Monday, June 9, 2014

Corporate Impact Venturing: Using Investments to Enable Sustainable Value Creation

The following comes to us from Maximilian Martin, Ph.D., the founder and global managing director of Impact Economy, an impact investment and strategy firm based in Lausanne, Switzerland, and the author of the report “Driving Innovation through Corporate Impact Venturing.”

In 2010, despite the then-recent economic downturn, an overwhelming majority of corporate CEOs in the UN Global Compact-Accenture CEO Study on Sustainability—93 percent—responded that sustainability will be critical to the future success of their companies. What’s more, they believed that a tipping point could be reached that fully meshes sustainability with core business within a decade, fundamentally transforming core business capabilities, processes, and systems throughout global supply chains and subsidiaries. Three years later, a new 2013 edition of the study argued that many corporate CEOs have found themselves stuck on the ascent towards sustainability.

Radical change in market structures and systems is needed, and a bolder path for industry transformation needs to be charted, at a time when the logic of value creation is changing. The days of traditional corporate social responsibility (CSR)—the bolt-on approach that is compliance driven, costs money, and produces limited reputational benefits—are fast coming to an end, because sustainability is now increasingly driving value creation itself. Assessing joint opportunities for financial and social returns is the way forward.


Take the case of Whole Foods Market, the leading chain of natural foods supermarkets in the United States. The company illustrates both the magnitude of opportunity for business transformation that is powered by the rise of the virtuous consumer or, in marketing terms, the “Lifestyles of Health and Sustainability” (LOHAS) segment; it also illustrates the velocity of the mainstreaming of the concept. A longstanding sustainability pioneer, Whole Foods has in recent years become the poster child of the LOHAS movement. The LOHAS segment is growing: a market scan by the Natural Marketing Institute from 2008 estimated that U.S. consumers spent roughly USD 300 billion on LOHAS-related products. More recent estimates indicate a global market of USD 546 billion.

Compared to the early eighties, sustainable consumption is now widespread and an emerging lifestyle choice that includes a variety of interaction patterns. Whole Foods, for example, uses a combination of approaches: the company rewards its employees, emphasizes autonomy and creativity, pays executives reasonably, sets animal welfare standards, gives preference to artisan producers, makes strong environmental commitments, and uses fully renewable power. Starting in 1978 with one store (and initially called “Safer Way”), the company has greatly expanded over the years, with sales of USD 19.8 billion in fiscal year 2014. The result is that Whole Foods is seen more as a lifestyle store, as opposed to just a grocery store. But the real news is that unlike 35 years ago, sustainable consumption can now also be incorporated into mega retail chains: the top five organic food retailers in the United States are Costco, Kroger, SuperTarget, Safeway, and Walmart. These are all incumbent food retail businesses that have discovered the opportunity for sustainable value creation in their core businesses.

Skeptics may argue that this is easier in some industries than in others. After all, a large retail chain can carry new products and green its logistics. The deeper question is how to achieve true business transformation across the board. A new approach called Corporate Impact Venturing (CIV), which relates to the practice of companies engaging in venturing through impact investing, can respond to structural changes in the operating environments of business by leveraging the power of venture capital fused with impact to access fresh business ideas.

The new approach is ambitious in terms of scale and impact. Next to the global virtuous consumer segment, the USD 5 trillion Base of the Pyramid market, multitrillion dollar green growth and a rising circular economy, as well as a modernizing welfare state are all pushing the world into uncharted territory—creating massive investment opportunities, and the possibility to achieve sustainable growth, social impact and corporate profits.

Take the case of IKEA, the world’s largest furniture retailer. By 2020, IKEA plans to operate 500 stores, employ 200,000 people, welcome 1.5 billion shoppers annually and generate EUR 45-50 billion in turnover (up from 27 billion in 2012). Growing consumer demand, rising raw material prices, and ecological footprint considerations resulting from growth and changing consumer expectations are collectively motivating a need to innovate—and the company is actively seeking to update its business model in order to remain competitive. This would be difficult to fully achieve in practice by only using existing resources and business innovation mechanisms. IKEA’s 2020 strategy includes retail stretch goals: all home furnishing materials, including packaging, are to be made from renewable, recyclable or recycled material, and all cotton used in production shall become compliant with the Better Cotton Standard. All leather and wood used in production is planned to be fully traceable and produced in accordance with forest and animal welfare protection guidelines and standards by the end of 2017. To achieve this, IKEA is encouraging its suppliers to move from compliance-driven to shared value-based social and environmental performance. The company is engaging in impact venturing on a variety of fronts to onboard the expertise needed to make the transformation happen. The company’s corporate venture IKEA GreenTech AB has already invested in green technology companies that help IKEA “go renewable” in its core activities, encompassing energy, materials, water and waste issues.

To put Corporate Impact Venturing into practice, a company basically has three options: (1) setting up an internal corporate venturing group that invests off balance sheet, (2) creating a dedicated external corporate venturing fund, or (3) becoming a limited partner in one or several venture funds that follow investment strategies that are relevant to the corporation. As in the case of any investment, the investment objectives, instruments and processes as well as investment sourcing and geographical focus should be clear at the outset. Consider the example of Patagonia, an outdoor apparel company with around USD 600 million revenues in 2013. The company is considered a leader in terms of sustainable value creation, and demonstrates how Corporate Impact Venturing can enable sustainable business innovation. In 2013, Patagonia launched “$20 Million & Change”, an internal venture fund that invests between USD 500,000 to USD 5 million per transaction into sustainability-minded start-ups focused on clothing, food, water, energy and waste. It also established a new holding company Patagonia Works. The subsidiary currently accommodates five new lines, including Patagonia Provisions. This line, in particular, sells packets of salmon jerky, and salmon that is only harvested from abundant sustainable fisheries.

At a time when sustainability considerations loom ever larger for global CEOs, and in the minds of consumers and regulators, the business transformation path is not yet common knowledge. The report “Driving Innovation through Corporate Impact Venturing: A Primer on Business Transformation” shows that templates for business transformation are emerging, and corporate leaders do not have to have all of the ideas themselves; instead, decision makers can build on the proven channel of corporate venture capital with Corporate Impact Venturing to source the innovations now needed.

Corporate Impact Venturing marries the logic of investments and impact and is a pathway to systematically engage in corporate opportunity without neglecting corporate responsibility. With increased demand of the poor, an aging population in most OECD countries, a growing youth population in many emerging countries, the need for greater total resource productivity, and a bifurcating consumer market driven only partially by price, the opportunity has never been greater to do good and well. But we need to leverage the power of investing to get ready for these markets of the future.

Corporate Finance, Corporate Governance, Current Affairs, Entrepreneurship, Financial Markets, Stefan J. Padfield | Permalink


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