Solutions Overview
A major challenge for companies is managing the environmental, social and economic impacts of their operations i.e their externalities - costs or benefits incurred by the stakeholders who did not agree to the action causing the cost or benefits in the first place. It is difficult to quantify the monetary value of externalities, as they may also reflect the ethical views and perspectives of the stakeholders. The market-driven approach to correcting externalities is to "internalize" them. In other words, by identifying your externalities and accounting for their true cost you can mitigate risks and identify opportunities.
Companies have long prospered by ignoring externalities, but in today's age of transparency, companies need to learn to embrace them, and work with them. This approach has many benefits including transforming adversarial relations into cooperative endeavors. Using techniques that are analogous to financial engineering, companies can implement benefit-engineering, and help mitigate social and environmental impacts by compensating for the "externalized" costs. In prior decades, it was possible to ignore or even hide societal issues but the digital age has changed these practices.
In a Harvard Business Review article, "Leadership in the Age of Transparency" the authors Christopher Meyer and Julia Kirby suggest "Thanks to trends in three areas-the growing scale of companies and their impacts, improvements in sensors that measure impacts, and heightened sensibilities of stakeholders-the demands to operate responsibly are dramatically increasing". They make the case that "the true measure of corporate responsibility - and the key to a business's playing its proper role in society - is the willing, constant internalization of externalities".
Their recommended solution is an externalities framework: "an externalities framework allows you to respond rationally and in ways that are simultaneously defensible to all stakeholders. By focusing on your company's own footprint-societal problems that really can be laid at your doorstep-you can establish priorities, set measurable goals, and take action".
But where do you start? In order to establish a framework for managing externalities you need to adopt a more scientific mindset to decision making, in particular, how to address key stakeholder concerns. That's how you integrate sustainability and corporate social responsibilities into your corporate DNA. The idea is to be accountable to all stakeholders-employees, communities, investors, civil society-through engagement, disclosure and constructive responses.
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