Realizing Tomorrow’s Value – 5 Key Insights
Authors: Anne Louise Koefoed and Cecilie Hultmann
The rules of the game for value creation is changing. Business models are amid reinvention to better meet the needs of today and tomorrow. Climate change, frequent resource price shocks, widespread governance failure, rising unemployment and social instability, digitalization and internet transparency, changing market preferences – are all factors forcing businesses to adapt and transform. For business models to be robust and protect against future risks and disruptions, a broader range of capitals must be assessed and incorporated in core strategy and decision-making. This is the main take-away from the new DNV GL study “Realizing Tomorrow’s Value: The Emergence of a New Business Practice” launched today.
Pioneering companies like PUMA, Ben & Jerry’s, Dow Chemical and AkzoNobel are already applying a variety of new approaches to measure and value the social and environmental impacts of their business activities to connect the dots between business, social and environmental performance. A better understanding of impacts and dependencies on all types of capitals, and the costs and benefits of these, help demonstrate the real value of the company for society and lay the grounds for more robust decision-making by highlighting future risks and opportunities.
In fact, according to the “Better Business, Better World” report by the Business and Sustainable Development Commission (2017), achieving the Sustainable Development Goals opens up USD 12 trillion of market opportunities in the four economic systems examined – food and agriculture, cities, energy and materials, and health and wellbeing. As such, environmental and social problems are increasingly viewed as an opportunity to differentiate, innovate and drive corporate growth – through developing technologies, products and services that generate business value, whilst placing environmental and social benefits at the heart of business models.
5 key insights to realize tomorrow’s value:
- Business strategy must consider multiple capitals to be robust
A critical element of an agile response to a rapidly changing business environment is to assess performance and value in a more holistic manner across the range of capitals – or stocks of value – that underpin company value creation (see figure 1). Assessing the broader range of impacts and dependencies is required to capture and fully understand value drivers and the factors that can and will affect business performance now and in the future.
Environmental and social pressures impact both long-term financial viability and success of business models. In other words, realizing tomorrow’s value – and optimizing long-term financial performance – translates into managing non-financial capitals and externalities today. To be robust and to get a full picture of current and future risks and opportunities, strategy and decision-making must incorporate information about performance on all capitals.
2. Unstoppable drivers create momentum for a new business practice to emerge
The science is clear – social and environmental pressures are understood, and future prosperity depends on how well we manage challenges. Digitalization forces transparency and accountability. Regulation is tightening and forcing business to be pro-active. Sustainability has become a source of innovation, and investors are moving capital to companies that demonstrate how they manage current and future environmental and social risks, as key factors contributing to long-term growth.
The new business practice we see emerging is a future-oriented response to these drivers and the unfolding shifts in the economy.
3. Business purpose and value are being radically redefined
The new business practice creates shared value for business and society, and optimizes the use of all types of capital. Business value is radically redefined and is understood in terms of its total contribution on all capitals, rather than merely creation of financial wealth, also revealing the true value and contribution of business activities to societal objectives. The relationship and interconnection between changes in the business environment and company value creation is articulated, and this information is fully embedded in core business processes and operations and are an integral part of how objectives are set, how strategies are developed, how decisions are made, how risks are assessed, and how products and services are designed and/or redesigned.
4. Realizing tomorrow’s value requires new management approaches
New practical approaches to provide information on performance across all types of capitals, and to incorporate this in the core business strategy and decision-making, is needed. Based on extensive review of existing initiatives and leading practices, DNV GL has devised a guidance to managers to implement Tomorrow’s Value Practice (see figure 2). A systematic approach to conduct multi-capital assessment will lay the grounds for better management of the fabric of capitals and value. But insights must be integrated in core business for business models to evolve. This implies integration with: existing management systems, processes underpinning decisions and capital allocations, and enterprise risk management to effectively manage issues that are impacting business viability.
5. A forward-looking orientation create business that is ‘fit for the future’
The future will look nothing like the past – as the conditions for value creation are in flux. Past performance is not a good proxy for future performance and value. A future orientation in sustainability-related information that is strategically relevant, is needed to understand the environmental and social risks and opportunities for the business. Forward-looking information that incorporates the economic, environmental and social perspectives, provides transparent information for decision-making, and also portrays the quality and sustainability of future corporate performance. Both the company and its stakeholders, such as investors, can thereby see how interactions with nature and society, and the management of social and environmental impacts, connect with core business performance.
Realizing Tomorrow’s Value
Tomorrow’s businesses create value in a way that represents a net benefit for a sustainable future – in other words, realizing tomorrow’s value. In DNV GL, we call this Tomorrow’s Value Practice.
There are very compelling twin benefits to aligning corporate behavior and business models towards this practice: the positive outcomes for the environment and society, and business better calibrated to manage, performance, risks and opportunities.
We believe that companies which embrace this practice will perform more robustly through ever-faster change cycles and gain significant competitive advantage.
This blog is based on the position paper “Realizing Tomorrow’s Value – The Emergence of a New Business Practice” (2017). To get a copy of the report, click here.
The position paper is the result of a strategic research and innovation project in the Climate Action programme, DNV GL Group Technology and Research.