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The Waves I: Value at the Edge
21 August 2021

I wrote in Tesla I and II about sustainability or ESG performance. But how do we move towards better performance? What follows is an overview of Incite’s Sustainability Value Spectrum which explores three different ways our ESG activities contribute value in relation to waves of disruption at the ESG edge. ‘The Waves’ forms one half of our sustainability performance equation. The other half considers depth of effort – or maturity – and I’ll share our thinking on that soon.

Developed in 2005, with ongoing tweaks, ‘The Waves’ has stood the test of time.

 

 

The framework shows how an expanding range of ESG activity enhances an organisation’s delivery of value. As organisations become more familiar with the edge, they expand their ability to turn ESG risks into opportunities to create or enable value.

In a nutshell:

  • Once they’ve realised that legal compliance (A.1) provides no immunity at the ESG edge, an organisation’s sustainability efforts turn to actively managing material ESG risks (A.2). The intention is to protect their current value streams.
  • Familiarity grows and organisations become aware of opportunities for profit-led social/environmental impact or ‘creating shared value’. Explorations follow (B.1). Viable innovations are scaled and may be linked together to reinforce each other (B.2). More on how that happens in a later post.
  • Having developed a solid profit-led ESG portfolio, organisations open to collaborating with peers – including competitors – to enable value by addressing systemic risks to the broader market ecosystem (C.1). A few are inspired to emulate living systems, focusing overtly on supporting cycles of life and qualitative growth (C.2).

Taking the property sector or real estate investment trusts as an example:

  • Most REITs manage carbon emissions and disclose the data to meet ESG raters’ expectations. (A: Protecting value)
  • Some REITs, such as US-based warehouse giant Prologis, install sufficient renewable energy infrastructure to increase non-GLA income and explore joint offset opportunities with their customers. (B: Creating value)
  • A handful are prototyping enabling platforms. SA-based Hyprop’s SOKO District digital leasing marketplace, for example, will allow customers to rent space and reusable shopfittings across their portfolio. (C: Potentially Enabling value)

As we become more familiar with the edge, we naturally start expanding our scope of activity. We should also find ourselves asking more difficult questions. These questions are catalysed at the edge rather than anywhere else we’d prefer to look, which is why highly distributed sources like social media become an important part of our intel. For example, as quoted by Mark Swilling, in Daily Maverick:

The sole purpose of a Mall is to permanently extract liquidity in the community ecosystem to the rich suburbs and offshore accounts.” Djo BaNkuna facebook post

If we don’t ask those questions, somebody will ask them for us and this will come in many forms. For many mall owners in South Africa, this took a particularly violent form a month ago, to which the article quoted above refers. And so it will be for each and every of our sectors as ESG awakening proceeds. Organisations that have taken ESG seriously for longer than the investors have a range of edge-tested capabilities, partnerships, tech, business models and networks to swing into action as another wave beckons. Dave Snowden call this exaptive innovation and it’s where future competitive advantage lies. (You can learn more about this way of thinking in a recent Field Guide from Cognitive Edge and the EU.)

Companies often develop their range of ESG activity in this sequence, but it doesn’t necessarily follow a linear progression. Some, like Kenyan-based mobile network operator Safaricom, leapfrog the over ESG risk management (A), to deepen their maturity in Shared Value (B) at the start. They spend time sorting out ESG risks to protect the value they’ve created at a later date. (And, in Safaricom’s case, the value created has far exceeded early expectations, with a very sizable chunk of Kenya’s GDP running through their platform.) You’ll see more examples of leapfrogs in Tesla II, many of which feature on the Fortune Change the World list.

Of course, companies have been creating Shared Value (B) well before Porter and Kramer popularised the term in 2011. (We use capitals to remind people that Shared Value is a technical term and does not mean ‘shared values’. I fear we’re up against the tide here.) Discovery, another leapfrog, launched their behaviour-based insurance model in 1992, featuring on Fortune’s inaugural list in 2015, almost 23 years later. It’s since been exapted (extended and adapted) to underpin their short-term insurance offering, banking operation and, more recently, informs their intention to reduce average CO2 emissions across their client base.

Most companies become aware of ESG opportunities (B.1) slowly and explorations are not always well received. Many people have ESG firmly pegged as a trade-off between social / environmental and financial value: value protection at best. This assumption is not easily overcome. And until very recently, sustainability types have largely been viewed as greenies who should not meddle in operational reality. So, unless the culture of the organisation can hold some tension, Shared Value explorations may fail to get the requisite investment and wither away. This happens more often than you would believe. I’m not naming companies because we might still work with some of them.

Over a decade, the average starting position of our clients has shifted from A.2 to B.1, which means that more companies are seeing opportunity at the ESG edge. We’re expecting this shift to speed up considerably in the next two years. Our clients move the red location marker around as they discuss where their current capability range lies. Then they discuss what they want their range to be in three or five years’ time. The best discussions usually end with a realisation that different parts of the business are at different positions at the same time, giving them insights into unexpected internal resources available to help expand their range of ESG activity.

In The Waves II, I’ll share some thoughts on another hidden resource that fewer companies are aware of, let alone exploring.

(P. S. I added C.2 in a slightly facetious mood, but I think naturalistic approaches may gain some ground as the climate crisis ramps up.)

 

The Great Wave off Kanagawa also known as The Wave, is a woodblock print by the Japanese ukiyo-e artist Hokusai. It was recently parodied in response to Japan’s nuclear wastewater dumping decision (https://www.globaltimes.cn/page/202104/1221726.shtml).

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