Tire suas Duvidas

Can Big Business use the Creating Shared Value model in solving water insecurity?

Water insecurity can broadly be conceived of as uncertainty or anxiety over the future supply of water, and is typically the result of over-utilisation beyond the rate of replenishment and the pollution of water sources. The problem is global in nature[1], and has important ramifications for economies and human well-being. Drinkable water is crucial for human health and survival, and the increasing prevalence of such issues in Less Economically Developed Countries (LEDCs) without the means to make alternative provisions raises the risks of water-related humanitarian crises. The shortage of water also directly affects agriculture, and indirectly all economic activity, while shifts in agriculture, energy and land use affect water consumption patterns as well, thus complicating the issue.[2] For example, in many LEDCs, food consists a large part of household budgets; declining food production due to water shortages would elevate food prices and expenditures on food, thus severely constraining their ability to consume other goods and services, which in turn constricts wider economic growth, as was observed in the 2007-2008 world food price crisis. Further anxiety is also caused by the transboundary nature of the problem, as over 60% of all freshwater runs in cross-border basins. This necessitates a multi-lateral approach to resolving water insecurity, but difficulties in reaching and enforcing agreements impedes progress.

This essay explores the concept of Creating Shared Value (CSV) as an approach for Big Business to contribute to resolving this urgent issue. CSV was first put forth by Porter & Kramer in 2006, and has quickly gained traction among the business community. It represents a major paradigm shift in relating the role of businesses in society – instead of redistributing value as in traditional Corporate Social Responsibility (CSR) thinking, CSV calls for firms to align profits with social benefits. Broadly, this is to be achieved by reconceiving markets in terms of unmet needs, recognising that externalities directly affect businesses’ own value chains and developing local clusters in their area of operations. Although this approach faces limitations where social and business interests cannot be reconciled and where business directed efforts could propagate inequality instead, there is definitely a case for CSV. Economic value is ultimately crucial for sustainable solutions, and business-led efforts can be greatly beneficial where government provision is not forthcoming. Nonetheless, there is a need to bear in mind the limitations of this approach where interests potentially collide and where a comprehensive solution is needed. Although the principles of CSV can apply across all types of organisations, Big Business is in a unique position to act due to their size. They possess the resources for larger-scale projects, and the larger scale of their operations mean more benefits from correcting externalities in society.

The important first step for Big Business would be to recognise that they are not exempt from externalities. Traditional economic thinking regard externalities, such as improper disposal of wastes into water sources, as something beyond the concern of businesses. The costs of water pollution is borne by the community, whereas the business alone reaps the benefits of low-cost waste disposal, so that the benefits to the business should greatly outweigh the costs and it is rational for the firm not to incur extra costs by changing its practices, unless obliged to by government regulation. However, Porter & Kramer point to a deeper understanding of productivity, which recognises that addressing externalities can improve business performance in the long run. On the other hand, short-term cost reductions through exploiting the environment or low-paid workers tend to be unsustainable. This is especially applicable to Big Business with operating in LEDCs, as the relative size of its operations to the local economy means that it reaps more benefits from addressing externalities. For example, Nestle’s SAI Platform is aimed at spreading principles and practices for sustainable agriculture among its suppliers. This programme yields significant positive externalities by spreading information and improving yields for all farmers, and reduces negative externalities resulting from wasteful or environmentally-unsustainable farming practices. In return, this has helped Nestle secure a reliable supply of raw materials, such as premium coffee beans for its Nespresso business. It does not take much imagination for Big Business in the food industry to see the impact on its supply chain if volatile water supply generates greater volatility in farm yield. Investments in programmes to better manage water resources or minimise wasteful usage can benefit the business in the long run by ensuring a stable supply of raw materials. These investments can take the form of spreading information on practices, or by helping farmers adopt crops that are less water-intensive. Given that governments may be unable or unwilling to act due to political reasons – e.g. eliminating electrical subsidies for irrigation would be extremely unpopular in India – Big Business can step in and significantly contribute to creating shared value for the community.

CSV also entails a re-conception of business models by targeting unmet needs in society rather than to expand demand through improving product quality or advertising among established markets. Where water insecurity is not directly addressed by governments, there are definitely unmet societal needs in coping with it where Big Business can make a difference. These markets tend to be underserved because the lack of water makes it impossible to use many conventional products. The potential market in this is tremendous, as coping with water insecurity can mean a requirement for all conventional goods and services, redesigned for water scarce conditions; this includes drought-resistant crops and almost all consumer goods. One good example would be the LifeStraw, which is an affordable and highly portable water filter that allow populations without access to clean water to drink directly from other water sources. The business potential is immense – had this been developed by a for-profit firm, they would have been able to corner a considerable global market. The fact that this was not the case further underscores the potential for Big Business involvement. Another case would be the Indian Jain Irrigation, which manufactures complete drip irrigation systems to conserve water; by successfully addressing the problem of water insecurity in agriculture, the company has achieved a 41% compound annual growth rate in revenue in 2006-2011. These case studies highlight the fact that underserved markets can be a major source of growth, and Big Business can tap on these by looking seriously at unmet societal needs and redesigning their products to meet those needs. In the long run, it may prove to be more cost effective to open up new markets with little competition than to expand demand in existing markets through expensive advertising and in rivalry against extant competitors.

However, solutions led by Big Business would tend to be directed towards their own interests, leading to an arbitrary gap in progress between regions in the same country. On one extreme, Big Business could leverage their power to divert water resources to regions that they operate in. While this ‘creates shared value’ for the local community, it does not result in net gain globally. In turn, this inequality could exacerbate societal tensions and lead to greater antagonisms between stakeholders of scarce water resources. While water scarcity has not been a major source of conflicts in modern history, this does not mean that as water gets scarcer the tensions would not erupt into violence. Hence, contrary to the romantic notion of Big Business saving the world through CSV, there is definitely still a need for governments and civil society to be involved to ensure that a comprehensive solution can be found with regards to water insecurity.

All in all, Big Business, acting through the framework of CSV, definitely has tremendous potential in combating water insecurity. This can be achieved by the recognition that although water insecurity is an externality, businesses’ interests are still aligned towards resolving it, and by businesses providing services to underserved markets facing water insecurity. However, there is a need to recognise that this approach ultimately has limitations, and there needs to be further action by governments and civil society to seek a comprehensive solution.

[1] According to the Global Risks report published in the 2014 World Economic Forum, over 700 government, business and non-profit leaders across the world were asked on the biggest risks for the next decade. Four out of the top ten were water-related.

[2] An excellent case study is the Indian government’s decision in the 1970s to provide free electricity to farmers for irrigation. This dramatically increased food production in the short-run, but caused a depletion of groundwater due to over-utilisation, forcing wells to be installed more deeply. The increased depth requires more electricity to pump groundwater, which form a severe drain on government budget and could possibly make groundwater irrigation an untenable option in future.

Source: http://project-firefly.com/node/19001