We recently attended the SOCAP conference in San Francisco and came away invigorated by the hive of activity occurring within the social entrepreneurship space. New businesses are proliferating and tackling some of the world’s most daunting challenges. However, we noted that systems thinking was often absent from the discussion. It is important for impact entrepreneurs to incorporate this mindset into their business models from the outset, in order to maximize the scale and scope of the impact that they can create.
For purposes of common understanding, Cornerstone Capital Group defines systems thinking as an understanding and consideration of a system by seeking to understand the interactions and linkages of the different components therein. For impact entrepreneurs, this translates into an understanding of the connections between the social enterprise and the different stakeholders with which it interacts. It involves thinking about how an enterprise operates within a specific, broad system, such as the immediate ecological environment or the social strata present in a society, and interpreting the needs and limitations of that system in the decision-making process using an ESG lens.
Combining a systems-based approach with an ESG framework involves considering the ramifications of decision-making at the business level on environmental, social, and governance systems. These are not necessarily mutually exclusive systems, and there is significant room for overlap. For example, an enterprise that is focused on building solar infrastructure will definitely have an impact on environmental systems by raising the availability of clean energy sources. However, the entity’s structure and board composition will also have consequences for governance systems, including how the company interacts with other entities due to its governance policies.
While systems thinking is important for any business endeavor, it is especially so for impact entrepreneurs who are looking to achieve a change to the status quo via their business model. Failure to think about the impact of a business model on the overall system within which it operates, and on the individual components within that system, will constrain the enterprise’s ability to drive the change it is looking to create, and to do so at a meaningful scale. So what should impact entrepreneurs be doing to facilitate systems level change and thinking through an ESG lens?
- Think broadly when developing the business plan and analyze the entire system. Where are there breakdowns within the system’s components and how can your business address these? This means going beyond the usual SWOT analysis to broadly consider all of the actors within the system, their roles, motivations, and limitations. This will result in a business model capable of creating lasting change within a system overall.
- Understand the impact of a system’s actors on the business model itself, not just the impact of the business on the broader system. In addition to understanding how a business model impacts a system, it is important to understand how the different actors within a system could potentially impact the business model. Are there elements of the system that could limit the business model’s ability to create change at scale? Are there actors within the system that could facilitate this? How can the business leverage the different system components to achieve its goals?
- Focus on scalability from the outset. Consider how the business model can scale within a given system and focus on building a business that can reach millions of people, even if it will only target 1,000 to start. Understand the entire system and how to leverage the different components to achieve this scale. Ensure that scale is embedded in the business model alongside the desired impact so that impact will be created within an ESG framework as the business grows.
- Are there important linkages between systems to consider? For example, clean cook stoves could have positive impact on both the environmental system (reduced pollution in the ecosystem) and the social structure (lowered negative impact on the respiratory health of low income women). As a result, part of the systemic impact could be the reduction of the burden on governments and NGOs to provide healthcare services to low income women suffering from respiratory illnesses. How can a business model positively impact multiple systems through these linkages? Is there an opportunity to create a scalable business that delivers change across multiple systems?
This is just a starting point for systems level thinking. Indeed, impact entrepreneurs face a challenge in building a discrete business model while also factoring in the diverse needs of complex systems in order to maximize their capacity to create change at scale. However, failure to consider the broader system from an ESG perspective will reduce the potential impact that a social enterprise can have, while also potentially limiting its growth. It is critical for impact entrepreneurs to consider these factors at the outset of their business plan development if they are to maximize the impact that they can create.
Jennifer Leonard is Director of Manager Due Diligence at Cornerstone Capital Group. Previously, she was vice president of impact investing at The CAPROCK Group, where she co-led the firm’s impact practice and helped clients build customized, impact-mandated portfolios.