2.2. Shared Value Approach and ECG Model
Porter and Kramer [
32]
(p. 6), defined shared value (SHV) as “… policies and operating
practices that enhance the competitiveness of a company while
simultaneously advancing the economic and social conditions in the
communities in which it operates. Shared value creation focuses on
identifying and expanding the connections between societal and economic
progress …”
Hence, the underlying idea is that
firms can simultaneously create economic, social and environmental value
(i.e., customer’s welfare, natural resources over-exploitation, key
suppliers’ sustainability and/or disadvantage situation of local
communities in which the company operates) [
33]. By all what has been pointed before, Porter and Kramer [
34]
pointed to SHV to be a concept that goes beyond Corporate Social
Responsibility (CSR). According to them, CSR conceives social value
creation as somewhat peripheral and, always subordinate to economic
value creation, in the firm’s strategy. In this sense, for them, CSR
policies are the consequence of the firm’s search for social legitimacy,
thus, maximizing short-term profits [
32].
Therefore,
by means of SHV, they redefine capitalism borders as the focus on a
different aspect to lever the businesses’ competitive capacity [
35]:
i.e., reconceiving products and markets, redefining productivity in the
value chain and developing local clusters. According to them,
reconceiving products and markets consists of identifying the new needs
of societies in fields of healthcare, housing, environment, etc.,
generating innovating products to fulfill those needs co-creating value
for the environment, society and businesses. On the other hand, by means
of redefining productivity in the value chain, i.e., reconfiguring the
activities of the value chain from the perspective of the SHV,
businesses enhance the use of resources, logistics, energy and
employees’ productivity, thus minimizing resource waste. In addition,
local clusters development allows the implementations of improvements in
different business areas by means of cooperation with local businesses
(suppliers, customers, competitors) and also with different types of
local institutions (business associations, local bodies, etc.).
However,
a strategy based on SHV is a bet for the long term as their outcomes
can involve longer time period and higher initial investment “… higher
return and broader strategic benefits to all the participants …” [
32] (p. 4).
As
in the case of the ECG model, such approach confers an important role
to market transparency, as well as to cooperation as an essential
condition to create SHV (i.e., cooperation between the firm and its
supply chain) [
36,
37]. However, unlike the ECG model, SHV model does not advocate for replacing competition with cooperation.
Another
key difference between both models is the role they give to business’
profits. In the case of SHV, the underlying idea consists of the
simultaneous co-creation of social (in a broad sense which includes
environmental) and economic value. Therefore, SHV considers social and
economic value creation as goals at the same level. In this sense, the
SHV model provides full legitimacy to business growth as a strategic
goal. Conversely, the ECG model considers business’ profits and economic
value creation merely as a means that allows businesses to contribute
to the common good. That is, as a mean to generate social and
environmental value.
Despite these differences, the underlying logic proposed by Porter and Kramer [
32] about how to create SHV can lever the future development of the ECG model [
38,
39].
Some of the actions that drive to SHV creation are also a way to
integrate the ECG values into business behavior: human dignity,
solidarity, social justice, environmental sustainability, transparency
and co-determination.
However, we must take
into consideration that SHV approach does not include business’ ethical
values; instead, such issues are relegated to a second term [
40].
For that reason, according to the SHV approach, businesses can
co-create social and economic value, but such approach will not
guarantee business’ legitimacy because it does not guarantee that
businesses assume full responsibility for their actions [
41,
42].
2.3. Triple Bottom Line and ECG Model
The Triple Bottom Line (TBL) has its origins in Carroll’s pyramid [
43,
44,
45].
Thus, Carroll’s pyramid points to the existence of four types of CSR:
economic responsibilities (be profitable), located at the base, on a
second level, there are the legal responsibilities (obey the law as
society’s classification of what is right or wrong), on a third level,
we find ethical responsibilities (be ethical, obligation to do what is
right, just and fair and avoid harm), finally, on the top of the
pyramid, we find philanthropic responsibilities (be a good corporate
citizen, contribute resources to the community, improve quality of
life). The ECG framework tries to operationalize the concerns related to
ethical and philanthropic responsibilities of the firms, i.e., those
voluntary adopted by the firms [
46,
47].
Following Elkington [
10]
(p.3), “the sustainable development is compromised with economic
prosperity, environmental quality, and social justice”. Thus, it takes
into consideration three different lines: society, economy and
environment. Society depends on the economy and this, in turns, depends
on the global eco-system whose health is represented as the third line
of the TBL. Society should be viewed in terms of its relations with
economy and eco-system, giving birth to a set of relationships among the
three lines [
48,
49].
The
TBL model employs a matrix to measure in a quantitative way the impact
generated by the organization from an economic, social and environmental
point of view [
50].
Such three dimensions are neither static nor stable; on the contrary,
they are viewed from a dynamic perspective due to the consideration of
the organizational environment in the model. Thus, every one of the
lines acts as a continental platform which can move independently from
the others. So that it can be placed above, below or beside the others;
this involves the possible existence of frictions among them [
51,
52].
Notwithstanding
the above mentioned, the matrix relates the three basic dimensions
(economy, society and environment) with the organization’s stakeholders
(shareholders, franchisees and/or subsidiaries, employees, customers,
competitors, local communities, humanity, future generations and the
natural world or eco-system).
The model has
succeeded in the last years as it has served to design and implement CSR
policies. It is possible to explain its growth by two reasons: (1) the
three dimensions of the model are easy to understand and integrate
within the organization goals due to its simple formulation; (2) is the
approach employed by the Global Reporting Initiative (GRI) to write the
guides that serve as a basis to produce sustainability reports, being
the GRI guides the most known and employed at global level.
The TBL has been applied to both the public and private sector, i.e., for profit and not for profit organizations [
53]. However, as pointed by Elkington [
54],
the TBL is not exempt from critics. Recently, he stated that “the
Triple Bottom Line has clearly failed to bury the single bottom line
paradigm” [
55]. Gary and Milne [
56],
point to the fact that in case of exchange among the three different
types of final outcomes, it is the financial outcome the one that
becomes more important over social and environmental outcomes. Thus, in
practice, social and environmental outcomes are subordinate to
businesses’ profitability. Likewise, McDonough and Braungart [
57]
criticize TBL for being a measure of “bottom line”. Therefore, TBL
would be providing strategies to firms addressed to minimizing negative
outcomes instead of levering the design of sustainable products and
processes as a starting point for businesses, thus, preventing negative
outcomes.
The TBL and the ECG model share the
triple dimension as a basis to build up their sustainability. For us,
the ECG model goes beyond the TBL in the sense that it takes into
consideration not only the outcomes for the different stakeholders but
also the path followed to get those outcomes. That is, it is not only
what you got it is also how you got it what matters.
2.4. Corporate Sustainability, Integrated Reporting, and ECG Model
The concept of CS has its origins in the relationship between CSR and sustainability [
58]. The Brundtland Commission [
1] employed the concept for the first time in its report of 1987.
Despite the different points of view arisen around sustainability [
59], all of them share the following traits: economic viability, full respect for the environment and be socially equitable [
2,
60].
Since
1987, the United Nations has held a number of summits and conferences
from which several agreements on sustainability goals have been made.
The last one has been the Summit of 2015 which set the seventeen
sustainable development goals to be achieved in 2030: (1) no poverty,
(2) zero hunger, (3) good health and well-being, (4) quality education,
(5) gender equality, (6) clean water and sanitation, (7) affordable and
clean energy, (8) decent work and economic growth, (9) industry,
innovation and infrastructure, (10) reduced inequalities, (11)
sustainable cities and communities, (12) responsible production and
consumption, (13) climate action, (14) life below water, (15) life on
land, (16) peace, justice and strong institutions and (17) partnerships
for the goals.
From its part, the Dow Jones
Sustainability Index (DJSI) defines CS as a business approach that
pursues the long run creation of value for shareholders by means of
taking advantage of opportunities and, at the same time, performing
effective management of the inherent risks to economic, environmental
and social development. Such definition goes beyond the mere concept of
environmental sustainability, providing a strategic focus based on value
creation [
61] which differentiates it from CSR [
62].
Despite it, DJSI does not take into consideration the creation of value
for the rest of the stakeholders (only shareholders). This trait
differentiates it from the ECG model.
Furthermore,
the CS approach, as SHV approach, does not consider business’ ethical
behavior or let this issue in a second term, which impedes the firm to
take full responsibility for its actions and give a response to the
legitimate stakeholders’ expectations [
42].
Unlike the CS approach, the ECG model puts ethical behavior in the core
of business management, placing it on the first level, which turns such
an approach into somewhat global and integrative.
In the same way that economic performance can and must be measured, the same consideration is applicable to sustainability [
63,
64].
This goal can be achieved through a system of non-financial indicators
to measure organizational performance and impact in terms of social and
environmental concerns [
65,
66].
Until
recently, firms did not have any legal duty of providing non-financial
information. In this sense, in 2014 the European Directive 2014/95/UE
included the duty of performing a non-financial statement (NFS) for
large firms. Those with an overall Balance Sheet above 20 millions of €
or a net revenue above 40 millions of €, of public interest, with their
headquarters located at any country of the EU or listed on any of the EU
stock market and with more than 500 employees by the end of the fiscal
year. Such an NFS must include information related to (1) business model
description (activities performed and essential information about how
these activities are performed); (2) an explanation on policies and
procedures (including environmental and social concerns, staff, human
rights and corruption prevention); (3) the main risks related to the
issues included in point 2 and how they can be associated with the
firm’s core businesses; (4) key non-financial indicators (KPI), relevant
to the firm’s core business. In case these indicators were not
provided, indicate the reason/s why they were not applied.
In the present, the most extended non-financial reporting come from ‘Global Reporting Initiative’ (GRI), since 1999 [
67].
GRI is a not-for-profit independent international organization based on
network structure. In its activities participate thousands of
professionals and organizations from a number of industries, communities
and world regions (
www.globalreporting.org).
Up to July 2018, the version in force is G4 designed in 2013 and
launched in 2014. From July 2018, a new version based on four
interrelated modules (Universal, Economic, Environmental and Social) has
substituted G4.
An important milestone in
terms of corporate sustainability reporting happened in 2010 when the
International Integrated Reporting Council (IIRC) developed a global
integrated report (IR) for the first time. The purpose was to build up a
set of corporate reporting rules internationally accepted and to
overcome the existing problems of over-information, lack of clarity and
reliability [
68,
69].
According to IIRC (
www.integratedreporting.org),
“an IR is a concise communication about how an organization’s strategy,
governance, performance, and prospects, in the context of its external
environment, lead to the creation of value in the short, medium and
long-term”. In other words, IR contains the essentials about financial,
social, environmental and corporate governance information by
summarizing it in one report. Thus, such report becomes the firm’s main
picture facing third parties [
70]. Hence, IR goes beyond sustainability reporting being the natural next step [
71,
72].
In the present, we can observe an exponential growth in the number of
reports included in the GRI database as “integrated” reports. They must
include: (1) an overall vision on the organization and its environment
(the organization’s scope, the legal, political, social and
environmental issues that can affect the organization and its value
creation); (2) governance (how the organization’s governance structure
is and how it can lever the organization’s value creation in the short,
medium and long-term); (3) business model (the organization’s recipe to
create value); (4) risks and opportunities (specify the main risks and
opportunities affecting the organization and how they can support the
organization’s ability to create value); (5) strategy and resource
allocation (what is the organization’s last purpose and how it will do
it); (6) performance and strategic goals within the time frame; (7)
perspectives (specify the organization’s main challenges and
uncertainties to implement its strategy); (8) essential assumptions
(determination of the relevant aspects to be reported and how they are
quantified and evaluated).
It is important to
note that GRI guides recommend, despite it is not mandatory, the
verification of the IR (which includes non-financial information). Such
verification should be in charge of an independent expert who has to
produce his/her own conclusions on the reliability and adequacy of the
information (compared with standard values). To perform this
verification process, IIRC has developed a set of international rules
and standards. Therefore, ensuring comparability and credibility to the
stakeholders to whom the information is addressed. These standards are
commonly known as “International Standards on Assurance Engagement”
(ISAE). Among them, we point out: AA1000 APS and ISAE 3000. Sometimes
both are combined as they show complementary traits.
Moreover,
there are independent agencies capable of assessing any type of
organization worldwide in terms of CS and IR. These agencies pick up the
relevant information from different sources (public reports, the
corporate website and others), later on, they contrast it by sending
questionnaires to third parties (NGOs, consumers associations,
environmental associations, unions). Once the information has been
obtained and contrasted, the results are expressed in terms of
measurable variables for every one of the analyzed dimensions. These
results allow classifying the organizations involved in the assessment
and their countries of origin. During the last years a number of
sustainability agencies have proliferated at a global level (i.e.,
EIRIS, Sustainalytics, Oekom Research AG, MSCI ESG Research and
RobecoSam Sustainability Investing). All these agencies work with the
methodology known as Socially Responsible Investment (SRI), a process
that takes into consideration social, environmental and corporate
governance criteria to support the investment making decision process.
Such a process consists of two phases: the first one is normalization
(setting up and disseminating the principles of SRI) and the second one
is screening or social rating (checking and certifying the firm
accomplishment of SRI principles). By its part, MSCI ESG rates more than
3000 corporations in the USA according to three criteria: environmental
(climate change and clean technologies, pollution, toxic wastes and
recycling), social (investment in the community, diversity and equal
opportunities at workplace, human rights and labor relations) and
corporate governance. This rating also includes another component
related to products and processes related to the exclusion of investment
in products like the alcoholic ones, tobacco, betting houses, arms
industry and nuclear industry. In this process, the above-mentioned
criteria are classified as strengths or weaknesses and scored with 1 or 0
points [
73]. In Europe, Vigeo-Eiris is the leader rating agency. It employs the Equitics
®
model, based on internationally recognized standards to assess to what
point the firms take into consideration their goals in terms of CSR in
their strategy definition and implementation. This model distributes
scores in six dimensions: human rights, environment, corporate behavior,
corporate governance and community participation [
73].
From its part, the ECG model [
13]
takes many of the indicators employed by IR, adds other indicators and
offers a global and integrative insight on businesses, but it tries to
promote changes not only inside the businesses but also at the social
level. In this sense, businesses are considered as a change lever, a
force for good. However, the ECG model only considers social and
environmental concerns and tries to improve the measurement of
stakeholders’ management in terms of social and environmental concerns.
This is because the ECG assumes that economic and financial reporting
are currently well developed and grounded; thus, the gap exists in the
fields of social and environmental outcomes measurement.
The
ECG model employs the Common Good (CG) matrix as the tool to manage and
measure the contribution of the business to the common good [
13,
16,
17].
In short, the CGM is the framework that the ECG model proposes to make
compatible the creation of economic, social and environmental value and
to measure the ability of the businesses to integrate the different
types of value in their business model. This way, we argue that the CGM
can be considered as a tool to lever business models based on corporate
sustainability.
Such a matrix relates the
firm’s behavior in terms of the general principles and values of human
rights, grouped into four categories (“human dignity”, “solidarity and
social justice”, “environmental sustainability” and “transparency and
co-determination”), to the stakeholders grouped into five categories
(“suppliers”, “owners, equity and financial services providers”,
“employees”, “customers and business partners” and “social
environment”). Hence, the CGM employs as one of its bases the
Stakeholders approach [
14] to measure the business contribution to the common good.
Hereafter, we proceed to analyze such aspects for every one of the stakeholders considered in the CGM [
74].
According
to the ECG model, the relationship between the business and its
suppliers should be based on the promotion of human dignity in the
supply chain. In this sense, businesses have to be conscious of their
responsibility for the value network in which they participate. Thus,
the criteria to select suppliers are proper work conditions (wages and
labor rights), environmental aspects (raw materials and sources of power
employed), social effects on other groups and regional alternatives.
The model proposes the prioritization of regional, green, social
suppliers to avoid carbon print, the control of risks (i.e., pollution)
related to products/services and the payment of fair prices in origin.
From an entrepreneurial point of view, we conclude that the ECG model
helps to lever local entrepreneurship due to the proximity criterion to
select suppliers; this way, it contributes to the local economic
development. Furthermore, given the prioritization of social criteria,
it also creates opportunities for local social enterprises.
The
ECG Business behavior in regards to its funding is based on ethical
financial management. To do so, businesses prioritize operation with
ethical banking and invest their surplus in ethical and environmentally
sustainable projects. The matrix also advocates for strengthening
self-funding and fostering the funding coming from commercial exchanges
between businesses. Hence, we can conclude that The ECG model drives to
the implementation of a private financial system based on ethical and
social values.
On the other hand, the
relationship between The ECG businesses and their employees is also
based on ethical human resources management (HRM). HRM is one of the
most valuated set of practices by the firms, as it drives to appropriate
management of human capital, can create a good working environment and
connects people and firms. This way, HRM must drive to ensure human
dignity at the workplace through the creation of healthier working
conditions based on freedom in the workplace and cooperation. The
proposed criteria are workplace quality, equality, fair distribution of
work loading, social, ethical and environmentally friendly behavior
promotion among employees, fair distribution of the income generated and
keeping internal democracy and transparency in the decision making
process.
In relation to the business
relationship with its customers and competitors, The ECG model advocates
for fair sales management. The goal is to treat customers as business
partners by putting into practice long-term relationships based on
conscious consumerism and ethical buying practices. The CGM proposes as
criteria: the use of social marketing practices, employee’s training in
relation to fair commercial practices, employees’ compensation systems
in relation to sales targets and customers’ participation in the
business decisions related to the offer of ethical and green
products/services. This way, The ECG model promotes conscious
consumerism and business sustainability not only in the business that
applies the model but also in its customers’ behavior. Heidbrink et al. [
75],
who have done qualitative research on the ECG model, pointed out that
it has the potential to promote a post-growth economy as consumers are
asked if they really need the product or service of a company.
Finally,
the ECG model also proposes an ethically driven environmental
management. In this sense, The ECG businesses define themselves as
citizen organizations socially responsible with a strong commitment to
the social environment in which they operate. To do so, the CGM proposes
the following criteria: human needs satisfaction assessment, return a
part of the profits to the local community, reduction of the effects on
the environment at the minimum possible level, minimize dividends
distribution and set up transparency and participation systems to ensure
social co-determination and transparency.
From
the application of the CGM dimensions and indicators, it is possible to
produce the CGBS which is an integrated report that includes social and
environmental information. Such report also includes improvement
measures and can be verified as in the case of IR.
The
verification process in the ECG model can be performed by means of a
peer to peer procedure (similar to benchmarking) or by an external audit
(approved auditors). There exists a support agency for the common good,
which is in charge of auditors training, auditors approving, advisors
training and advisors approving. Furthermore, this agency has set up a
system to recognize businesses achievements when they perform the whole
process. The term employed to perform the ranking of the firms is
“seed”. Then, they qualify with one seed the businesses that have
produced their CGBS, two seeds if the businesses also followed an audit
peer to peer, and three seeds if the businesses produced their CGBS and
also followed an external audit. Such agencies take the form of
associations that operate at country and/or regional level. Currently,
there are Associations for the promotion of the Economy for the Common
Good in nine different European countries: Austria, Germany,
Switzerland, Italy, Spain, France, Sweden, United Kingdom and The
Netherlands. There exists another association in Chile.
below, summarizes the relationships of the ECG model and its
implementation-control tools (the CGM and the CGBS) with the
pre-existing models (TBL = Triple Bottom Line, CS & IR = Corporate
Sustainability and Integrated Reporting, SHV = Shared Value and,
Stakeholders’ Theory) to capture non-financials based on sustainability
approach.
Figure 1.
The Economy for the Common Good (ECG) model’s origins.
