When Creating Shared Value Causes Value Destruction: The Case of Nespresso

In early 2016, the city-state of Hamburg, Germany, as part of its sustainable purchasing program, banned the purchase of products that are hard to recycle or create unnecessary pollution, including coffee capsules. This has stimulated a lively discussion around the costs and benefits to society of the consumption of these capsules, in particular those of Nespresso.

We analyze this issue in light of the controversy between the creating shared value (CSV) and corporate social responsibility (CSR) strategies to guide company action.

CSV and CSR: What's the difference?

Since the publication of the controversial article, Creating Shared Value: How to reinvent capitalism and unleash a wave of innovation and growth, by Michael Porter and Mark Kramer in the Jan-Feb. 2010 issue of the Harvard Business Review, there has been considerable discussion about the benefit of a creating shared value, CSV, approach over that of traditional corporate social responsibility (CSR).

 

In the article, Porter and Kramer decried CSR as an obsolete concept by equating it with philanthropy, social investments and in general as greenwashing tool.

The main counter argument espoused  by academics and managers of CSR was that Porter and Kramer used an outdated and incomplete interpretation of the current understanding of CSR, which is now understood as the assumption of responsibilities toward society (and the environment) for the impacts that a company had, has and wants to have in order to contribute to its development.

Creating shared value was described as a strategy through which the activities of the company had to create value for the company and for society, at the same time.  Many authors, myself included, consider CSV as a subset of CSR, as it looks only at specific activities, creating value simultaneously for the company and society.  CSR, on the other hand, looks at the impact on the company and society for all its activities -- in the past, in the present, and those expected or desired in the future. In its narrow definition, CSV ignores issues like pollution, climate change, product responsibility, labor practices, human rights, corruption, transparency, reporting and governance, among others, which are part of corporate responsibility toward society.

This was basically the conclusion drawn at a recent forum -- entitled Is CSR dead? -- which discussed the merits of either strategy, with of John Elkington advocating for CSR and Mark Kramer advocating for CSV, in spite of the poor defense by Elkington (who happens to be a member of the advisory board of Nestle, creators of CSV).

The case of Nespresso

Nespresso, part of Nestle, produces coffee capsules to be used in its specialized machines (some readers may recall the ads featuring George Clooney).  Taking this product as an opportunity to create shared value, the company makes sure the coffee is produced under sustainable conditions, pays fair prices and provides technical assistance to farmers.

 

This is a typical case of CSV: It creates value for the company and creates value for society, in this case represented by the farmers.  But to understand the implications of value-creation and sharing for society, the whole lifecycle of this product and its context must be analyzed.

The Nespresso value chain involves the mining of bauxite, the energy-intensive production of aluminum, the extraction and refining of oil for the production of plastics, the planting and farming of coffee (where the value is shared), the assembly into capsules, the consumption by the consumer via expensive machines, and the ultimate disposal of the capsules as waste. As the spent capsules contain metal, plastics and coffee residue (an organic material), it cannot be directly disposed.  Some countries require the separation and disposal of the three components in three separate bins.  If disposed whole in the “undifferentiated” bins, it requires the recovery of the capsules and the deconstruction in its components to be recycled separately.

Nespresso Spain, conscious of this problem of recycling and wanting to create more shared value, recovers some of the capsules in its stores (a small percentage) and in municipal collection points. It then deconstructs the capsules for recycling and uses the coffee residue as a component in fertilizing rice fields that donate food to food banks.  It converts a recycling problem into a value-add of rice for the hungry -- and a philanthropic donation of about US$70,000 a year.  But does this deconstruction process really add value?

Looking at only a part of this cycle, it may appear that value is shared in the consumption of coffee capsules, with coffee producers and the food banks.  But if the process is examined in its entirety, it's revealed to be a highly resource-intensive operation (extraction, mining, farming, manufacturing, deconstruction and disposal). The capsule has to be constructed to be deconstructed at considerable expense, which presumably is paid by the consumer, as Nestle does not lose money on this product.

Some people may derive value, but society as a whole is worse off.  Worse off than what?  Consider the alternative used by some of Nespresso's competitors, which produce the capsules or pods with fully biodegradable materials and sell them in regular stores with the corresponding economies of scale -- avoiding significant costs to society and the environment in general and to consumers in particular.

If Nestle had a comprehensive and updated view of CSR, it would have analyzed the integral impacts that its products have on society and the environment, and most likely it would have designed them differently, as some competitors do.  Instead, it designed a product for maximum commercial impact and then went to look for some opportunities to share value.  It did what Porter and Kramer accused the “old” CSR of doing: mitigating some of the impacts to look good.

If Nestle had a comprehensive CSR strategy instead of a collection of partial CSVs for its different activities, it would not have created an irresponsible product.  CSV is the old CSR.

Concluding comment: This discussion does not mean that Nestle is not a responsible company.  Nestle does create and share significant value for society through the production and marketing of products that society needs, of high quality and nutritional content, using responsible practices in most of its phases. This article refers to one case where a CSV strategy can lead to value destruction and as such it is inferior to a comprehensive CSR strategy.

Note: This post originally appeared in Spanish as an extensive comparison of the concepts and implementation of CSR and CSV was published  as Compartir el Valor Creado versus Crear Valor Compartido: diferentes estrategias, diferentes implementaciones, diferentes resultados in issue No. 10, Jan.-Apr. 2012, of Revista RSE Fundación Luis Vives (no relation to the author).

Image courtesy of Nespresso

Antonio Vives is Principal Associate at Cumpetere, a CSR consulting firm.  He is also Consulting Professor at Stanford University and a member of the Sustainability Advisory Panel at several multinationals.  Was the Sustainable Development Manager at the Inter-American Development Bank. Has published seven books, dozens of academic papers and more that 300 blog articles on CSR (www.cumpetere.blogsport.com) and is a frequent speaker at conferences and universities. Holds a Ph.D. in Corporate Finance from Carnegie Mellon University. Follow him on twitter @tonyvives