Corporate responsibility (CR) has come a long way.
A few years ago, it was associated with terms like compliance, philanthropy and reputation management. In today’s discussions, concepts such as risk prevention and shared value dominate. But the corporate reality still doesn’t live up to these promising concepts, because in many organisations CR still operates in a silo at the periphery of established strategy processes.
Advancements are often more driven by corporate reporting and reputational considerations rather than by enterprise risk management and the development of scalable business strategies that can contribute to solving societal challenges.
This problem is described in a recent study by the World Business Council for Sustainable Development (WBCSD), which assessed the materiality analyses of their member companies. As part of a materiality analysis, companies identify the most important sustainable topics that should then be in the center of CR management and reporting. In only eight percent of the cases, the WBCSD analysts found an alignment between the most material CR topics and the topics included in the risk reporting section of the annual report. In 35 per cent of the cases, they could not even find a single topic that appeared in both reports. This indicates that companies are still far away from the necessary integration of CR in corporate risk management and that the topics are not considered to be strategic.
The significance of an integrated approach for the management of CR issues is shown in a recent study by Harvard professor George Serafeim et al.1 Serafeim found out that companies who excel in managing the material CR issues outperform peers who do not, even if a peer company performs well in all non-material CR issues. These results show that materiality analyses need to move from the periphery into the center of corporate strategy development. They need to form the backbone of an engagement of investors supporting messages about strategy, risk and long-term value creation.
Integrated reporting on material issues should follow suit, including thoughtful consideration of how such materiality analysis will impact disclosure practices.
Consequently, it seems like news from Captain Obvious that companies need to further integrate findings from robust materiality analysis into strategic planning, risk management and business modeling. However, as shown above, this is not a reality in many companies. So, what can be done to create insights on material issues that will then help to further drive CR integration?
Graphic: Applying a robust M&E framework
As references for evaluation frameworks and for examples, please see: http://sites.bu.edu/evaluatingaccess-novartisaccess/ and https://www.accessobservatory.org
CR integration through data and insights
At Novartis, we believe that CR integration needs to be driven by insights and data. Influencing the management decisions of an organisation – for example, the development of new business models that cater to the needs of patients in low-income countries – requires more than just narratives. A business case needs to be built on evidence that certain issues are relevant (and therefore deserve management attention) because they are at the cross-section of business and societal needs and will have an impact on the bottom line, or will help the company to mitigate and manage risks.
"Influencing the management decisions of an organisation requires more than just narratives."
A robust materiality analysis is an essential first step for stronger integration. At Novartis, we conducted our first materiality analysis in 2006. Since then, we have continuously improved the methodology to collect information that not only explains which topics society is expecting us to manage but also helps us to understand the why and how, as well as the different perspectives of relevant stakeholder groups. We believe that a materiality analysis, when done in the right way, can be an excellent tool to drive CR integration:
- Through systematic research and analysis, a framework of clearly defined topics is created that forms the basis for a common language across departments
- Stakeholder research provides qualitative and quantitative insights into why topics are important and how they will evolve over time
- A risk and opportunity assessment for each topic helps linking material topics with the current performance and activities
In our latest materiality analysis, published in 2018, we included new modules that helped us to significantly increase the depth of insights and the relevance for decision makers outside the CR department.
- With a risk/opportunity assessment, we transposed our current performance into the future and discussed with experts whether we would run into risks in the areas of costs, revenue and reputation, or would miss out on opportunities if we continued our activities as they are today.
- A scenario analysis helped us to look even further into the future to learn the relevance of an issue beyond our regular planning cycles.
Based on the data collected, we are now having discussions with internal topic owners, assessing our activities and defining areas for action. We are convinced that these discussions will further drive change as they have done in the past.
One problem remains: the insights from the materiality analysis are based to a large extent on perception data collected through surveys, interviews and desk research. Understanding stakeholder expectations is a crucial first step to substantiate our strategy – they will eventually have an impact on the market condition through regulation, consumer behaviour, and so on. But perception data is not enough. We need to create evidence with robust measurement and evaluation strategies and activities on two levels:
- at the level of our CR activities on the ground, to prove that they have a positive impact and not just good intentions
- at the corporate level, to manage the total impact the organisation is having on society and the environment
However, we also need to be realistic and see that measuring CR activities or environmental, social and corporate governance (ESG) issues as a whole can be a challenge: the level of complexity is high, as performance indicators are often interrelated and affected by third parties or macro trends that the company cannot control. In addition, activities usually come with intended or unintended aspects. Hence, if measured at all, companies tend to focus on output metrics as a proxy for impact: for example, the number of pills donated to patients rather than the impact the donation had on the communities these patients live in.
But these impacts will only occur if, for example, the donated medicines really reach the patients and are being used in the right way which is not always the case as our impact valuation studies show. Output metrics focus on the action/intervention itself and can only prove a good intention. Impact metrics on the other hand measure what really counts, namely the positive/negative consequences of the action.
On the activity level, to get closer to having robust monitoring and evaluation in Novartis for top material issues, such as access to healthcare, Boston University researchers have been evaluating the impact of Novartis Access, a programme against key chronic conditions, on Kenyan households. A core idea is that we want to be able to link social interventions and business models with our core strategic priorities. This makes it essential to understand the impact of these programmes. Such measurements enable us to improve programme management and resource allocation.
"We want to be able to link social interventions and business models with our core strategic priorities."
Following the performance of an investment is not just good management practice: we need to understand precisely how social impacts and enhanced business performance fit together. And this Is how we can finally achieve social change on a large scale. This triggered a whole range of activities around measurement and evaluation in the company (for more information, please see the article "Effect of Novartis Access on availability and price of non-communicable disease medicines in Kenya: a cluster-randomized controlled trial” in The Lancet).
However, we wanted to go even further and look at the impact we are having on the corporate level through a financial, environmental and social impact valuation (FES). The objective of FES is to quantify and monetise the impacts of our business activities. By looking at impact pathways, we translate positive and negative, direct, indirect and induced, intended and unintended, into financial terms. With this, we not only consider the impacts of our direct operations but also the impacts caused by our supply chain. We believe that this will enrich business and investment decisions to a considerable extent.
Due to the complexity of many issues, our approach to impact valuation is still evolving as we are not yet able to capture and calculate impacts for all dimensions of our issue areas identified by the materiality assessment. However, the current indicators already give us a lot of information on a global as well as a country level and help inform our business strategy. They also serve us when discussing our priorities and impacts with external stakeholders. Novartis plans to continue to add additional areas to the analysis to get closer to a full understanding of our impacts on society, both positive as well as negative.
1 George Serafeim et al. Corporate Sustainability: First evidence on Materiality; Harvard Business School Working Paper, No. 15-073, 2015