At business school and in my qualifications with the Association of Corporate Treasurers, I learned a lot about various measures of performance – ROE, ROI, ROA, etc. I came across a new one recently that caught my attention – Return on Purpose (ROP).
It sounded like a relatively new concept and clearly driven by increasing focus on the ESG agenda but a bit of research showed that it goes back at least 4 years.
During the pandemic we have increasingly heard how important it is that companies consider their corporate purpose. Typically, this results in a series of nebulous and hard to define concepts, created by marketing and consultancy firms.
However as companies look out over the next few years and consider where to invest scarce resources, aligning these decisions with corporate purpose becomes more important – especially as investors, employees and customers ask increasingly fundamental questions about the role of the companies they invest in, work for or buy from.
Return on Purpose looks at a variety of activities that a company undertakes and identifies individual RoIs for each of them to come up with an overall holistic view.
A study from the consultancy firm Ketchum found that measuring ROP was not easy. In its report, it claimed that while 64 percent of retailers believed purpose-driven initiatives were critical to long-term growth, only 40% claimed it made sense to invest only when measurable ROIs could be delivered. It goes on to recommend that companies focus their purpose-driven initiatives on social and business impacts that are meaningful to their organisation and stakeholders, and then define the measurement criteria. For example, working together with key partners in the supply chain to define and prioritise shared metrics and benchmarks could increase the relevance and return for both parties.
It uses the example of the UK retailer Marks and Spencer (M&S), who have built an interactive supply chain map that provides stakeholders with information about all M&S suppliers across different product categories. The cost of such an investment can be considered part of the company’s effort to increase transparency of its supply chain sand support its purpose of maintaining high levels of customer trust.
Another interesting example of a company that has invested heavily in this area is SGS – a Swiss multinational company that undertakes inspection, verification, testing and certification. Its 98-page sustainability report considers the following 6 lenses:
The report then identifies KPIs and estimates the contribution (positive or negative) each makes to the business to come up with the diagram below:
There is currently no specific methodology to calculate ROP, which projects to include, or indeed how to aggregate the information. However, like ESG in the early days, the lack of consistent standards or an agreed methodology should not stop businesses from undertaking their own analysis and treasurers should not ignore its potential value.
It is easy to consider traditional and specific metrics such as ROI and ROA but with greater focus on purpose, treasurers should be encouraged to consider how ROP can be measured. Treasurers may find it a useful exercise in aligning what their company articulates at a strategic level with the actions it takes and the investment cases that are made. The days of simple hurdle rates for capex and opex may well be over.
Associate Director Policy and Technical
Association of Corporate Treasurers (ACT)