It’s time for a new corporate mantra for business leaders who want to turn a healthy profit, but also do good: “Dollars and cents first, social responsibility later.”
At least, that’s the gist of it.
The Inter-American Development Bank (IDB) has come up with a new methodology to figure out how business leaders can improve their bottom line while also making a positive social impact. Unlike old social responsibility programs of yore, IDB says this method will truly stick because it focuses, first and foremost, on profitability and revenue generation.
The development bank works with a wide range of firms in Latin America and the Caribbean and has helped transform many businesses with its loans and socially responsible business plans.
Kelle Bevine, chief of strategy at IDB’s Structured Corporate Finance group, sat down with Knowledge at Wharton to discuss her organization’s new methodology, dubbed the shared value appraisal.
An edited transcript of the conversation appears below.
Knowledge at Wharton: Let’s discuss the basics of IDB’s approach to social impact. Specifically, what is the shared value appraisal? What role does it play in your bank’s lending?
Kelle Bevine: IDB is a mission-driven lender that is very interested in social impact. The shared value appraisal is a relatively new tool that we developed to help our private sector clients identify new business strategies that would both improve their bottom line and benefit the community, or environment. The shared value appraisal helps us identify opportunities that can benefit the business and community at the same time.
Knowledge at Wharton: Let’s discuss a concrete case. You used the shared value appraisal when you worked with the Saint Ignacio University in Lima, Peru. Can you tell us about that deal and how the shared value appraisal was used?
“Ultimately, if a new initiative is not going to have a tangible impact on a company’s bottom line, we won’t suggest it.”
Bevine: Sure. The for-profit university was established in 1995 and was growing robustly. The university came to IDB in 2012 for a basic brick-and-mortar expansion loan, since we do a lot of infrastructure lending. They needed more campus buildings to accommodate their students.
However, we know that access to quality university education in Peru is out of reach for many low-income and disadvantaged students, which is a growing market segment. So this is the gist of what we said to them: “We want to help you expand, but while we consider loan options, let’s look at your business model, too. We can use our shared value appraisal tool to work out how to help you grow while also helping the community. If you plan to meet your growth projections, you can’t rely on a shrinking market of tuition-paying students. Our methodology will show us how to enhance your business model and enhance your access to students who otherwise wouldn’t attend your quality institution.”
This was a win-win situation to put the two together.
Knowledge at Wharton: In situations like this, how do you balance the financial considerations versus the social considerations?
Bevine: That is a common question. Ultimately, if a new initiative is not going to have a tangible impact on a company’s bottom line, we won’t suggest it. This is not a corporate social responsibility (CSR) program that is simply intended to generate goodwill. We want to see a concrete increase in revenues. Therefore, there’s no trade-off between financial gains and social gains. Both can be pursued at the same time. Once we removed this trade-off paradigm, that’s when it got exciting because we can serve clients while also improving the lives of people across the region.
Knowledge at Wharton: There’s been a lot of skepticism about corporate social responsibility. Some argue that it’s just a form of marketing and it’s not real and authentic. Do you think this shared value approach will help get rid of that skepticism and help corporations have true social impact?
Bevine: Let me be clear, I don’t have anything against CSR. I think companies that commit to robust corporate social responsibility programs can have a dramatic impact. But CSR programs, as wonderful as they may be, are the first to get cut when budgets are tight. So what we’re looking to create is a sustainable, transformational change within a business that won’t get cut during tough times.
When a core, profitable business is also creating social impact, you seriously mitigate risk of the program being cut. We want to eliminate the dichotomy where one arm of a business produces the revenue while another arm is doing great things that have social impact. Weaving them together so they’re inextricably linked is really the sweet spot that we’re after.
Knowledge at Wharton: But measuring social impact is very hard. Can you walk us through how you assess social impact using your shared value approach?
Bevine: Sure. It is very hard.
We start with the basic cost-benefit analysis methodology that’s known all over. We apply it to figure out how to prioritize our actions. We start by asking, “What’s your challenge to growth?” This is the business starting point.
In the case of Saint Ignacio University, administrators were facing the possibility that the university would see its population of new, tuition-paying students shrink. This was the business challenge. It’s a pretty primitive business model when you get down to the sources and uses of capital to run a for-profit university. After identifying the business challenge, we asked ourselves: “What can we do to ensure the university will increase its sources of revenue?”
Then we looked at the social angle to understand the areas of society that are underrepresented at universities. Peru has had a rapid expansion in what we consider the emerging middle class, which is a tremendous success story. But there are still large pockets of people that just don’t have access to higher education. About half of youth don’t even graduate high school. Essentially, half of the university’s potential clients can’t enter college.
“Sometimes our clients entertain a gut feeling about what they should be doing, but we bring back analysis showing that an alternative solution would be better and give clients more bang for their buck.”
After examining these factors, we went to figure out how to best design a program that would enable the university to recruit and retain more of these students, which would ultimately increase enrollment and revenue. We based our work on information provided by my colleagues in the public sector who had all sorts of well-established data showing that people who graduate from college gain higher incomes.
On some of our other projects, we had to do a lot of stakeholder analysis and extrapolate the information. We would go out and interview people, asking questions such as, “What will really matter to you?” and “What will really improve your quality of life?”
In many cases, the answers we collected and brought back to our clients were different from their original expectation. Sometimes our clients entertain a gut feeling about what they should be doing, but we bring back analysis showing that an alternative solution would be better and give clients more bang for their buck.
Knowledge at Wharton: Can you give an example of this scenario?
Bevine: Sure. We worked with an avocado producer in Chile that had been a small company but really started growing. They came to us for an expansion loan, but we saw an opportunity since they operate in such a dense, high-employment industry. They have many pickers and packers and everything.
We asked them, “What’s your biggest challenge?” They said, “Our biggest challenge is employee turnover. People leave the farm and then we have to retrain people and it’s a huge cost and drain on net income.”
Then we asked, “How were you planning to address this situation before we began our discussions?” They said, “The key to avoiding extra costs is better employee retention. To retain workers, we think we’ll need to foster loyalty. We’re considering investing in building a day care center to encourage people to work for us and stay with us.”
We thought this sounded like a great plan, so we explored that option along with others. But through the process and methodology that we followed, we found that investing $2 million in a day care center was not an optimal investment. The company had 20,000 employees — including direct employees and outsourced supply chain farmers — but only about 100 people would actually be able to walk to the day care facility with their kids. So those 100 people would be incentivized to stay with the company, but that’s not enough when you’re looking to retain 20,000 people.
When we did the stakeholder analysis, we found that the employee population was predominantly female, and we realized that if the company had a program to give their kids an education, that would help with employee retention. We suggested the company take the $2 million that it had planned to invest in the day care center and instead provide educational credits for the employees. This does not involve increasing spending; it simply involves optimizing and reallocating resources that were set aside for employee retention. This, in turn, improves the bottom line.
Knowledge at Wharton: That’s a great example. When you approach these issues using the shared value appraisal, are clients receptive to this approach? What are the challenges with getting people to understand why you’re doing this and how they can implement the solutions?
Bevine: There are definitely challenges.
But anyone who is coming to us for a loan is aware of our mission and they know we’re not engaging with them for pure profit reasons. But, based on our mission, they expect we’ll come with some suggestions. This isn’t the key challenge.
One challenge is that we often get redirected from top management to work with the person who is in charge of sustainability and CSR. But you need the C-Suite to get on-board. You need either the CEO or, at a minimum, the CFO to be willing to work with your ideas, since these plans have to become part of the core business.
We often say, “Yeah, I’d love to talk to your CSR person, but I really need to talk to the CFO too.”
That’s a recurring challenge, but we seem to manage it. We’re not just consultants coming in to provide advisory services. We’re also providing a potential loan. And every time we make our business case to the people in charge, they really get it. It’s just about getting the time to discuss the idea, and positioning the idea correctly.
Knowledge at Wharton: What challenges did you face in developing the shared value methodology?
“We often say, “Yeah, I’d love to talk to your CSR person, but I really need to talk to the CFO too.”
Bevine: Initially, we brought in outside consultants to help us build the nuts and bolts of a model that we could use. Far too frequently, we found there was a slide in thinking, with people saying, “Well, it will produced goodwill.” But I said, “No. I need to see dollars and cents.” If it’s too intangible, then it won’t merit the attention of the CEO or CFO, and we’ll instead be talking to the CSR guy. We want to say, “This deserves your attention. This needs to be part of your core business.” That was a challenge. But I think the methodology is robust and that’s what makes it click with businesspeople.
Knowledge at Wharton: Where do you see IDB going in the future in the area of social impact investing?
Bevine: We’re replicating the shared value ideas in the climate space. We’re asking, “How can we green our portfolio and make our companies more energy efficient? How can they invest in natural capital to drive their bottom line?” We are working with some very large forestry project sponsors in that space.
It’s really about using our relationships with large-scale private sector actors to help companies shift out of that business-as-usual mode into a mindset where they are focused on driving profits and driving impact at the same time.
I see a big future ahead of us because it looks like this concept really works. Once you get the alignment of interests correct, you really can start to look for scale.
Knowledge at Wharton: Can you give us an example of one of your green investments and how you went through the financial and social impact analysis there? How do you approach it?
Bevine: Sure. Our infrastructure practice is doing a huge amount of work with the renewable energy sector. We haven’t done fossil fuel-based generation projects in several years, which is fantastic.
I’m fascinated by our ability to get some private investors and private company owners to make investments that are not urgent.
Generally companies come to us looking for loans for growth opportunities. But we have used that to start conversations about other interesting initiatives they could pursue.
Now, we’ve gone beyond that. We can start up conversations with companies even when they are not looking for loans. We say to them, “There are opportunities for you to actually save on your energy consumption and your bills. The return on the investment would only take a couple of years. We can give you a loan for this. We’ll make sure we structure the debt in a way that works. The economics work.”
We are building a whole new business line that really changes the dynamic of how we go about addressing the climate change issue. This is something we hadn’t pursued beforehand.