Creating Shared Value Investment Framework

Measuring shared value may not have been a key focus of the Creating Shared Value (CSV) Leadership Summit in New York, but it was by the far the hottest topic on everyone’s agenda.

A survey of conference participants ranked measuring CSV as the area of greatest interest, along with how you create and implement CSV programs in practice. These topics also dominated networking sessions between practitioners from the not-for-profit, government and corporate sectors.

There were two key sessions which addressed the measurement issue, each from a different perspective:

1.       Michael Porter, in his opening address, called for the development of a CSV Investment Framework to replace ESG, Responsible Investment Frameworks and Impact Investing.

2.       A working session on measuring shared value in the health sector with global leaders who are providing health solutions in developing economies.

In my first blog I will focus on the CSV Investment Framework.

Creating Shared Value Investment Framework

In his opening address, Michael Porter called for the development of a Creating Shared Value Investment Framework - a framework that will enable investors to make informed decisions on the social and commercial value created by companies. The Framework aims to overcome the weaknesses of existing investment frameworks such as Responsible Investment, ESG and Impact Investing, namely the limited correlation between environmental and social performance with financial performance:

  • Responsible Investment – There is limited correlation between the financial performance of a company and the alignment of the ethical values which underpin the RI Framework
  • ESG Investment – Assists in deciding which company in a sector is the best to invest in based on a range of social, environmental and governance criteria. However there is limited correlation between ESG and financial performance.
  • Impact InvestingIs in the early stages of development and to date has focused on social enterprises with limited applicability to large corporates who are wishing to create shared value.

The CSV Framework, currently under development by Porter (and his team), will be an extension of traditional investment analysis focusing on measuring the factors that are material to the economic and social performance of an organisation. From Porter’s perspective, the CSV Framework will differ to the existing investment frameworks by focusing on the correlation between social and financial performance. 

The need for a CSV Investment Framework is certain to generate a great deal of discussion, both for and against.

A key recommendation from a collaborative research project between the University of Sydney Business School, CAER and Net Balance, Assessing the relationship between sustainability and financial performance of the ASX 300: A creating shared value perspective, identified the need for more work to develop appropriate criteria to measure the social and commercial value of a company’s CSV initiatives.

The research investigated the correlation between CSV performance and financial performance of the ASX 300 over a five year period (2008-12). Given CSV is a relatively new concept, a CSV score was derived for each company by using a subset of 26 ESG variables that closely align to the three areas of CSV: Recreating products and markets; Increasing productivity in the value chain and; Creating clusters to secure the supply chain.

The preliminary findings from the research found a strong correlation between the CSV and financial performance, in particular lower indebtedness as measured by leverage ratio and higher rate of return of assets (profitability). It also found companies with a high CSV score also had higher levels of investment in intangibles and capital expenditure.

However, the research also highlighted that further work is required to develop additional criteria which focus on the social and commercial value created by an organisation’s CSV activities.  In particular the social and commercial value created by developing new products and services and from developing industry clusters in the supply chain.

The research does not imply that existing ESG criteria are no longer required. The research shows that additional criteria are required which balance the risk and impact perspective of ESG with increasing social and commercial value creation as required for CSV.

I look forward to seeing how Porter’s CSV Investment Framework evolves and the level of support it receives from the ESG and mainstream investment houses. The three key questions on my mind are:

1.       The level of analysis: program, organisation, society?
2.       Alignment to Integrated Reporting and SASB?
3.       Identifying the source of value creation and who captures the value?

The Net Balance Research Institute is currently developing an approach to measuring CSV – The Total Value Framework – which is presented in our draft insights paper The Potential for Creating Shared Value in Australia: How Australian companies co-create long-term commercial and social value.

Melinda Leth is a Senior Associate at Net Balance. Melinda is based in Sydney.