A Watershed Moment for the Future of Corporations
The shifting priorities of companies, development agencies, and investors has caused their objectives to become increasingly aligned, creating the opportunity for them to work together in innovative ways. By coordinating the capital, talent, and expertise of the public and private sector, corporate investment partnerships can benefit both businesses and the communities in which they operate.
By Emily Langhorne, INVEST Communications Specialist, and Charlotte Davidsen, INVEST Activity Coordinator
In 2018, Unilever’s purpose-led Sustainable Living Brands grew 69 percent faster than the rest of its business. One of the nine “Green Giants” — the first companies with sustainability and social good at their core to generate over a billion dollars in revenue — Unilever has shown that sustainability is profitable. The Green Giants’ stocks have outperformed a portfolio of rival, conventional companies by 11.7 percent a year. These companies may be the first Green Giants, but they certainly won’t be the last. Recently, another wave of popular, do-gooder companies, such as Patagonia and Warby Parker, has been joining this billion-dollar club.
The trend shouldn’t be surprising. A 2016 study published by the Harvard Business School surveyed 500,000 employees in 429 firms over five years and found that companies that communicate their purpose with clarity experience better accounting and stock market performance. Furthermore, 63 percent of Americans who responded to a 2017 Cone Communications study said that given the continuing absence of government regulation, they hope businesses will drive positive social and environmental change forward.
CEOs are responding to both their own consciences and consumer demand. In August 2019, the Business Roundtable, a group of 200 CEOs, publicly redefined the purpose of a corporation, asserting that businesses should invest in employees and communities, protect the environment, and deal fairly with supplies rather than prioritize shareholder value above all else.
Their timing couldn’t be better. International development agencies and other donor organizations know that they cannot solve the world’s toughest challenges on their own. The price tag for achieving the United Nations Sustainable Development Goals — a global checklist created in 2015 and composed of 17 objectives designed to eradicate poverty and promote sustainable, inclusive economic growth — exceeds the public resources available by trillions per year.
For businesses, this gap is an opportunity. The UN estimated that achieving the Sustainable Development Goals (SDGs) by the 2030 deadline could generate $12 trillion in business savings and revenue and create 380 million jobs. Through the SDGs, the United Nations provided companies with a clear roadmap for embedding sustainability practices into their businesses. This blueprint is also allowing companies to better identify the connection between business benefits and positive societal impact.
Developing countries and their emerging markets, responsible for nearly two-thirds of global growth over the last 15 years, have also become increasingly interesting to investors who are fed up with the persistently low interest rates of developed economies.
The shifting priorities of companies, development agencies, and investors has led to a watershed moment. Their objectives are becoming increasingly aligned, creating the opportunity for them to work together in innovative ways. In response to the complex social, environmental, and business challenges arising around the world, creative and enterprise-driven collaborations between the private sector and the development community have begun to emerge. By coordinating the capital, talent, and expertise of the public and private sector, these corporate investment partnerships can benefit both businesses and the communities in which they operate.
How Do Companies, Development Agencies, and Investors Benefit from Corporate Investment Partnerships?
Corporate investment partnerships promote corporate strategies that have sustainability as a core value, which in turn creates value for development agencies and investors as well as companies.
When companies invest in and create sustainable products and services, they can enter new markets and reach new customers. At the same time, development agencies that engage in a corporate investment partnership also benefit from growth because they can increase the number of beneficiaries that they serve. By using a company’s customer base, supply chains, and distribution networks to target more beneficiaries, development agencies can expand their services to more people, thereby amplifying the scale of their impact.
By investing in sustainability, companies strengthen their supply chain resilience and create a shield against risks associated with resource scarcity, climate change consequences, community pressures, and more. Investing in more sustainable, resilient value chains and the ecosystems that surround them increases a company’s competitive advantage and can lead to longer-term financial returns. By partnering with companies, development agencies can also increase their returns on capital: they achieve greater development outcomes per dollar of donor resources spent. Through co-investment, they can leverage their resources and extend the timeline of their impact well beyond the traditional five-year development program cycle.
Through corporate investment partnerships, investors gain access to the risk mitigation resources that development agencies and companies can provide. Development agencies can offer concessional capital cushioning investors from first-losses while companies with a history of working in emerging markets can offer experience-based guidance to investors. These tools increase the confidence of investors entering new markets so that can diversify their investment portfolios and receive greater returns.
Lastly, companies that invest in sustainability increase their brand equity. Society is responding positively to companies that take into account their social and environmental responsibilities. Companies that invest in sustainability increase their reputations as well as their ability to attract and retain both talented employees and customers.
Meanwhile, development agencies that engage in corporate investment partnerships no longer work in isolation. Companies can help them validate important technologies and bring them to market through their tested distribution networks. This type of validation can also lead to improved reputation with beneficiaries and partners; in other words, it can build the development agency’s brand equity.
Investors too increase their brand equity by making sustainable investments. Investors who integrate environmental, social, and governance (ESG) principles into their portfolios represent about $17.5 trillion in investment capital as of 2018, up 69 percent from 2016.
A Corporate Investment Partnership in Action
Among the world’s 12.5 million coffee farms, more than 12.4 million are small farms. These small farms produce close to 80 percent of the world’s coffee, yet more than 44 percent of their owners live in poverty. Despite favorable environmental conditions for coffee production and a steadfast increase in the demand for coffee globally, small coffee farmers operate at low productivity because they lack reliable access to agronomic skills, financial expertise, and markets.
Wanting to help small farm owners tackle these challenges, Neumann Kaffee Gruppe (NKG), a German-based leading green coffee service group composed of 49 companies operating in 27 countries, introduced NKG BLOOM. NKG BLOOM is a long-term sustainable sourcing initiative designed to optimize the company’s supply chain. It operates around three pillars: livelihoods transformation, minimum sustainability standards in coffee production, and traceable value chains. NKG BLOOM directly invests into small farm owners by providing critical inputs (e.g., fertilizer) and financing (e.g., cash advances).
To form NKG BLOOM, NKG worked alongside three European banks, ABN AMRO, Rabobank, and BNP Paribas, to create an innovative $25 million funding facility. The partner banks fund operational expenses and share the risks associated with farmer defaults. At the same time, the United States Agency for International Development and IDH the Sustainable Trade Initiative provide credit guarantees to support the expansion of the initiative, demonstrating how a company can work alongside the public sector to catalyze the deployment of private capital into an initiative that aligns with development objectives.
The 2017 pilot program provided fertilizer and cash advances to over 2,500 farmers in Uganda, and farmer yields increased by over 150 percent. In the coming months, NKG BLOOM aims to expand to six additional countries, and NKG expects the initiative to reach 300,000 coffee families in at least 10 coffee-producing countries by 2030.
The Future of the Corporation?
As sustainability and profits have grown increasingly intertwined, companies have begun to take notice of society’s response. Most millennials believe that companies should be measured by more than just financial performance, and companies that have attempted to orient around purpose have seen an increase in both customers and the retention of talented staff. Meanwhile, investors who have integrated environmental, social, and governance (ESG) principles into their portfolios have seen an increase in profits and public opinion.
Corporate investment partnerships have immense potential. They can help companies shore up their supply chains, enhance their reputations, and ensure long-term sustainability. They can help investors reduce their risk, generate high returns, and meet their ESG goals. They can also help development agencies move the needle on tough social and environmental challenges.
However, these partnerships require unconventional alliances. Development agencies are often more comfortable working with companies’ foundations rather than the commercial business. Likewise, businesses are often unaware of the ways that development agencies can support their efforts.
Companies and development agencies must be willing to build their internal capacity. To understand each other more deeply, both must bring in new talent and cultivate internal skills so that they can communicate more effectively and better identify, evaluate, and develop partnership initiatives. They must be willing to break down their silos and envision a common purpose that benefits people, profit, and the planet.
To learn more about corporate investment partnerships, check out INVEST’s report, Corporate Investment Partnerships for Growth and Sustainability: How Companies, International Development Agencies, and Investors Align Around Purpose and Profit.