A New Approach to Profits: Creating Shared Value for Business and Society

As the world's social and environmental challenges multiply, committing to sustainability has moved higher up the corporate agenda. Many global companies are working to innovate in this area. Gone are the days when corporates set up a fringe office and ran corporate social responsibility programs as part of their marketing campaigns. Today global business recognizes the importance of approaching sustainability efforts more seriously -- focusing on the root causes of public concerns.

The social and environmental effects of global value chains are one such concern. Global production networks, or value chains, fundamentally change the way companies make products and deliver services. These networks source inputs, labour and technology from distant locations to produce goods and services in the most cost-effective manner possible. This renders borders porous while raising new concerns about the welfare of local communities and the use of shared natural resources.

The transnational corporations (TNCs) that shape these global value chains command a great deal of power. They can be hailed for promoting efficiencies and delivering attractively priced goods to consumers; at the same time, they can be vilified as behemoths that advance their own interests at the expense of citizens, workers and the environment. At the heart of the matter is how these large corporations account for social and environmental impact of their activities.

The concept of 'shared value' was coined in 2006 by Harvard Professors Michael Porter and Mark Kramer and promotes an innovative corporate approach to link business practices more explicitly to sustainability. The idea is to build bridges between business leaders and communities worldwide to address pressing social challenges associated with the operations of global corporations. Porter and Kramer provide more insight into the concept in a seminal 2011 article, and in 2012 they launched the Shared Value Initiative at the Clinton Global Initiative Annual Meeting.

Proponents of shared value hope to overcome outdated approaches to value creation, which traditionally pitted business interests against those of society at large. In an increasingly integrated world economy, business leaders should factor social and environmental consequences of company operations into the equation of economic profitability. The core meaning of shared value is that the creation of economic value can no longer be separate from the creation of value for society as a whole.

This new understanding of value creation goes beyond short-term financial performance and focuses on longer-term customer needs that are at the root of a company's success. These include reducing the rate of depletion of natural resources, ensuring the social welfare of key suppliers, and promoting the environmental sustainability of local communities where companies source and sell.

Gaining a deeper appreciation of how company productivity is affected by -- and affects -- social and environmental needs is evolving. There is a need for further research and learning that is sector and context-specific. However, many TNCs have already taken significant steps to re-conceive their products as well as the logistics of company operations to align them with development needs. Specific activities include not only designing green products, but also improving production processes along the value chain to protect the environment and to promote local skills development.

The growing interest in shared value comes at a time that the international community is discussing a set of ambitious sustainable development goals for the period after 2015. Proposals that will soon go before the United Nation's member governments centre on eliminating extreme poverty by 2030 and include goals related to economic growth, health, education and the environment.

UNCTAD's World Investment Forum 2014 to be held in Geneva, Switzerland, on 13-16 October focuses on investing in these sustainable development goals. These goals represent immense value that the world must create, recognizing that private investment is pivotal to their achievement. Ahead of the forum, UNCTAD and Nestlé are holding a joint international conference specifically on Creating Shared Value on 9 October to discuss experiences from corporate initiatives regarding sustainable agricultural supply chains, food security, malnutrition and the impact of water scarcity. By looking at lessons learned we hope to provide insights on how to leverage the capacity of business to achieve profitability while nurturing long-term sustainable development.

Of particular interest are shared value initiatives in agriculture, the sector where many poor people work. UNCTAD has pooled resources with the World Bank, the International Fund for Agricultural Development and the Food and Agriculture Organization to create traction for shared value-oriented approaches in the agricultural sector through a set of Principles for Responsible Agricultural Investment. This initiative aims at improving knowledge on the nature, extent and impact of private sector investment and best practice in law and policy. The aim is to influence discussion on national regulations, international investment agreements, global corporate social responsibility and individual investment contracts in this vital sector for developing countries.

As we look past 2015, shared value ideas will affect the interactions between companies, government officials, NGOs, and other stakeholders. Wider cooperation can help to find innovative ways of using new technologies and company management approaches to address pressing economic, social and environmental needs. In this way, what is good for the bottom line can also be good for society as a whole.

This blog post is part of a series produced for the Nestlé Creating Shared Value Forum, co-organized with UNCTAD on Oct. 9 in Switzerland. For more information about the Forum or to follow the event live, click here.