Questioning the Status Quo

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Stockholm (NordSIP) – On September 17, Nordea held its third annual Nordic Sustainable Finance Conference. This edition focused on opportunities and on providing practical tools for both investors and corporations to allow for a faster pace of change by questioning the status quo. “Creating sustainable shareholder value”, “the role of regulation” and “what technology can do to solve global challenges” were the topics addressed by panels. Two keynote speakers stood out the most. The first spoke about flawed measurements and the over-reliance on single metrics. The second took a step to the side of sustainable finance and provided insights on how to generate sustainable innovation.

Paras Anand, Head of Asset Management, Asia Pacific at Fidelity International, called for a change in how we measure performance. “Traditional ways of measuring do not work,” he states. “They cause unwanted effects and can cause crises if there is no change”.

- Promotion -

We, humans, feel good about numbers. However, the way we measure may not always provide a fair representation of reality. Measurements of economic activity we use today, such as the GDP or GNP, for example, were designed for a different society. Boards, investors, analysts and governments continue to use these traditional ratios, even if they have long known that they provide an inadequate image of today’s world.

In Anand’s view, our belief in numbers is misguided. “Single observations are given too much weight. Often, we change our behaviour to achieve the required statistics instead of taking a holistic view to come up with the best results and solutions”. The GDP, he explains, is a decades-old measurement tool. It is no longer relevant, given that it fails to include so many activities that create value in today’s society. Accounting rules also provide a flawed assessment, Anand points out. The notion of accounting profit universally guides corporate decision-making, while its shortcomings are well known.

The greatest challenge of all, Anand claims, is to start measuring sustainable finance correctly. Anand recommends a path forward following four recommendations:

  • Challenge existing statistics as to sources and measuring methods.
  • Use frameworks instead of statistics. For a healthy society, we need a balance between individuality, solidarity and hierarchy.
  • Learn from other disciplines or sectors. It is in the intersection between different organisations that ideas are generated.
  • Challenge prevailing ideals.

“We are at a crucial pivot”, Anand concludes, “and we need a new direction. We need to steer away from statistics and towards qualitative evaluating discussions. We must focus on what is happening for real and not try to come up with new statistical measuring methods”.

Tendayi Viki, Author and Innovation Consultant, teaches large corporations how to build true innovation hubs within their complex organisations. Sparking innovation is not about generating ideas through contests, hackathons or sticky notes, he says. It is all about finding and testing the business model.

“The atomic unit of innovation is a business model that creates, delivers and captures value,” Viki claims. Technology has no power by itself but in leading to change that creates value.

“With real innovation, you cannot pick the winners on day one. You need to create the right environment,” he continues. A winner rarely stands on its own; it emerges from many initial concepts, most of which have failed. In the process we need to evaluate, select and reject ideas along the way, he explains. Viki highlights the 1/3 rule: “1/3 of investments will fail, 1/3 of investments will underperform, and 1/3 of investments will succeed”.

Innovation management is about identifying the teams that are close to finding a business model that works. Reducing risk and uncertainty along the way is crucial. Innovation is an exploration challenge, not an execution one. “Who cares if an idea is on time and budget if it doesn’t work?” Viki asks rhetorically.

Innovation teams need to answer the following questions to identify a winning business model:

  • Feasibility – Can it be done?
  • Desirability – Should it be done?
  • Adaptability – What is the impact on the eco-system?
  • Viability – Can it be done profitably?

The answers to these questions must be grounded in facts and measurements, instead of mere guestimates or personal opinions. Teams should set concrete targets, collect relevant evidence and evaluate the initial hypothesis. As soon as possible, they can tweak their initial ideas, correct weaknesses to fit customer demands and ultimately provide solutions that add value.

“It is important not be afraid of making mistakes,” Viki stresses. “The secret is to learn to make cheap mistakes. To do that we should think of innovation as a puzzle. If an idea doesn’t create value for customers, we should stop spending. Make fast mistakes and learn by the mistakes.”

 

Picture © NordSIP

 

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In the current economic environment, even the strongest companies will face challenges from the impact of the COVID-19 pandemic. Perhaps now more than ever, understanding the factors that could have a material impact on a company’s sustainability will play a role in investment decision-making.

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