SUSTAINABLE BUSINESSFINANCIAL TIMES SPECIAL REPORT | Thursday June 23 2011

www.ft.com/sustainable­business­2011 | twitter.com/ftreports

InsideProcurementGroupsare usingtheirbuyingpower tofightpoverty. The task canbe complex butsuccess can havestriking effects Page 2

Measuring impactSocial issues are finallycatching up withenvironmental ones andprecise evaluation helpscompanies in theirreporting Page 2

TerminologyJargon has confusedthe sustainabilitydebate and languageshould be clearerPage 2

FinancialinclusionBanksandclientsneed tolearn

from each other in bothemerging anddeveloped markets.Plus, profile of BarclaysPage 3

Corporate partneringNGOs tread gingerly intheir dealings with theprivate sector – does aprospective ally fit thebill? Page 4

Project Laser BeamUnileveristeamingup withothergroups tohelp theworld’s poorest peopleby focusing on childnutritionPage 4

The world economymay remain fragile,but companies arenot abandoning

efforts to address theirsocial and environmentalimpact.

Preserving resources hasrisen up the agenda andsome big companies evenappear to be rethinking theway they do business.

Yet a significant gap inperformance exists betweensmaller and larger compa-nies.

Rising involvement ofsenior leaders is one indica-tion of the prominence ofsustainability in today’scorporate strategies, accord-ing to a recent report fromthe Global Compact, theUnited Nations’ corporatecitizenship network.*

More than 70 per cent ofrespondents said their chiefexecutives were activelyinvolved in policy andstrategy development, withalmost 60 per cent of pub-licly traded companiesreporting board engage-ment.

At the same time, some ofthe world’s largest compa-nies appear to be goingbeyond simply cutting theirresource consumption orintroducing energy effi-ciency measures.

They are focusing less onshort-term shareholdervalue and more on thevalue provided to customersand suppliers, as well as tothe environment and soci-ety at large.

“Many big businesses arein a real sense trying tomove towards much moresustainable practices andmodels,” says Gavin Neath,senior vice-president ofcommunications and sus-tainability at Unilever, theAnglo-Dutch consumerproducts group.

Unilever’s considerationof both business and societydates back to VictorianBritain, when WilliamLever, one of its founders,developed Lifebuoy soap tohelp reduce the spread ofdisease by promoting clean-liness. Similar motives liebehind its Shakti initiative,through which its soapproducts are distributed viaa network of low-incomefemale entrepreneurs inIndian villages.

More recently, some com-panies have been inspiredto develop business strate-gies that also benefit soci-ety following the publica-tion this year of a HarvardBusiness Review paper co-authored by Michael Porter,a Harvard Business Schoolprofessor and management

guru. Shared Value**, writ-ten with Mark Kramer,argues that companies canpursue self-interest whilealso creating value for thecommunities that are theircustomers and suppliers.

It is a proposition Nestléappears to have embraced.“It is not enough for acompany just to createvalue for the shareholder,”Peter Brabeck-Letmathe,chief executive, told a NewYork audience at the Coun-cil on Foreign Relations inMarch. “You also have tocreate value for the societyat large that allows you toact.”

For Nestlé, creating thislicence to operate meansfocusing, among otherthings, on ethical sourcing.With reports of child labouron cocoa farms in westAfrica sparking protestsfrom activists and con-sumer groups, Nestlé – oneof the world’s biggest cocoapurchasers – has developedprogrammes promoting thewelfare of the millions ofsmallholder farmers thatare its suppliers in develop-ing countries.

Unilever has recently re-emphasised that it is look-ing beyond traditionalmeasures of success. In out-lining its “sustainable liv-ing” plan last year, PaulPolman, chief executive,described a strategy drivenless by quarterly resultsthan by the need to focuson long-term sustainabilityin everything from deter-gents that wash at lowertemperatures to alternativesources of palm oil.

The company argues thatdeveloping such sustainableproducts and supply chainsis in the interests of boththe company and society.And part of this relates tothe threat to the supply ofnatural resources. “There’sthe simple arithmetic ofresource scarcity,” says MrNeath. “So if you look fiveor 10 years out, you’regoing to have to be doing

things very differently.”This is the same argu-

ment used by companiessuch as Nestlé in food andCoca-Cola and PepsiCo insoft drinks for addressingwater consumption. Forsuch companies, the pros-pect of severe water scar-city constitutes a risk tothe business as well as tosociety and the planet.

Meanwhile, PepsiCo hasgained attention recentlyfor intensifying its focus ondeveloping its line of “goodfor you” products. The com-pany this year has made a$50m investment andassigned more than 100 ofthe company’s top expertsto bringing new nutrition-based products to market.

Along with other compa-nies, PepsiCo sees businessadvantage as well as bene-fits for its consumers inmanufacturing productsthat contain healthier oilsor less sugar and salt.

“There’s clear consumerdemand for products thatare ‘good for you’,” saysMehmood Khan, chief exec-utive of PepsiCo’s globalnutrition group, and chiefscientific officer.

“If you look at the cate-gory of ‘good for you’ prod-ucts, it’s the fastest grow-ing, with three to six timesthe growth of other catego-ries,” says Mr Khan, whooversees the global evolu-tion of the company’s port-folio, including its researchand development activities.“So it makes absolute busi-ness sense.”

However, while somecompanies are connectingconsumer health, resourceconservation and labourconditions in developingcountries with competitiveadvantage, there is evi-dence that these ideas haveyet to take hold across thebusiness community.

The Global Compact sur-vey found that multi-stake-holder dialogue was beingconducted only by a minor-ity of companies respond-

ing, with 30 per cent or lessfor each area the reportexamined. Some 18 per centsaid they were not takingsustainability issues intoaccount at all with respectto their suppliers.

The report also high-lighted the fact that while 89per cent of the largest com-panies (with more than50,000 employees) said theywere addressing humanrights principles in their cor-porate code of conduct, only56 per cent of small andmedium-sized companiesreported this to be the case.

Part of the reason may bethat smaller companies areless prepared or less able toignore the demands of thefinancial markets for short-term profits. For sustaina-bility initiatives, such asthose being implemented bylarge, leading companies,tend not to generate imme-diate financial returns butaddress the long-term via-bility of the business.

Mr Neath admits thatinvestor demands can limitthe ability of companies totake on projects for whichprofits are likely to emergeonly after a period of years.“It’s certainly a constraintthat has to be factored intoyour thinking,” he says.

Mr Khan stresses theimportance of being clear inexternal communicationsabout the relationshipbetween the size of invest-ment and resources and thereturns to be expected fromany business innovation.

“If you’re very clear onthat, then the conversionbecomes more straightfor-ward,” he says. “It’s about

clearly mapping out theoperational goals, the finan-cial targets and how thenew products address per-formance – but performancewith purpose.”

Even so, companies can-not ignore the markets com-pletely, so for organisations

that want to implementlong-term sustainabilityinitiatives tensions arelikely to persist.

“You can constantly besaying that the future isgoing to be very differentfrom the past and that as aresponsible leader of a com-

pany, you have to do some-thing about positioning thebusiness for that future,”says Mr Neath.

“But at the same timeyou have to deliver forthe short term, and that’sthe tightrope that chiefexecutives have to tread.”

Benefits f lowas top peoplejoin the battleGaps persist butthe sustainabilityagenda remainson course despitehard times, writesSarah Murray

Resource issue: water scarcity is a risk to the business as well as to society and the planet Bloomberg News

Companies ‘fall into two camps’Is your company an“embracer” or “cautiousadopter” of sustainability?

A study this year by MITSloan Management Reviewand The Boston ConsultingGroup reveals two distinctcamps of companies, writesAndrew Baxter.

Embracers placesustainability high on theiragenda, while cautiousadopters have yet to focuson more than energy costsavings, material efficiency,and risk mitigation.

The report identifiesseven specific practicesexhibited by embracercompanies, which togetherbegin to definesustainability­driven

management. These includethe need to move early,even if information isincomplete; to be authenticand transparent internallyand with the externalstakeholders; and to workaggressively to “de­silo”sustainability, integrating itthroughout operations.

The commitment of thecautious adopters tosustainability is increasingat a far faster rate thanthat of the embracers.

Improved brandreputation is perceived asthe biggest benefit ofaddressing sustainability.More at http://sloanreview.mit.edu/feature/sustainability­advantage

In the third quarter of this year,Xstrata Copper expects to begin devel-oping a $4.2bn copper mine in theApurimac Region of southern Peru.

Construction of the Las Bambasproject will be the culmination of aseven-year process to obtain not onlyregulatory consents, but the criticalsupport of a local community thatmust be relocated to allow the open-cast pits to be dug.

Trust-building began in 2004, beforethe mining group even began explora-tory drilling. Teams of Xstrata staffarrived in the potato-farming commu-nity, at 4,400 metres in the CentralAndes, followed by doctors, agricul-tural specialists and even an experton guinea-pig farming.

At Las Bambas, the drive to win asocial “licence to operate” has gone

hand in hand with the legal process ofobtaining regulatory permits for min-eral extraction. The effort has beenthorough, because it is founded on along-standing recognition among min-ing companies of the need to buildcommunity goodwill if they are to winnew regulatory consents. The latterare needed to sustain their businesseslong term.

But Professor Matt Gitsham, direc-tor of the Ashridge Centre for Busi-ness and Sustainability at AshridgeBusiness School in the UK, says build-ing this social, or informal, licence tooperate is essential for every business.

“If you have a bank of goodwill andtrust, when things go wrong – andwith the best will in the world some-day things will go wrong – you aremore likely to be forgiven,” he says.

Technology has vastly increased theability of far-flung workers or envi-ronmental activists to publicise corpo-rate shortcomings.

Negative publicity is easily aroused,whether by operational accidents,apparent obstruction by pharmaceuti-cal companies to the availability ofcheap generic drugs in developing

countries, or, as Monsanto has discov-ered, public concerns over geneticallymodified foods.

The response is a substantial shiftin big companies’ approach to valuecreation. Talking about shareholdervalue alone is out of fashion. Today,many organisations argue that “act-ing in the interests of a wide range ofyour stakeholders is how to build themost durable value for shareholders”,says Prof Gitsham.

Paying attention to things custom-ers, suppliers, regulators and otherstakeholders care about has multiplebenefits. It can help recover from dis-asters, but also avoid pitfalls. And itcan facilitate deals or contribute tolighter regulation, making it easier toadapt and innovate.

Goodwill may be keyto gaining green lightLicence to operateSuccess can hinge on morethan following a legalprocess, says Ross Tieman Matt Gitsham: build ‘bank of trust’

Continued on Page 4

* 2010 Global CompactImplementation Survey,United Nations, June 2011

** The Big Idea: CreatingShared Value, Michael Por-ter and Mark Kramer, Har-vard Business Review, Janu-ary-February 2011

2 ★ FINANCIAL TIMES THURSDAY JUNE 23 2011

Sustainable Business

To an oil company’s head of sustaina-bility, the word “integrity” mightapply to anything from a humanrights policy to a set of corporatevalues. For an oil industry engineer, itmight be associated with the physicalperformance of pipelines.

But while the language of sustaina-bility can be poorly defined, somecompanies are developing terms thatmore accurately describe efforts tomanage environmental and socialrisks and opportunities.

“We should not be preoccupied bylanguage, but language does matter,”says David Grayson, professor of cor-porate responsibility and director ofthe Doughty Centre for CorporateResponsibility at Cranfield School ofManagement in the UK. “It can clarifyor confuse.”

When it comes to the word “sustain-ability”, a multitude of corporate defi-nitions prevails. However, the waycompanies describe their behaviourwith respect to society and theenvironment varies widely and hasevolved over the decades.

For many years, companies talkedof little more than “corporate citizen-ship”. Later the initials “CSR”emerged, referring to corporate socialresponsibility (but often describingmore philanthropic activities).

Prof Grayson argues that conceptssuch as corporate citizenship are lessrelevant to today’s companies thanthe way they conduct their core busi-ness activities.

“I am only marginally interestedin how a company spends half or1 per cent of its pre-tax profits,” hesays. “I am passionately interested inhow a company makes its profits.That’s why I prefer to talk about‘responsible business’ and ‘corporatesustainability’.”

Following this year’s publication ofa Harvard Business Review papertitled Shared Value, the idea thatcompanies should invest in the com-munities that are their customers andsuppliers acquired a new description –one that now is being used by a grow-ing number of companies.

“Shared Value emphasises innova-tion and the concept of maximisedmutual value creation and develop-ment,” says James Farrar, vice-president of sustainability at SAP, theGerman software group.

Meanwhile, the investor communitytends to talk about the “ESG” (envi-ronmental, social and corporate gov-ernance) performance of companies.

Mr Farrar believes that the variousterms in use apply to different corpo-rate approaches. “Corporate citizen-ship emphasises the voluntary civicrole of business in the community,”he says. “CSR emphasises the respon-sibility of business to the communityand the rights of stakeholders beyond

shareholders.”Increasingly, however, more specific

language is emerging to describe cor-porate activities that address socialand environmental issues, particu-larly when it comes to climate changeand the conservation of naturalresources.

In addition to “carbon reduction”,among the most widely used is“resource efficiency”. This term hasemerged as companies have recog-nised that addressing their environ-mental impact means looking beyondtheir carbon footprint to their use ofwater and natural resources such asforests and plants.

“We do need clearer language,” saysPeter Lacy, head of sustainability forEurope, Africa and Latin America atAccenture, the consultancy. “But thewords people increasingly use are‘resource scarcity’ and ‘rising stake-holder expectations’, and they dounderstand the whole issue of ‘ethicalstandards in business’.”

For some industries, the language isbecoming far more specific. In thefood sector, for example, companieshave moved from talking about “CSR”to notions such as “traceability”, “eth-ical sourcing” and “food security”.

Mining companies, which have beentackling social and environmentalrisks for longer than many, tend totalk less of broad concepts such as“sustainability” or “corporate re-sponsibility” than of addressing socialrisks such as local protests, ethicalobstacles such as bribery and corrup-tion, or environmental threats suchas toxic waste and resource degrada-tion.

“That’s a product of long practiceand a reflection of the level of sophis-tication inside these organisationsthat they know what each of thosethings mean,” says Mark Lee, execu-tive director of SustainAbility, a con-sultancy.

Mr Lee also cites the example ofStarbucks, the US coffee chain, whichfocuses on areas such as ethical sourc-ing, food ingredients and nutrition forconsumers. “They now feel they’vedefined what being responsible meansfor them,” he says. “And they’ve beenat it for longer. They’re two decadesof finding their way into it and theynow have a language that works forthem.”

In fact, companies that have devel-oped sustainability strategies overlong periods of time tend to have alsodeveloped a set of terms that describemore specifically the risks and oppor-tunities they are attempting to man-age. “The companies that are doingmost have worked their way throughthe jargon to a language that makessense for their employees and fortheir industry,” says Mr Lee.

Companies ensureefforts are notbeyond descriptionTerminologySarah Murray on how toavoid adding confusion tothe sustainability debate

‘We should not bepreoccupied by language,but language does matter’

David Grayson,Cranfield School of Management

Carbon emissions and resourceconsumption tend to be meas-ured within the organisationwhere they happen, as they hap-pen. In contrast, measuring thesocial impact of sustainabilityinvestments in areas such ashuman rights, labour standardsand business ethics involvesmeasuring a wide range ofrelated external issues over aperiod of time.

“Social issues were runningfive years behind environmentalones,” says Teresa Fogelberg,deputy chief executive at theGlobal Reporting Initiative(GRI), which maintains a sus-tainability reporting framework.“2011 is a historic year, becausewe have closed the gap.”

She refers to last month’supdate of the Organisation for

Economic Co-operation andDevelopment’s Guidelines forMultinational Enterprises onethical behaviour. And wideacceptance of the framework onhuman rights produced by Pro-fessor John Ruggie, the UnitedNations secretary-general’s spe-cial representative for businessand human rights, which isincorporated into the GRI guide-lines.

Ms Fogelberg is also excitedby The Consequences of Manda-tory Corporate SustainabilityReporting, a study by IoannisIoannou at London BusinessSchool and George Serafeim atHarvard Business School. Thisexamined the effect of manda-tory reporting on several meas-ures of socially responsible man-agement practices in 58 coun-tries.

It found that reportingincreases the social responsibil-ity of business leaders; raisesthe priority of sustainable devel-opment and employee training;improves corporate governance;reduces bribery and corruption;and increases managerial credi-bility.

Fronesys, a sustainabilityadvisory company, has identi-fied well over 1,000 individualsustainability impact measures.These include the GRI Guide-lines, the Ethical Trading Initia-tive Base Code and SocialAccountability International’sSA8000. It also uses externaldata from organisations such asGovernanceMetrics Interna-tional and Reputex.

“While there is no shortage ofpossible indicators, organisa-tions need a proper process toidentify which impacts are mostmaterial,” says Jyoti Banerjee, apartner at Fronesys. “It is adeeply strategic activity,because once an impact isdeemed to be material, it can bemonetised and decisions madeon how to manage it.”

Dror Etzion, professor of com-pany strategy at the DesautelsFaculty of Management ofMcGill University in Canada,points out that many organisa-tions focus on compliance withprinciples, codes, protocols andother practices regardinghuman rights, labour, commu-nity and so on. However, this is

one step removed from actualimpacts. “Compliance is noguarantee that organisationsare actually making positivecontributions to the stakehold-ers they affect,” he warns.

One problem with measure-ment is that it is not alwayseasy to distinguish betweensocial areas, because they havesimilar impact. Tom Smith ishead of marketing and business

development at the SupplierEthical Data Exchange, a not-for-profit membership organisa-tion. He points out that labourstandards, health and safety andbusiness integrity can allincrease productivity and prod-uct quality and reduce strikes,recalls and supply chain disrup-tion.

Charity Bank has providedloans amounting to almost

£130m ($210m) to more than 900charities and social organisa-tions since 2002.

Geoff Burnand, its chiefinvestment officer, explains thatcompanies that used to makecharitable donations now make“impact investments” and needto see that their money is beingused effectively.

“There are various approachesto measurement, no method isuniversal and there are no his-torical data,” he says. Workingwith Investing for Good, a spe-cialist adviser for impact invest-ments, of which he is also chiefexecutive, Charity Bank meas-ures the social value of itsinvestments through its ownimpact rating.

It is based on confidence, interms of financial stability andinvestment risk; financialreturn; and impact. Impact cov-ers mission fulfilment, usingquantifiable indicators for meet-ing initial objectives; value to astakeholder, in depth of involve-ment and how their contribu-tion affects change; and howthis change has made thingspossible beyond the organisa-

tion and its immediate stake-holders.

Another organisation that hasdevised its own way to measureits social impact is Green-Works, a registered charity anda social enterprise that “tradesfor the planet and the people”. Itis paid to take away old officefurniture that it refurbishes andsells. It invests any profit intraining hard-to-employ people,such as prisoners, homeless andlong-term unemployed.

“Every pound we take pro-duces £1.55 in social and envi-ronmental benefits, includingonly a small amount of carbon,”says Colin Crooks, its chiefexecutive. The social enterprisemakes a qualitative assessmentof trainees’ job readiness whenthey join and leave, coveringconfidence, approachability andpotential.

Valuation uses external meas-ures, such as the £21,000 a yearthat homeless people cost thestate in healthcare, emergencytreatment and police time; andthe long-term reduction inprison costs by avoiding repeatoffences. With 38 per cent of

Tracking social impact catches up with resource issuesMeasurementPrecise evaluationadds to the reportingability of organisations,writes Rod Newing

The procurement policies ofmultinational companies canshape the prosperity of com-munities, regions and nations.

Many are now trying to use theirpurchasing power to combat poverty,but the task is complex.

Demand is only half the equation.In emerging economies, they havealso to nurture capacity among smallfarmers and entrepreneurs even asthey offer them a market.

When they succeed, the effects canbe striking. Five years ago, HeinekenInternational set out to procure ricelocally for Bralima Breweries, a sub-sidiary in the Democratic Republic ofCongo.

In partnership with the EuropeanCo-operative for Rural Development(Eucord) a Brussels-based non-govern-mental organisation (NGO), and theSchokland Fund, backed by the Neth-erlands government, Heineken pro-moted rice production in abandonedpaddies along the River Congo. Theproject provided seeds, advice, boatsto collect the harvest and even bicy-cles to transport the sacks to the jet-ties.

Last year, production was up morethan fivefold to 11,120 tonnes, exceed-ing Bralima’s needs. Locally grownrice is now being redirected to foodmarkets in Kinshasa. “When farmerstrust they will be paid, they go for it,”says Tom de Man, Heineken regionalpresident for Africa and the MiddleEast.

Heineken reckons more than 21,000farmers and dependants are inte-grated into Bralima’s supply chain,replicating the success of its sorghumprocurement schemes in other westAfrican states.

Some companies are reaching out todeveloping country smallholders frommarkets in the “rich” world. Throughthe Cadbury Cocoa Partnership andother initiatives, Kraft Foods reckonsit is engaged with more than 230,000cocoa farmers in Ghana, a third of thetotal in the country.

The effort is driven by enlightenedself-interest: the need to refresh a flag-ging supply chain to ensure its sus-tainability. Research in 2008 painted apicture of unstable incomes, decliningyields and ageing farmers. The CocoaPartnership, embracing the Ghanaiangovernment and NGOs, encourageseach farming community to draw upan action plan. “We then look at howwe can help them get there,” saysAlison Ward, associate director of cor-porate affairs at Kraft.

Yields are reported to be improving.But the goal is also to develop adynamic of rising living standards forcocoa farmers and their families, sothat young people take up the produc-tion relay. Part of the £45m committedover a decade by Kraft is being usedto provide village wells, electricityand travelling doctors, as well asbolstering access to training, inputs,credit and advice on farming practicesvia farmer organisations.

Economic development activities ofthis sort are a far cry from the busi-ness of making and marketing choco-late bars, or retailing to consumers.Another model used by both KraftFoods and Marks and Spencer, theUK-based retailer, is to sell productscarrying the label of the FairtradeFoundation.

Paul Willgoss, head of food technol-ogy at M&S, notes that procuringFairtrade tea, coffee, wine or greenbeans, which are popular with cus-tomers, does not let multinationals offthe hook in terms of social responsi-bility.

“We have a set of global sourcingprinciples that we apply across our

business, regardless of whether theproduct is Fairtrade or not,” he says.

But when companies work directlywith suppliers that invest in schools,healthcare and buses to get people toand from work, “there is a danger ofdeveloping a paternalistic arrange-ment”, says Mr Willgoss. The Fair-trade system puts matters in thehands of the community, empoweringlocal leaders to make the developmentchoices.

Yet amid the focus on poor farmers,the capacity of multinationals toboost wider economic development isoften overlooked. Andrew Hinkly,group head of supply chain at Anglo

American, the mining group, says:“Linking a company’s demand forgoods and services to local economiesis fundamental to private-sector jobcreation.”

In-country operations should try tomaximise local procurement of goodsand services, says Jean-Marc Fon-taine, vice-president for health, safety,environment and sustainable develop-ment at Total E&P, an oil company.“The biggest challenge is the lack ofcapacity in communities.”

Total’s response is to split contractsinto small lots, so community compa-nies can respond, and provide trainingand support where needed. Such initi-

atives can extend beyond the com-pany’s own value chain. In PointeNoire, Republic of Congo, a Total-backed association teaches would-beentrepreneurs how to set up and runcompanies, and obtain credit. “Overtime, we can develop small andmedium enterprises (SMEs) with thecommunity,” Mr Fontaine says.

The value of such initiatives hasbeen proved over two decades byAnglo American Zimele, a South Afri-can enterprise development offshootof the mining group. In 2010, it pro-vided $17.6m in funding, along witheducation and mentoring, for SMEsthat employed 3,286 people and gener-ated turnover of $41.8m.

This success shapes Anglo Ameri-can’s approach to enterprise develop-ment in Chile, Brazil and elsewhere,Mr Hinkly says. “Our focus is on lever-aging our procurement spend, whichwas more than $10bn in 2010, to buildresilient local supply chains that fostereconomic and social development inthe countries where we operate.”

David Noble, chief executive of theChartered Institute of Purchasing &Supply (CIP&S), says governmentshave noted such achievements, and“in Africa are imposing local sourcingrequirements where they can”.

Aided by a joint United Nations-CIP&S programme that is trainingprocurement officers, many states arealso trying to strengthen their ownability to buy locally.

The power of procurement to createprosperity is now widely recognised.But companies, communities and gov-ernments are still learning how to useit to best effect.

Groups use purchasingpower to combat povertyProcurementEnlightened self­interestlies at heart of companies’efforts, says Ross Tieman

ContributorsSarah MurrayFT Contributing Editor

Alison Maitland,Rod Newing,Ross TiemanFT Contributors

Andrew BaxterCommissioning Editor

Nick SmithSub­Editor

Steven BirdDesigner

Andy MearsPicture Editor

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‘Our focus is on leveragingour procurement spendingto build resilientlocal supply chains’

Fair point: procuring Fairtradeproducts ‘does not let retailers

off the hook in terms ofsocial responsibility’

Alamy

trainees finding employment orundertaking more education, MrCrooks says the training savesthe state £5,000 per individualeach year, as well as generatingtax revenue.

Mr Banerjee warns that a sig-nificant challenge for manybusinesses is that their sustain-ability impacts are tucked awayin their supply chains. “Gettinghold of the relevant data is diffi-cult,” he says. “They may nothave the measures themselvesor do not want to share it withyou.”

B Lab, a non-profit organisa-tion helping business have apositive social and environmen-tal impact, has created theGlobal Impact Investing RatingsSystem. This rates social andenvironmental impact as aguide for potential investors.

“The most important thing isto gather a tremendous amountof data and measure impactover time to produce perform-ance trends,” says AndrewKassoy, its co-founder. “Compa-nies are measuring impact notjust as an assessment tool, butan improvement tool.”

Compliance isno guaranteethat positivecontributionsare being made,says McGill’sDror Etzion

FINANCIAL TIMES THURSDAY JUNE 23 2011 ★ † 3

Sustainable Business

Profile BarclaysBarclays operates banks inmore than 50 countriesworldwide, and financialinclusion is an importantpart of its citizenshipstrategy.

Banking for Billions, areport it commissionedfrom the EconomistIntelligence Unit in 2010,found that 2.5bn of theworld’s adults remain“unbanked”.

“Tackling financialinclusion is one of the mostimportant aspects of gettingpeople out of poverty,” saysAntony Jenkins, chiefexecutive for retail andbusiness banking.

Whether you areaddressing the US, Europeor Africa, a range of issueshave to be considered.However, there is no ‘onesize fits all’ solution,because they vary so muchbetween markets.”

These issues includeformal and informalstructures, legal identity andverification, regulatorypolicies, urbanisation, rurallocations, literacy, age,collateral, women’sempowerment, migration,levels of income, cultureand psychology.

The bank takes acollaborative approach,working locally withgovernments, voluntaryagencies, consumer groups,microfinance institutions,technology providers andbusiness.

Rather than develop aproduct or service that abank thinks is needed, itengages with eachcommunity to find out whatthey want. Partnerships withthe voluntary agenciesalready working with localcommunitiesareespeciallypowerful.“Theyaretrustedand havemore

scope and impact,” says MrJenkins. “They help us tounderstand the informalstructures in place so thatwe can build on them.”

He says financial inclusionis not just about givingpeople access to financialservices, which they mightnot use, but helping themthrough the whole life cycle,including use of the productor service and increasingtheir financial awarenessand capability.

The bank cannot do allthis directly, but relies onvoluntary agencies. Theywork with people who donot visit banks, read theirliterature or seeadvertisements. They usenot just their skills andcapabilities, but theirnetworks in thecommunities.

Mr Jenkins insists thatfinancial inclusion is a long­term strategy that mustco­exist with short­termprofitability objectives. He isbuilding into the culture ofthe bank the need tobalance the interests of allstakeholders in both theshort and the long term.

“It isn’t just about theimmediate bottom line,” hesays. “You have to look atthe long­term interests ofsociety and the role thatbusiness plays in helping todrive positive change.

Financial inclusion is goodfor economic growth, whichis good for business. Overtime, these vulnerablepeople become potentialemployees, customers andclients. It is the ‘right thingto do’, but there isdefinitely long­term bottomline value.”

He recognises that mostbig companies are changingtheir views on whatsustainability and citizenshipare really about. It is nolonger about communityinvestment; it is about theway companies do business.

“We have made someprogress, but there is a lotmore to do. The key is toleverage the power ofpartnership to change thegame and make a big

difference.”

Rod Newing

Antony Jenkins:doing ’right thing’

Financial inclusionhas a big role toplay in relievingpoverty and increas-

ing general economic pros-perity. Yet the majority ofpeople in emerging marketsdo not have access to abank account.

“They choose to ‘stash’their wages under a mat-tress, where it is at risk ofbeing stolen; invest it incattle which can becomediseased and die; or in com-munity saving schemes,which are often fraudu-lent,” warns Pankaj Gulati,chief executive of More-Magic Solutions, which pro-vides mobile money serv-ices in emerging markets.

However, traditionalbanking products andbranches have little to offerpoor people, whether home-less, living in slums or inrural areas.

“Innovation lies not withproducts, but with theinsight into consumerfinancial behaviour,” saysJulius Abensur, a financialservices expert at PA Con-sulting Group.

Banking processes arehighly structured, beingbased on customers visitingformal branches or usingthe internet, and they valuereliability in customers.

“There is a natural crea-tive tension between banksand poor people, who arenot structured,” says PeterRyan, founder and chiefexecutive of MicroLoanFoundation, a charity thatprovides small loans andbusiness training to womenin sub-Saharan Africa.

Mr Abensur adds thatreliability is uncommon inthe lives of the less privi-leged, whose income is lowand irregular. Dealing withunpredictable cash flows ismore important than calcu-lating the best mix of risk

and return, which is typicalof more privileged custom-ers.

He says: “Financial insti-tutions have to move awayfrom trying to address thepoor using their ‘balance-sheet binoculars’, towards a‘cash-flow kaleidoscope’ tobetter understand the reali-ties of their financial lives.”

Perhaps the biggest issueis creating trust betweenthe vulnerable “unbanked”and a financial institution,especially global retailbanks.

Mr Abensur warns: “Cer-tain elite members of ruralcommunities attack privatebusiness for political rea-sons that can be tracedback to colonial times.”

Solutions include workingwith local financial institu-tions, which are generallybased on business bankingin cities, to create nation-wide retail operations, or towork with the voluntarysector. Banks must eitherestablish informal “shops”near their customers, suchas in slums, or visit them intheir villages.

Rabobank Group, a Neth-erlands-based co-operative,is providing technicaladvice and taking minorityinvestments in local institu-tions.

“It is close to our hearts,as we were created by poorfarmers without any finan-cial means,” says FrankNagel, head of project man-agement for Africa. “It issimilar to what we did inthe rural Netherlands morethan a century ago.”

MicroLoan Foundationlends to groups of womenin rural areas to start busi-nesses. Its 120,000 loansaffect 650,000 family mem-bers, and 99 per cent ofmoney is repaid and thenre-lent. “There is a creativetension between us andbanks,” says Mr Ryan.“Eighty per cent of what wedo is training, mentoringand support.”

Areas include how towork with MicroLoan, howto run a business, the con-cept of interest, how towork as a group and how tosupport each other. The

foundation visits each cli-ent every two weeks to con-tinue the process.

Rabobank teaches similarsubjects. “Many peoplethink if they get a loan theydon’t have to repay it,” saysMr Nagel. “You have towork on their literacy levelswith very basic stuff, justas we did in the Nether-lands.”

Unlike traditional bank-ing, the onus on ensuringmicroloans are repaid lieswith the bank. Customersmust not be punished withhigher interest rates or laterepayment fees.

Poverty is not restrictedto the developing world andsuch schemes are needed inmature economies. The US

Federal Deposit InsuranceCorporation’s 2009 NationalSurvey of Unbanked andUnderbanked Householdsestimated 17m adults in thecountry do not have a bankaccount.

Grameen Bank, owned byits clients and the Bangla-desh government, won aNobel Peace Prize in 2006for its work providingcredit to poor women inrural parts of the country,without any collateral.Grameen America began itsoperations in New YorkCity in 2008 and is expand-ing across the country.

MicroLoan has recentlytaken two UK organisationsto Africa to see its work, sothey can bring some of thelessons back.

“There is a tremendousopportunity for microfi-nance in developed econo-mies,” says Mr Ryan. “Poorpeople have not been edu-cated in how to worktogether and support oneanother. They could set upvery successful small busi-nesses doing very simple

things needed in every com-munity, such as car wash-ing, painting, decorating orgardening.”

Mr Abensur sees somechallenges to inclusion inmature markets. There isgovernment pressure tosupport small business, notsmall people.

Automation, such as

credit scoring, makes thecost of allowing exceptionsunpalatably high and banksare driving alternatives tocash, when the poor arealmost exclusively depend-ent on it.

Lastly, the poor in manywestern countries haveactively resisted inclusion,even from non-banks such

as postal services, so achange in behaviour andattitude is required.

Mr Gulati at MoreMagicsays that mobile moneyservices in African coun-tries have seen householdincomes increasing by up to30 per cent.

Rabobank’s Mr Nagel con-cludes: “Banks have a

responsibility to promotestructure and self-disciplinein the financial lives of theless privileged.”

“Connection to financialservices changes people’slives by making themaware of their financialmeans, so they can plantheir expenses and see thebenefits of regular saving.”

Banks and clients mustlearn from each otherFinancial inclusionThere is more to doin emerging anddeveloped markets,writes Rod Newing

A little goes a long way: Bangladeshi women receiving microcredit from Grameen Bank Corbis Sygma

‘Innovation lies notwith productsbut with the insightinto consumerfinancial behaviour’

4 ★ FINANCIAL TIMES THURSDAY JUNE 23 2011

Sustainable Business

A good record travels as wellas a bad one. Claire Divver,head of corporate affairs atXstrata, notes the benefits ofpositive perceptions.

“When we bought Falcon-bridge [a copper miner] in 2006,we had to make the case in Can-ada that Xstrata’s acquisitionwould bring benefits for commu-nities,” she says. “We were ableto hold up the example of ourearlier acquisition of Mount Isain Australia.”

Today, the slightest failure tomeet social and environmentalnorms – no matter where – putsa multinational’s licence tooperate at risk. But socialinvestment has also become away to build goodwill and brandimage.

Some companies – such asBody Shop and Google – haveanchored their consumer appealin ethical behaviour. Ben Pack-ard, vice-president for globalresponsibility at Starbucks,says: “If you look at the Star-bucks brand proposition, sus-

tainability is core to the visionand values of the company.Long-term relationships withcoffee growing communities arepart of what we stand for.”

Standard Chartered, a UK-based bank that is strong inAfrica and Asia, has adopted theslogan “Here for good”. Commu-nity investment is a key part ofits sustainability strategy, saysAlisha Miranda, senior managerfor community investment.

“It is not just about philan-thropy,” she says. “It is aboutgenerating high social returns

and ensuring we can be a bankfor as long as we can.”

In 2010, Standard Chartereddevoted $47.4m, or 0.92 per centof operating profit, to this goal.The group has three global pro-grammes, centred on: HIV andAids education; tackling avoida-ble blindness; and empoweringwomen. It also contributes tomalaria prevention in Africa.

Why these? “We look at howwe can contribute to causes thathave been identified as criticalby communities and govern-ments in countries where we

operate,” says Ms Miranda.“Governments are an importantstakeholder for us.”

Aids and malaria are alsoemployee health issues in someof the bank’s territories. Thatoffers a chance for engagementby employees with externalstakeholders – a plus for thebusiness. To leverage itsemployee Aids education pro-gramme, the bank shared mate-rials with customers and sup-plier partners.

Close involvement of employ-ees is a growing part of many

corporate community actionprogrammes designed to rein-force the social legitimacy oforganisations, says Prof Git-sham.

KPMG, a professional servicesfirm, allows UK employees halfa day a month of paid absenceto spend time on communitywork. The firm works directlywith schools, and encouragesstaff to become governors of theschools their children attend.

Opportunities for communityinvolvement facilitate recruit-ment, improve staff retention

and broaden employee skills,says Mike Kelly, the firm’shead of corporate social respon-sibility.

“It is not a one-way street,” hesays. “There are very tangiblebenefits coming back to thefirm.”

Yet measuring the payback oncommunity investment remains“the Holy Grail”, says MsMiranda at Standard Chartered.The returns from investing in alicence to operate are rarely ascopper-bottomed as those fromXstrata’s new mine.

Goodwill may be key to gaining green light for developmentContinued from Page 1

Acouple of decades ago, non-governmental organisations(NGOs) and companiestended to see each other as

opponents, but recent years have seena radical change.

Large non-profits and campaigngroups have set up business-facingdivisions through which to work withcompanies on social and environmen-tal issues. For these organisations,however, the question is how toassess whether or not a company willbe an appropriate partner.

Some NGOs have had corporatepartnerships for many years. US-based Environmental Defense Fund,which first entered a partnership withMcDonald’s more than two decadesago, is one of the most well versed inthe field.

Since then others have followed.WWF works with companies thatinclude Procter & Gamble, Marks andSpencer, HSBC, SABMiller and MBNAEurope Bank. Oxfam has establishedpartnerships with companies such asAviva, Accenture and PizzaExpress.

However, NGOs and campaigngroups, like companies, have brandsto protect. They also have large mem-bership bases and groups of donors,

all of which pay close attention to theactivities of the organisations theysupport. Not every business willtherefore make the right partner foran NGO.

“It’s a matter of establishing wherethere is value added and whether it’sreally worth the transaction costs,including reputation costs – becausethose can be quite high,” says RosTennyson, director of the PartneringInitiative, which fosters partnershipsbetween business, government andcivil society that promote sustainabledevelopment.

For Oxfam, this means researchingpotential business partners before anyformal agreement is signed. Ahead ofany agreement, a research team at theUK-based charity taps into online andother resources for information abouta potential partner.

Oxfam also gathers intelligencefrom industry figures and the data-bases of organisations such as Eiris,which provides independent researchinto companies’ environmental,social, governance and ethical per-formance.

“Because we’re a campaign andadvocacy NGO, due diligence and anethical check is a very significantpart of what we do before forming apartnership,” says Chris Ashworth,corporate partnerships manager atOxfam.

“And the acid test is that we don’tpartner with anyone who substan-tially undermines our cause.”

This may mean ruling out partner-ships with companies whose mainbusiness is, for example, in manufac-

turing and selling arms. However, MrAshworth also says that potentialbusiness partners need to adhere tocertain principles, such as recognisingfreedom of association, or to havesigned up to codes of ethics, such asthe banking sector’s Equator Princi-ples or the United Nations’ Principlesfor Responsible Investment.

Mr Ashworth stresses the need to berealistic, however. “No organisation isever going to be perfect,” he says. “Ifwe expect any entity to live up toevery one of our exacting principles,then we’ll be hamstrung in our activi-ties.”

The idea, he explains, is to establishwith corporate partners the areastargeted for change and then, as thepartnership evolves, to seek assur-ances on a regular basis that progressis being made in those areas. “WhatNGOs are good at is being criticalfriends,” he says.

For Environmental Defense Fund,too, working with squeaky “green”companies is not necessarily the pri-ority, since its aim is to transformcorporate environmental performance.

With FedEx, for example, it formeda partnership in 2000 to develop thefirst fleet of commercially viablehybrid trucks, while with KohlbergKravis Roberts, it is working toimprove the environmental perform-ance of the companies within the pri-vate equity group’s US portfolio.

Taking no money from its partners,the environmental group works todevelop new sustainable businesspractices that can be replicated acrossindustries.

“So, what we’re looking for is wherewe can be the most transformative,and that often means not workingwith companies that are squeakyclean,” says Gwen Ruta, director ofEnvironmental Defense Fund’s corpo-rate partnership programme.

“So, we’re working with Walmartand DuPont. Not everyone thinksthey are the fair-haired boys of theenvironment set, but these companieshave leverage, and we want to be ableto use that leverage.”

For the EDF, the courtship periodtherefore means establishing whetheror not companies are genuinely readyfor change and willing to share whatthey learn with other businesses intheir sectors.

This means engaging in conversa-tion with individuals from the com-pany early on. “You have to meet allthe people that are going to be part ofthe process and understand whetherthey’re bringing the right people in,”says Ms Ruta. “Because if you’re talk-ing about operational change and youdon’t have the operations guy in theroom, forget it.”

Asking the right questions is criti-cal, says Ms Tennyson. “You have tohave a checklist of what you expect,”she says. “And a lot of that is aboutwhether or not the company is pre-pared to invest people time, ratherthan just making a donation.”

A “partner assessment tool” createdby the Partnering Initiative has a listof suggested questions for a prospec-tive partner, including askingwhether it has a good record, usefulcontacts that it is willing to share,

skills that complement those of theNGO, financial stability and a stablegroup of employees. The tool also sug-gests finding out whether prospectivepartners are experienced in develop-ing projects, can successfully mobiliseand manage resources, and haveemployees that are good communica-tors and team players.

As well as asking the right ques-tions, NGOs need to work with theircounterparts to ensure both partieshave the same goals and expectations.

This was the case for WWF in itspartnership with P&G, which hasevolved from an informal workingrelationship on issues such as con-sumer education, forest conservationand use of renewable resources to aformal three-year partnership.

As part of this process, individualsfrom P&G and WWF meet every threeto four months to discuss progress onvarious goals. “We have a formalwork plan for the things we’re work-ing on with various deliverables,”says Len Sauers, head of global sus-tainability at P&G.

However, while many leading NGOsare embarking on partnerships suchas the one between P&G and WWF,Ms Tennyson at the Partnering Initia-tive argues that this is not happeningfrequently enough.

“A lot of NGOs still think compa-nies are a necessary evil,” she says.“They’re not doing enough partneringor thinking through what the genuinevalue [of corporate partnerships] is interms of innovation and challengingand changing behaviour and ulti-mately sustainability.”

NGOs tread gingerly when matchmakingCorporate partnershipProbing questions helpdetermine whether aprospective ally fits thebill, says Sarah Murray

‘The acid test is that wedon’t partner with anyonewho substantiallyundermines our cause’

Chris Ashworth,Corporate partnerships manager,

Oxfam

Inspecting contaminatedwater supplies, meetingimpoverished villagers andsweating under mosquitonets in Bangladesh is notnormally part of the jobdescription for the head ofEuropean communicationsat a multinationalcompany.

But Patty O’Hayer(pictured below) wearsmore than one hat atUnilever, the Anglo-Dutchconsumer goods group. Sheis also head of globalpartnerships. As such, sheplays a pivotal role inProject Laser Beam, a$50m five-year partnershipbetween the private sectorand the UN, which has theambitious goal of endingchild malnutrition.

Over the past 18 months,Ms O’Hayer has spent upto two weeks every quarterin Bangladesh,investigating solutions to aproblem at the root ofunderdevelopment.

“If children aren’t gettingsufficient nutrients in theirfirst two years, this is oneof the key factorsthat determinesthe GDP of acountry,” shesays.

“It stuntsthe body,saps strengthand lowersresistance todisease. Thisprevents childrenfrom reachingtheir full potential.All the education inthe world isn’tgoing to

overcome that diminishedcapacity.”

Project Laser Beam,which launched anotherpilot in Indonesia thismonth, breaks new ground.

First, it brings together alarge number of partnersfrom the public, privateand voluntary sectors.DSM, the Dutch lifesciences group, Kraft Foodsand Unilever werefounding corporatepartners, working with theUN, the Global Alliance forImproved Nutrition, aGeneva-based foundation,governments and localdevelopment agencies.Other businesses, includingIndonesian food companies,have joined.

Secondly, instead of justthrowing money at feedingchildren, the project aimsto find lasting solutions bytackling the causes ofmalnutrition – lack ofnutrients, contaminatedwater, chronic illness, poorhygiene, lack of income –in target areas and thenreplicating these solutionselsewhere.

Thirdly, it combinescorporate funding withbusiness skills and long-term business goals. Thisshifts the emphasis fromphilanthropy to socialinvestment, says MsO’Hayer.

“I’m investing incommunities in which welive and operate, in thehope that we can bringthem to some level wherethey may become our

consumers. Our aimis not to make

money, but I’mnot allergic tothe idea thatwe couldmakemoney.”

Eachpartnerchooses

what gap itis best

equipped to fill,in conjunction

with theothers.

Jane Nelson is directorof the corporate socialresponsibility initiative atHarvard Kennedy School,which teaches public policyand public administration.She says the scheme is ahybrid partnership modelaimed at finding long-termsolutions that use marketmechanisms rather thanrelying only on donorfunding.

“It will hopefully alsoachieve solutions that aremore systemic, becausethey are looking atdifferent parts of the sameproblem in a co-ordinatedway,” she says. “That co-ordination requires non-traditional leadershipskills.”

The World FoodProgramme (WFP), whichleads the UN’sinvolvement, sees it as a

new way for agencies towork with business. NancyRoman, its director ofpublic policy,communications andprivate partnerships, says:“If we’re going to tacklebig social problems, this isthe kind of model needed.The whole idea is that noone corners the market. Weneed everyone.”

Project Laser Beam isaimed at the world’spoorest people – those “atthe bottom of thepyramid”, in the words ofCK Prahalad, themanagement thinker whourged businesses toaddress them as customers.

The target population inthe pilot districts inBangladesh and Indonesiais ultra-poor, typicallyliving on less than $1 aday. But interventions,

such as creating secureincomes for women so theycan provide for theirfamilies, can have a bigimpact, says Ms O’Hayer.

Unilever, for example,has agreed to fund 3,000women for three years in aprogramme run by Brac, ahuge Bangladesh-baseddevelopment organisation.

This provides stipendsfor women to learn skillssuch as animal husbandry,supplying them withchickens and a goat, andadvising them on when tosell for profit.

“In two years, thewomen go from less than$1 a day to more than $2 aday, when they can accessmicrofinancing,” she says.

As well as jobs, MsO’Hayer is focusing onfeeding programmes withthe WFP, clean water with

WaterAid Bangladesh,mobile clinics and hand-washing campaigns. She isalso working to persuadeother companies to provideexpertise, such as buildingdykes to protect low-lyingareas from flooding.

Wearing her third hat asUnilever’s head of globalemployee engagement, sheexplains how she tookpictures of 250 femalevillagers to show to thecompany’s business inSpain, which had agreed tohelp.

Unbidden by her,employees wrote theirnames as individualsponsors alongside half thephotos, and a Spanishretail customer of theconsumer goods companyoffered to sponsor the rest.

In key markets, thecompany runs supermarket

promotions, for exampleproviding a free schoolmeal for a child inBangladesh or Indonesia ifa customer buys twoUnilever products.

A promotion in Germanybrought 500 employees intosupermarkets to talk tocustomers about theproject, increased sales andraised enough to pay for500,000 meals.

“It’s good for mybusiness, because mycustomers like to beengaged in some of theseprogrammes,” says MsO’Hayer. “And when mybusiness makes a return,that makes the projectmore sustainable.”

It is personally fulfillingtoo. “It grounds you,” shesays. “It’s probably thegreatest thing I’ve workedon in my career.”

Scheme putsthe focus onmalnutritionin childrenProfileProjectLaser BeamUnilever teams upwith other groupsto help the world’spoorest, writesAlison Maitland

Dirty water – but often no other options are available in many parts of Satkhira, a district in south­west Bangladesh Katja Freiwald

The targetpopulation in thepilot districts isultra­poor,typically living onless than $1 a day