The "cotton wool test" is to measure business purpose by answering the question of how much impact it generates, and abstract answers full of intangibles will not do.
The value of the social and environmental impact generated by business has never been more important to humanity, more visible to society and more strategic to the economic activity of companies.
The unfortunate COVID crisis has highlighted not only the fragility of our health system, but has also exaggerated something that has been clear for many years about our economic model: that inequalities are growing and that the damage to the environment resulting from our actions is close to irreversible and we cannot look the other way.
There are many voices calling for a revision or modification of some of the principles of capitalism. And they do not come from radical or anti-establishment groups but from organisations as reputable in the corporate world as the World Economic Forum in Davos or the editorials of the Financial Times.
In this respect Rebecca Henderson, Harvard professor and author of the recently published book Re-imagining Capitalism, explains that she aspires to re-imagine capitalism, or at least our current version, which is obsessed with the short term and does not believe that business should care about the health of our society or our institutions. Doing so is the best way to ensure that both business and our society thrive for decades to come.
If capitalism is one of the great inventions of the human race, an incomparable source of prosperity, opportunity and innovation, we will not solve the problems ahead of us without it. To solve inequality, we need job opportunities adapted to the new reality that is coming our way. To solve climate change, we need (among other things) to transform the world's energy, transport and agricultural systems.
Time will tell whether this expected evolution of capitalism will happen in the short or medium term, but I believe there are grounds for optimism, despite the effects that the Covid crisis is having on our economy.
Measurement, key to assessing purpose
Measuring the effects that companies have on their environment, positive or negative, has never been more objective than it is today. In the coming months we will see data from many companies quantified in detail and incorporated into a new income statement that incorporates "impact" into the current accounting system. The activity of the Impact Management Project (IMP) and especially its Impact Weighted Accounts initiative are spearheading this evolution.
Companies' integrated reports or non-financial information statements are becoming more and more specific in their data and go deeper into the material concepts of each company when it comes to highlighting their progress in responsibility and sustainability.
Public administrations and regulators are doing their part, sometimes slowly. But initiatives such as the European Union's Green Deal or the variations in the fiduciary responsibilities of boards of directors in the United Kingdom, going beyond share value and considering all stakeholders, or the incorporation of Benefit Corporations as a new type of company in some countries are clear steps in the direction we want to go.
The "cotton wool" test
This year can be considered the year in which ESG investment took off. And although there is still a long way to go in separating the wheat from the chaff in true ESG investing, the next breakthrough that continues to grow is impact investing, also in Spain.
It is a fact that corporate purpose is "in" and most companies now claim to have a purpose with a social or environmental impact. The "cotton wool test" that they will all have to pass in a few months will be to measure that purpose by answering the question of how much impact their purpose generates, and abstract answers full of intangibles will not be valid.
In this trend of being more specific in measuring, valuing and comparing the added value of companies to society, there was a lack of an initiative that would shed light and detail on the importance of inclusive growth. And the project led by the Codespa Foundation, which Transcendent is a partner of, aims to highlight the contribution and performance of companies and to inspire other companies through its business practices to create a better world for all.
And all these developments can and must share the common language of the SDGs that give us focus and a time horizon to which we all need to contribute before it is too late.
Innovation with impact
This evidence of what is already happening is embodied in the kind of projects we are doing in recent months with our clients.
We are working with management committees to size the size of the corporate social impact opportunity in your company, grounding it in your strategy and identifying opportunities for growth and efficiency with an impact on your bottom line. These opportunities translate, among others, into innovation with impact (new business models, products/services, customer segments) or, in the case of efficiency, rethinking the way your business operates ("doing more with less").
We have embedded the SDGs at the heart of a company's business, as a framework for identifying opportunities for growth, efficiency and risk minimisation by measuring the extent to which they are being achieved and setting ambitious targets.
We are measuring the effect generated by a company in terms of ESG, seeking to raise it to the level of strategic impact and taking into account not only inputs but also outputs, with the aim of facilitating decision making with business impact.
We have structured impact management within the company and redesigned the governance of the company to increase opportunities for growth, efficiency and risk minimisation in all business and support areas.
