Deciding by impact: Balancing economic and environmental resilience

Authors: Mark Ambler, Tom Beagent and Andrew Thurley

Environmental risks can slip down the strategic and public policymaking agenda when they come up against seemingly more pressing economic priorities, even though this could store up trouble for the future.

Could there be a more informed basis for decision making that would allow business and political leaders to balance these twin resilience demands?

Which global risks arouse the greatest concern? According to the World Economic Forum's (WEF's) Global Risks 2014 report, of the top six risks deemed most likely to occur, and with the greatest impact, two are economic, one societal and three environmental. Fiscal crisis is at the top, but water (ranked third), climate change (ranked fifth) and extreme weather events (ranked sixth) are all near the top of the list. What's more, since 2011, environmental risks have become more prominent, and concern about geopolitical risks has given way to concern about socio-economic risks.

It's clear that global economic and environmental systems are both under significant stress. And yet, the more immediate demands of the global economic system remain set to absorb the attention of leaders for the foreseeable future — even though a sudden and massive collapse on either the environmental or economic fronts would jeopardise the chances of developing an effective, long-term solution for these equally pressing challenges.

Indeed, the WEF's sustainability-adjusted Global Competitiveness Index (GCI)[1] suggests that "there is no necessary trade-off between being economically competitive and being sustainable". So what makes leaders choose to address one set of risks over another? With disparate stakeholder demands, how do they decide which ones to prioritise and which ones to sacrifice?

The challenge for business and political leaders is therefore in how to build resilience into our economic, environmental and social systems at the same time. Is there a way to weigh these systems against each other based on robust data? What can be done to help them make decisions that lead to the most beneficial impact — and thereby greater resilience — for the widest groups of stakeholders?

This article is our response to the WEF's call for longer-term thinking in building systemic resilience and generating prosperity in a sustainable way. We propose these resilience practices:

  1. Take a different view of growth as a starting point for reconciling competing stakeholder desires for prosperity.
  2. Measure the impact of doing business or of potential political choices. Assessing impacts against 'good growth' outcomes allows leaders to be more objective in deciding between conflicting stakeholder demands. We illustrate this with WEF's risk number five, climate change.
  3. Use this same approach to stimulate cross-sector collaboration in an increasingly resource-constrained and connected world.

Can the desire for growth still be good for a changing world?

The problem starts with our desire for continued growth. This leads us to steer resources towards economic gains rather than addressing social and environmental issues to create long-term, sustainable benefits.

Why do we all want growth? In short, because it drives prosperity. People need growth to sustain their livelihoods. Governments need growth to maintain employment and promote well-being. Businesses need growth to satisfy their shareholders. To date, growth (as conventionally measured by changes in GDP) has been a benchmark of success.

But could the kind of growth we've been chasing be doing more harm than good? We've seen boom and bust. We've seen vital resources being frittered away. And we're seeing communities that are failing to benefit from business and economic success — and the unrest that follows.

At the same time, the world in which growth needs to be delivered is being transformed by a series of massive and all-pervasive global forces (see Figure 1). Responding to these transformational trends and meeting the differing needs and values of all stakeholders would require leaders to take a broader view of growth, one which looks beyond increased output and short-term financial returns and towards growth that is real, inclusive, responsible and lasting — what we call 'good growth'.

Figure 1: The forces for change

What does good growth look like?

Growth sounds good — but it's not always good. Bad growth can quickly evaporate. Bad growth brings little benefit to society, depletes more resources and exacts a bigger cost than the short-term returns it generates. The benefits of bad growth are not shared.

So what do we mean by good growth?

  • It's real. Real growth generates wealth rather than simply shifting market share from one place to another.
  • It's inclusive. Inclusive growth benefits everyone — consumers, employees, suppliers, shareholders and society alike.
  • It's responsible. Responsible growth considers the total impact of doing business rather than just the profits.
  • It's lasting. Lasting growth invests in the future and looks for returns over the long term.

Good growth makes sound sense, as businesses perform better in a society that is stable, healthy and prosperous.

Want to find out how HP made good growth choices in moving their manufacturing plant from Shanghai to another part of China? Click here: HP 'Go West' Strategy in China

Good growth needs a new language

The changing world still presents plenty of opportunity for growth. The challenge facing businesses is judging which options might lead to good growth, learning how to measure good growth, and expressing it — while still balancing the needs and expectations of all the different stakeholders.

Unfortunately, making the choices needed to generate good growth isn't simple. That's because it's hard to get data to inform these choices. Good growth isn't always reflected in conventional financial and management reporting. In fact, the language of value creation has barely changed since the days of Luca Pacioli.[2] It is about inputs (i.e., resources used) and outputs (i.e., activity, rather than achievement). It is about revenues and costs. Risk is defined in terms of factors that can throw the financial model off course — rather than in terms of long-term resilience.

This language is deeply rooted in how business is structured and governed, and, consequently, in how decisions are made.

So we need a different kind of language to talk about good growth. In response, many management teams have started examining aspects of their broader environmental, social or economic performance and, in some cases, impact. This additional 'vocabulary' allows them to track whether they are heading towards good growth — and also to communicate to their stakeholders what they are doing about it, and why.

Want to find out how PUMA is tracking and reporting its environmental footprint? Click here: PUMA – Environmental Profit & Loss

Interestingly, PwC's most recent Global CEO Survey uncovered that emerging-market CEOs are much more focused on balancing the needs of all stakeholders (78%) than are their developed-market counterparts (51%). CEOs from emerging markets also believe more strongly that non-financial information leads to long-term success. These two factors are linked as other stakeholders have more interest in the non-financial information.

These developments point to a growing recognition that the language of Pacioli is no longer enough.

The language of total impact measurement and management

Imagine if you could measure, with hard numbers, the 'impact' of your activities. Wouldn't that provide a firm foundation for weighing options and aligning diverse stakeholder priorities? An overwhelming consensus (85%) of CEOs would seem to agree, saying that seeing the total impact of doing business would be more insightful than financial analysis alone[3].

We believe that measuring impact with quantifiable data is the key. It provides a more objective way for businesses and governments to choose between different options in the face of the overwhelming — and sometimes conflicting — economic, environmental, fiscal and social risks and challenges they face today.

So instead of basing decisions solely on the most commonly available economic information, good growth options look at impacts across society, the environment and the economy (see Figure 2 for one approach) and putting a value (negative or positive) on these.

Figure 2: The total impact of doing business

Want to see how these twenty outcomes can be impacted by one decision? Click here for "The great trade off"

Measuring impact allows businesses and governments to measure, understand and compare the trade-offs between different strategies. They can make decisions with a more complete knowledge of the overall impact they will have, and a better understanding of which stakeholders — employees, communities, shareholders, governments, customers or suppliers — will be affected.

With a shared view of good growth, the ability to measure the impact of important decisions using quantifiable data, and a new kind of language for communicating those good growth choices, nations and businesses can better reconcile competing stakeholder demands for prosperity with longer-term needs.

How does this help with responding to the risk of climate change?

Like many social and environmental risks, decisions over the response to climate change have been influenced by personal experience, short-term thinking and other cognitive biases, as explored in the WEF's Global Risks 2013 report. The risks and their impacts have historically been viewed as slow-moving, long-term threats that are difficult to measure and estimated as unlikely to happen. The Global Risks report describes cognitive biases as 'rule of thumb' judgements (often faulty and emotional) that people make in the face of such ambiguity and complexity.

But with the increasing certainty that global temperatures will rise, there's more urgency for a 'climate-smart' mind-set to permeate all levels of decision making. Focusing on good growth and measuring total impact provides nations and businesses a way to re-evaluate strategies and policies without cognitive biases.

How might this look?

First, governments, businesses and communities need to agree on a shared vision and understanding across society about what good growth looks like for them. In Figure 3, we suggest that climate-smart good growth has five dimensions of value: greenhouse gas (GHG) emissions reduction; economic growth; social development and poverty alleviation; biodiversity and ecosystem services; and climate change resilience.

The areas where these dimensions intersect represent important goals to pursue, often for different stakeholders. So, for example, the intersection between GHG emissions reduction and climate change resilience raises a need for climate change adaptation and mitigation. Where economic growth intersects with social development and poverty alleviation, there need to be specific goals and actions related to equitable growth — goals that are also climate-smart.

Figure 3: Climate-smart good growth

Agreement from all sectors of society on common priorities to drive climate-smart approaches for growth is the critical first step. This paves the way for the re-evaluation and prioritising of different sets of goals and their solutions by understanding the total impacts of these approaches, and measuring and comparing impacts in a consistent way. Governments and businesses can start to weigh the various demands on scarce public resources and dwindling budgets in both the near and longer terms.

A number of countries are adopting this kind of practice.

  • Indonesia: At a turning point in its development, Indonesia wants to develop its economy and reduce inequality, but at the same time reduce its reliance on the traditional economic engines of mining and forestry. To achieve this, the nation has a master plan to remove barriers to business by linking the country's islands through vast infrastructure projects.

    How will they do this without opening up the country's beautiful natural environment to exploitation? PwC is helping the Indonesian government examine climate-smart alternatives to the projects in the master plan, applying principles based on preserving natural capital, improving resilience, building local economies and being inclusive and equitable.
     
  • United Arab Emirates: The UAE's leadership seeks to maintain the remarkable growth and development the nation has enjoyed during the past decade — but not at any price. So they have outlined a vision for an innovative economy, a cohesive society and a sustainable environment.

    PwC has helped the UAE government start to turn this vision into reality by developing a National Strategy for Green Growth. The strategy articulates the costs and benefits of going green and how this will catalyse further growth in the UAE. It also examines further benefits such as the creation of new economic clusters, conservation of natural resources, improvements in skills and social advancement.

Stimulating cross-sector collaboration

With increasing demand for minerals, water and other finite resources, many of these resources risk becoming more costly, and their markets more volatile. There may come a point where the most efficient and sustainable use of resources for society as a whole will come into question. Would the right response be to solve the problem alone, or in collaboration?

The growing competition for finite resources raises new challenges for delivering good growth — challenges that will require new ways of thinking. This thinking would take account of, and involve, all parties within the system. It would look at where each organisation fits in, and how the system delivers value to all parties and society as a whole. In this more collaborative way, participants may be able to identify mutually advantageous solutions — not only to the problem of pressure on scarce resources, but also to a wider range of interconnected environmental, societal and economic risks.

One way to weigh the pros and cons of collaboration over competition is to assess the impact of each option. What would be the likely total impact of collaborating with various parties across sectors, or on a national level versus not, and how would the rewards be distributed? Leaders could then quantify and value the potential impacts and thereby understand potential trade-offs. Will shared innovation provide a catalyst for the development of a new, safer way to find and extract scarce raw materials, for example? Would faster development and greater safety outweigh a loss of intellectual property?

Collaborating around impact can also set the scene for sustainable change. By joining forces across sectors — society, businesses, communities, academia and NGOs — stakeholders can develop a fuller picture of the impact of various governmental choices. With this new language of 'impact' they can lobby governments for the kinds of regulation and policy planning needed to reduce further environmental, economic and social risks.

Equipping for resilience

Total impact thinking equips leaders to balance investments in climate and environmental resilience with economic growth, and to justify their choices to stakeholders.

This more holistic perspective of impacts will provide leaders with more objective information to weigh priorities that address the various risks, promote good growth opportunities, and build economic, environmental and social resilience.

We believe that using total impact to measure and manage how businesses and nations are run and judged by stakeholders is just the beginning of the debate. If you'd like to join this debate, please visit us at pwc.com/totalimpact.


[1] For more information on the sustainability-adjusted Global Competitiveness Index, see Chapter 1.2 of The Global Competitiveness Report 2013-2014, World Economic Forum 2013.
[2] Luca Bartolomeo de Pacioli (1445 – 1517) is widely viewed as the father of accounting.
[3] PwC CEO Pulse Survey of 187 CEOs, July 2013