunities.  This education includes K to 12, University and apprentice/applied educational programs and reskilling. The third requirement is decent work.  Decent work comprises living wages, social security programs to assist in managing through out different work situations, being disabled and pension arrangements.  Access to ongoing education to provide mobility will be increasingly important as the fourth industrial revolution, particularly with respect to AI and robotics, becomes increasingly pervasive.  

Wrapping these three requirements is the fourth component, which is the right to be living in a climate and environmentally sustainable environment.   The climate and environmental challenges are both global and local issues.  Due to the climate urgency and the potential implications of missing the Paris Climate Agreement target of not more than 2 degrees Celsius increase in average temperature, overall this is the most important component of the social contract.  We know we are tracking to hit over a 3 degree increase in temperature.  This has critical consequences for different countries including liveability, the local economy, access to food and water, and massive inter-country issues such as environmental refugees. Environmental refugees are also inevitably linked into both economic and political refugees.  The refugees crisis can only increase from its current estimated level of 80 million of which 46 million are internally displaced people according to UNHCR.  Predictions of 200m or more climate migrants by 2050 are not uncommon.  The ripple effects of this should not be underestimated in terms of human cost, economic cost, rising populism and societal destabilisation. 

The fifth component comprises the core human rights of privacy, access to facts and the truth, and the interlinked rights of freedom of information and freedom of speech. At the heart of privacy is personal control over all the personal information that is gathered, generated and used in the public arena of the internet and other networks of information.  Collective access to data, information and the truth has to be essential.  This means that fake news needs to be clearly identified, be managed in its distribution, and restricted in critical areas such as advertising and the social media push of content.  Social interaction and discourse needs to have common ground based on truth for societies to operate effectively.  Finally, freedom of access to information and freedom of speech is fundamental.  The debate around this is rightly growing and becoming increasingly complex with developing factors such as the growth of ‘fake news’,  the social media driven and algorithmic based delivery of content, the emerging “cancel culture”, and the growing voice of a full range of minority interests.  

Being definitive on the requirements of each of the components of a “North Star’ social contract is complex; but, excusing ourselves and not progressing on them is irresponsible.  Each country will need to define their specifics behind a common set of principles for all countries. The vital thing is that we become individual and inclusive centric to how we ‘reboot’ to create more sustainable societies and a more sustainable collective world.  

At the heart, the social contract is about solving inclusivity and fairness, which is the solution to the problem of inequality. We can see the urgency to address the growing issue of inequality in many countries. Yet in context, Branko Milanovic, an expert on global inequality, assesses that about 80% of inequality is across countries as opposed to within countries (Branko Milanovic, “Global Inequality – A New Approach For The Age of Globalisation”). Solving multi-lateral problems is exponentially more complex than country problems. I will explore this and inequality in more detail in later blogs.

In my next blog, I will looking in more detail at the role of the government in a democratic society.

#social contract #climate change #global warming #Universal Declaration of Human Rights #inequality #inclusivity #fairness #privacy #digital trust #cyber #mass manipulation #truth #Global Inequality #SDGs #Sustainable Development Goals #Paris Climate Agreement #UNHCR #UDHR #refugees @Kate Raworth @ Joseph Stiglitz @Branko Milanovic @CISL @Google @Apple @Facebook @Amazon

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REBOOT World View

Successful Societies

“It is not the strongest species that survive, nor the most intelligent, 
but the most responsive to change”, Charles Darwin

To address the three challenges, that I identified in the last blog – decarbonisation and biodiversity regeneration, inclusivity and fairness, digital privacy and collective truth – it is worth understanding where we are starting from.  Looking at the components of successful countries and societies is a good place to start.  Most comparisons of countries are focused on GDP per capita, the growth of GDP per capita, and the unemployment rate.  I think we all know that there is much more to life and a society than just these factors.  Income is important but there is also health, education, happiness, safety, freedom, fulfilment and purpose.

Lyndon B. Johnson said, ”The Great Society is a place where every child can find knowledge to enrich his mind and to enlarge his talent…  It is a place where the city of man serves not only the needs of the body and the demands of commerce but the desire for beauty and the hunger for community…It is a place where men are more concerned with the quality of goals than the quantity of their goods”.  The language may not be gender appropriate for today, but the idea of what makes a society is captured. 

Yet, as we sit here and watch what is happening around us we know it is even deeper than this.  It is the ability of someone being able to go to church or to teach a class and not have any risk of being attacked. It is the ability of someone of BAME origin or any gender to have equal respect, equal opportunity and equal justice. It is the ability of a young woman to be able to travel unintimidated on public transport late at night.  It is the feeling that you are safe at home and that your job is secure even though you may different political views.  It is not just freedom of thought but also freedom of speech.  

In my analysis, I tried to look at successful countries and societies based on a simple composite ranking across a set of factors including GDP/Capita, Exports as a % of GDP, GINI coefficient, life expectancy, mean years in school, democracy index, gender inequality, homicides, and CO2 emissions per capita. On a GDP per Capita basis, the USA is 9th; and surprisingly, from a composite rank perspective, 25th out of the top 25 countries with the highest GDP per Capita (populations over 4 million people).  This jars with the American narrative we have been fed over generations; although perhaps not, when we watch with amazement the reducing presence of America globally, the polarisation of the country and its massive decline in global respect, especially in the last four years.  More specifically, this is reflected by America’s withdrawal from the Paris Climate Agreement and the World Health Organisation, the levels of social division, the growing gap between the haves and the have nots, the implicit caste system that still to some extent exists, the rapid rise of the public buying of arms and munitions through fears for their own safety and the conduct of the US Presidential Election.  Xi Jinping, Putin, Erdogan et al. are salivating as they watch the main symbol of democracy and prosperity in disarray and broadcasted around the world.  

The common thread across the top 25 countries in GDP per Capita is that they all have market economies and 23 of the 25 (excluding UAE and Kuwait) have democratic forms of government.  It is also worth noting that looking across other countries, there are no strong and progressively developing economies that don’t have market economies.

The top 10 countries (Switzerland, Norway, Sweden, Denmark, Ireland, Netherlands, Singapore, Austria, Finland and Germany) based on the composite ranking outperform as a result of having a much more balanced society.  As well as a high GDP, they have less inequality and higher levels of upward mobility, a higher life expectancy, a more educated population, a more effective democracy, better gender equality, lower homicide rates and are more environmentally friendly.  I would argue that these countries have been able to create an overall better balance between the role of the market economy and the state, and how they together contribute to the well being of their citizens.  

These top 10 countries also outperform across all measures (except CO2 emissions) vs. groups of upper middle income, lower middle income, and low income countries.  It should be no shock that these dimensions are all intertwined to create more prosperous and sustainable societies.

Definitions
Developed countries – Top 10 overall ranking – Switzerland, Norway, Sweden, Denmark, Ireland, Netherlands, Singapore, Austria, Finland, Denmark
Upper Middle Income – Selection of 5 countries – China, Turkey, Brazil, Botswana, Colombia
Lower Middle Income  – Selection of 5 countries – India, Indonesia, Nigeria, Egypt, Ghana
Low Income – Kenya, Bangladesh, Tajikistan, Rwanda, Ethiopia
Note: The data is based on simple averages across the countries

If you look at government spend as a percent of GDP across the country groupings in Figure 2-2, small government involvement in the economy is not a characteristic of advanced economies. More advanced economies do have higher rates of taxation and larger investments in the delivery of public services than less developed countries. Looking across the most advanced economies, there is no apparent clear model of the optimal involvement of a government.  Most of us intuitively believe that a well functioning market economy should create more opportunities, innovate faster, grow more quickly and therefore have more potential to create a better society across a range of dimensions. Perhaps less intuitive, is that strong delivery of public services and the creation of a well balanced society also appears to be an important contributor to economic performance.

So, what is the role of the government to help create a well functioning society.  Lee Kwan Yew, Prime Minister of Singapore from 1959 to 1990, stated, “the ultimate test of the value of a political system is whether that society establish conditions that improve the standard of living for the majority of its people.”  He always stated that the proof is in the pudding; rising incomes for the broad middle class, health, security and economic opportunity.  Today, I would argue that there should also be a concept of ‘no one left behind’ and an opportunity for all; which would be encapsulated by ensuring that there aren’t rising levels of inequality and there are increasing levels of mobility within a society.  In addition, most people would also add responsibility to ensure that society operates in a climate and environmentally sustainable way.  

Arguably the primary fuel behind the growth of the standards of living has been the development of market economies and the driving force of capitalism.  The personal rewards of taking risks and succeeding and of hard work has accelerated progress and built strong economic foundations to many economies. 

Yet, capitalism without frameworks has never worked sustainably.  Unstructured accumulation of wealth and power leads to self destruction of a free market economy, exploitation of the masses, environmental damage, and inevitably social instability.  Since the 19th century, combinations of legislation, regulations, other frameworks and tax policy have been required to manage against the creation of monopolistic powers and the retention of competitive market sectors. Legislation has been required to deal with slave and child labour and to institute the concept of minimum wages.  Rules and requlations have had to be put in place to deal with city air pollution, water pollution, land waste, environmental destruction, the erosion of the ozone layer.  Extensive regulations have also had to be put in place to control financial markets.  Finally, consumer protection has required regulations and legislation for food and drug safety, minimum product warranties, mis-selling and misuse of personal information.  

So, let’s not kid ourselves that unbridled capitalism is in a societies interest.  The real question is – what is the right combination of the freedoms of a market economy and the participation of the government.   A lighter touch is always ideally preferred; however,  in most countries we are still a long way from having the right balance.  To move in the right direction and prioritise actions it is vital that there is clarity on what the social contract is within a society.  Societies are complex systems and there are no simple solutions.  Any individual initiative by either the market economy, the government or the public will inevitably have trade-offs and shortcomings.  The UN Sustainable Development Goals illustrate this complexity in living colour with 17 areas of focus and 169 subsidiary goals!  

Looking at the most successful societies gives us insights into what they have done and where they have been successful in creating their broad based societal success.  R. James Breiding’s book “Too Small To Fail” which focused on the innovative approach of smaller successful countries provides a number of good examples.  Examples include Finland’s transformation of their education system, Singapore’s low cost-high quality inclusive healthcare system, Denmark’s leadership in renewable energy, Israel’s building of a Silicon Valley style ecosystem, and the Nordic story on leading in gender balance. These are best practice examples that give guidance on better ways to move forward.  The challenge is to move towards these best practices globally and then well beyond.  

The three challenges are steeped in the historic practices of our take-make-waste culture, the singular focus on the maximisation of short term profitability and minimally regulated use of technology and data at the expense of the citizen.  Each country sits in a different place on the continuum of progress to solving these issues locally. But we should not forget that all three challenges need to be solved also at the global level.  Isolated examples of progress against climate will not solve this existential crisis! The context for progress is also now different.  There is urgency. There is a recognised need for a unified approach to tackling these issues. There must be an accelerated development and adoption of critical technologies.  And, there is a need, and a demand from the public, for a fundamentally more purpose driven, values driven and sustainability focused approach to how we live and how our societies operate. 

In the next blog, I want to talk about a framework for solving these issues and the social contract. 

#climate change #global warming #decarbonisation #biodiversity #species extinction #regeneration #rewilding #carbon sequestration #inequality #inclusivity #fairness #privacy #digital trust #cyber #mass manipulation #truth #social contract #Too Small To Fail @James Breiding #Sustainable Development Goals #SDGs #Paris Climate Agreement #WHO #take make waste

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REBOOT Strategy

REBOOT Business Strategy

“Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the licence to operate from key stakeholders.” Larry Fink, CEO, Blackrock

We have now covered the first six of the eight topics for strategic focus.  As a reminder, the eight topics are:

  1. From shareholders to stakeholders
  2. From Michael Porter’s five forces to macro models
  3. From risk monitoring to business resilience
  4. From product-market fit to customer–product fit
  5. From simple to multi-factor business models
  6. From product to company based technology, innovation and design
  7. From profit focus to triple bottom line
  8. From medium term strategies to long term scenario based strategies

The seventh topic, from profit focus to triple bottom line, is a major shift for most companies from being shareholder focused to stakeholder focused.  This shift in the purpose of the business requires new thinking, different leadership and major adjustments to incentive systems to create alignment.  Simply put, a company must now extend their objectives beyond measurements almost exclusively focused on shareholders to also add measurements on environmental, social and economic impact.  

Let’s start by looking at the pressures to move beyond a pure profit focus. These pressures are from nations, central banks, investors, consumers and the public as illustrated by Figure 11-1.

Figure 11-1

In 2015, the UN reached agreement, with all United Nations Member States, on 17 Sustainable Development Goals and 169 targets focused on economic, social and environmental goals for 2030.  193 countries are signed up to this agreement.  

Also in 2015, the Paris Climate agreement was signed.  The Paris Agreement sets out a global framework to avoid dangerous climate change by limiting global warming to well below 2°C and pursuing efforts to limit it to 1.5°C. It also aims to strengthen countries’ ability to deal with the impacts of climate change and support them in their efforts. There are now 197 countries signed up to this agreement.  Shockingly, the US under Donald Trump said that it was going to withdraw from the agreement and the effective date is 4 November 2020, 1 day after the next presidential election.  You can imagine who the rest of the world is voting for!  

As of June 2020, twenty countries and regions have agreed net-zero targets by 2050 –  Austria, Bhutan, Costa Rica, Denmark, the European Union, Fiji, Finland, France, Hungary, Iceland, Japan, the Marshall Islands, New Zealand, Norway, Portugal, Singapore, Slovenia, Sweden, Switzerland and the United Kingdom.  Denmark is leading the way and has legislated a target of reaching a carbon emissions target 70% below its 1990 levels by 2030.

About 50 central banks have now joined the NGFS, the central banks’ network focused on climate change risk management. .  Mark Carney, former Governor of the Bank of England, has been one of the global leaders in pushing forward this climate agenda. The Bank of England will be the first central bank to test how well the financial system can withstand risks posed by climate change.  Under this test the largest lenders, insurers and asset managers will have to stress test their portfolios against different climate scenarios.  In turn, they will need to engage the companies behind these loans, insurance policies and investments to provide information for this reporting. The Federal Reserve has declined to participate; but, it is realising that this position will not be tenable for much longer (FT.com 120120, Gavyn Davies).

Investors representing about $130tn in investments are now starting to require ESG (Environmental, Social, Governance) reporting.  Some of these portfolio managers have also set climate targets for their portfolios as part of their criteria for investment.  Two of these funds are the Norwegian and Japanese Soveriegn Wealth Funds, each of which have fund valuations well in excess of $1 trillion.

There is also a group of over 450 investors, Climate 100+, who represent $40tn in investment that are initially focused on 161 global companies that cover up to 80% of global industrial emissions with 3 goals.  Firstly, to improve corporate climate governance, secondly to curb emissions in line with the Paris Agreement and finally to strengthen climate related disclosure.  

Shifts in investment focus and willingness to lend money to certain sectors is already underway.  One of the first sectors to be hit hard has been the coal industry.  Investors are looking more intensively at the ESG focus of companies and adjusting their decision making on investments. Banks are under increasing pressure to do responsible lending and are also starting to restrict their focus towards companies that are impact focused; although, there is still a long way to go.  

The fourth group of stakeholders are customers who are increasingly voting with their wallets on social and environmentally responsible companies.  This involves shifting their purchasing from companies who breach fair trade principles, are not diversity inclusive, support Amazon deforestation, are high CO2 emitters, and are plastic and types of polluters.

Finally, there is the public that are showing that they want things to change whether it is climate protests all over the world linked to Greta Thunberg, who has twice been nominated for the Nobel Peace Prize, or the response to the recent ‘black lives matter’ protests.  Both of these are driving significant rethinking in Board rooms regarding environment and social responsibility. 

The memorable way to capture this approach is to use the phrase John Elkington coined over 25 years ago, the ‘triple bottom line’ (TBL) or as it is also named ‘people, planet, profit’.  The idea is that as well as profitability of the company there needs to be impact measurements linked to sustainability.  

The use of this phrase has gone in different directions, so I will define it specifically as to how I am thinking about it.  Given the need to integrate with the UN SDGs (Sustainable Development Goals), which is the best current consensus on the set of components required for long term sustainability of the planet, there are three areas of external impact that need attention – economic, social and environmental impact.  Clearly, also for the company to be sustainable it must focus on its profitability and growth in order to attract and retain capital. In this context then the company has two factors in the economic component (Figure 11-2).  Firstly, its own economic performance; and secondly, its external economic impact at the local, national and international levels.  

Figure 11-2

Companies now need to both align their Triple Bottom Line strategies with their key stakeholders as well as building the reporting and measurement requirements for internal use, for ESG reporting and for the needs of investor rating agencies.

These are the impact definitions that need to be considered to establish the impact measurements the company chooses to focus on.  

  • Economic: the positive and negative impact an organization has on the local, national and international economy. This includes creating employment, generating innovation, paying taxes, wealth creation and any other economic impact an organization has.
  • Social: the positive and negative impact an organization has on its most important stakeholders. These include employees, families, customers, suppliers, communities, and any other person influencing or being affected by the organization. 
  • Environmental: the positive and negative impact an organization has on its natural environment. This includes reducing its carbon footprint, usage of natural resources, toxic materials and so on, but also the active removal of waste, reforestation and restoration of natural harm done.

There is confusion on how a company should define its own situation specific impact factors.  Clearly, this is going to be affected by sector and geography as well as the specific strategy of the company, and how impact ties into the value proposition to its customers and other key stakeholders.  The concern is that companies must focus on ambitious impact targets aligned to ambitious profitability targets.  With the fuse on climate change and other critical environmental issues burning, just reporting on ESG without a deep understanding, thinking and commitment to a strategy with impact will fall far short of what is required and ultimately expected by key stakeholders.   

Setting impact factors can start with understanding the current impact of a company; however, it does not stop with just setting tighter targets within the existing strategy that require moderate changes to achieve.  From an environmental perspective, if you are depleting resources, are an energy producer, have high energy consumption, are a manufacturer or you have high volumes of waste (eg. packaging) then a major rethink of your strategy is probably needed to ambitiously reduce your environmental footprint and reposition yourself.  The broad goal would be to shift from a linear strategy of ‘take-make-waste’ towards a wasteless or circular strategy.   One of the leaders in this space who are helping drive this shift is the Ellen MacArthur Foundation (www.ellenmacarthurfoundation.org ).  

The core elements of a circular strategy, to create a circular economy, is to firstly design out waste and pollution.  Secondly, to keep products and materials in use and finally to regenerate natural systems.  From an economic and social impact view, the goal is very much about responsible management towards employees, customers, other players in the supply chain and related communities.  Considerations include anti-slavery, fair trade and work practices, providing living wages, the provision of health services, education/skills development, paying taxes (eg. not working through tax havens), and enhancing  and supporting the key communities that interact with the business.  Decisions on the impact focus, as well as profitability, also need to be tied into resilience considerations.   A strong and sustainable strategy will create alignment of the business with the economy, society and environment (Figure 11-3). 

Figure 11-3

In summary, businesses need to shift their thinking to focus on both profitability and impact.  Impact factors are defined by the UN SDGs. The specific impact targets that a business sets as its goals will be affected by the industry sector, the businesses geography and the particular strategy of the business.   Businesses need to revisit their strategies and in many cases make some fundamental changes in order to set ambitious impact targets along with their profitability ambitions.    

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REBOOT Strategy

REBOOT Business Strategy

“The future depends on what we do in the present”, Mahatma Ghandi

Blog 6 of the Business Strategy Series

‘From Michael Porter’s Five Forces to macro-models’.  In the last blog, we talked about the need to shift from a shareholder perspective to a stakeholder perspective.  In this article, I want to cover off the importance of overlaying onto Michael Porter’s 5 forces industry analysis two factors (Figure 6-1).  Firstly, an understanding and integration of what is happening in the macro environment into the strategic thinking and planning for a business.  In broad terms, these macro factors can be put into one of 5 categories – Economic, Environmental, Geopolitical, Societal and Technological.  Secondly, a detailed analysis and assessment of the threats and opportunities that could come from technology.  

Both of these factors need to be looked at from a multi-time horizon perspective. The external dynamics impacting a company can be significant on all these horizons; therefore, scenario modelling on each of these horizons is essential. As examples, in the short term, we are seeing how a pandemic can have dramatic effects on our business. In the medium term, the movement of a technology into a growth phase of rapid adoption could have a signficant effect on a competitive environment and customer purchasing dynamics. In the longer term, climate change is affecting most businesses and sectors, and may affect longer term investment decisions. Superior understanding about how an industry could be affected provides a real opportunity to outperform and improve business sustainability.

Figure 6-1

Starting with the macro environment, the World Economic Forum ‘Risk Trends Interconnection Map’ (Figure 6-2) illustrates well the range of macro factors that a business may need to watch and monitor. This will help a business decide how to adjust its strategy as these factors and their interconnections wax and wane over time.  

Figure 6-2

Just since February 2020 and the emergence of Covid 19, businesses are having to deal with a combination of many factors including the need for remote working, limited ability to make sales, massive financial pressures from the financial crisis, a collapsing oil price, increasing trade tensions between the US and China, increasing national sentiment, potential implications of greater control being put on Hong Kong by the Chinese government, and in some sectors a heightened level of cyber attacks.  Do any of these have any bearings on your strategy going forward?  This level of challenge to a business will not go away and for many the issue of climate change will only create even more profound challenges.  Thinking about these potential risks in different scenarios over the short, medium and long term is vital.  The key is really to solve how to take advantage of the situation to strengthen the performance potential of the business and strengthen its competitive position.

Secondly, it is vital to look at the threats and opportunities of technological change.  It is easy to forget the accelerating speed at which new technology is adopted at scale (Figure 6-3). For businesses, it affects what products and services can be provided, how businesses operate, which markets they can reach and focus on; and, it results in whole new market sectors being developed.

Figure 6-3

In addition, the speed at which new technologies are being developed and related products are being introduced is astonishing (Figure 6-4, 6-5).  In the research world, there are unprecedented levels of information sharing and collaboration coupled with increasing speeds of access to new research through digitization, open access and data sharing.  Over time, the profile of research is showing higher levels of collaboration and higher levels of cross border research cooperation.  As long as the world keeps opening up this will only accelerate; and in turn, continue the acceleration in the development of new technologies.  

Figure 6-4
Figure 6-5

The biggest challenge emerging from new technology being adopted to its full potential is the ability of individuals, businesses and governments to understand its potential and reap the full benefits (see illustrations in Figure 6-6, 6-7).  Increasingly we are also going to find that many high value applications involve the convergence and integration of multiple technologies. For example, an autonomous driving vehicle combines the use of recent and emerging technologies including AI, robotics, battery storage, big data and sensing.

Businesses need to be more focused than ever on understanding technology based opportunities and innovating new products and services. The old fashioned approach of driving leadership from focusing on primarily driving down its cost position or innovating within its existing knowledge and parameters will not survive. 

Figure 6-6
Figure 6-7

In the analysis of the potential impact of technology, a key factor to assess is the speed of adoption of new technologies.  Despite the potential for high speed adoption, this is not always the case. It is particularly important to analyse in sectors where there is a high concentration of market share among a few companies.  In these situations, there are two factors that affect the speed of change.  Firstly, for any of the key competitors is there a bigger profit opportunity in the short or medium term of adopting new technology?  If the business model of these competitors could be disrupted and their could be a leak of profitability then, depending on the level of competitor concentration, the adoption could be slowed significantly.  Secondly, once one of the big players makes an aggressive move to shift to adopt new technologies and adjust their business model, perhaps from shifting to a long term view of how they need to compete, then the rate of change in the industry is likely to change.  

This slowing down of the potential rate of adoption, was very prevalent in the research publishing sector with the likes of Reed Elsevier (now RELX plc) and Springer (now Springer Nature).  The rate of adoption of the real potential of digital technologies and its full implications to benefit the sector probably took at least 10 years longer than it could have.  Time bought them the ability to search for new sources of profitability before any core compression of performance in their core business. It would also be interesting to speculate what the energy sector would look like today if one of Shell, BP or ExxonMobil would have made a strategic commitment to commit to clean(er) energies say 15 years ago; after all, they knew about global warming in the 1980’s.  

Overlaying onto an industry analysis, how to take advantage of an increasing rate of technology introduction, understanding factors that may delay technology adoption, and managing continuously changing dynamics surrounding a market is fundamental to strengthening the performance potential and competitive postion of a business.

In the next blog, we will look at shifting from risk monitoring to business resilience.