Profit vs Social Impact... Why should businesses care?

 

Environmental Degradation

Businesses in Nigeria, like in any other capitalist country, aim to make a profit. However, in recent times, there has been a growing concern about the impact that businesses have on society. In Nigeria, the debate is even more significant due to the country's socio-economic challenges. In this article, we will explore the profit versus social impact debate in Nigeria.

Profit is an essential factor for the survival and growth of any business. It allows businesses to expand, create jobs, and contribute to the economy. However, businesses that purely prioritize profit over social impact often neglect the social and environmental implications of their actions. These businesses may engage in unethical practices such as environmental pollution, exploitation of workers, violation of human rights and generally poor corporate governance practices.

On the other hand, businesses that prioritize social impact over profit aim to create a positive impact on society while still making a profit. These businesses often engage in sustainable and ethical practices that contribute to the development of society. They tend to prioritize the well-being of their workers, protect the environment, and contribute to the local community. However, their business models may make it difficult to attract local funding and scale due to thin margins and modest growth projections especially in a high inflationary environment.

Profitable Social impact

Social Impact motivation

Social impact-focused businesses are for-profit enterprises that prioritize social and environmental impact over profits. These businesses often operate in sectors such as renewable energy, sustainable agriculture, and affordable housing. Social impact-focused businesses measure their success based on their impact on society, rather than solely on their financial performance.

An example of a business that prioritizes social impact over profit in Nigeria is Wecyclers Corporation (*Disclaimer*: This is not an endorsement). Wecyclers is a waste management company that aims to reduce the amount of waste in Lagos, Nigeria. The company provides waste collection services to households and businesses while empowering low-income communities through job creation and community development projects. Wecyclers also partners with local recycling companies to recycle the collected waste, contributing to a cleaner environment. This type of business typically has very low margins however, this has not discouraged Wecyclers from entering that space and conducting their business.

Another example of a business that prioritizes social impact over profit is Reliance Health (*Disclaimer*: This is not an endorsement). Reliance is "a health insurance company that uses software, data science and telemedicine to make health insurance delightful, affordable and easier to access" in Nigeria. The healthcare industry in Nigeria is grossly underfunded and with the over 200 million population, the government simply does not have the resources to provide adequate healthcare for its citizens. Private healthcare is very expensive for the average citizen and potential investors shy away from investing in a sector that provides lean profits over a long term. Companies like Reliance have focused on the social impact of its business rather than immediate profits.

Profit only motivation

Environmental degradation

In contrast, a large number of corporations in Nigeria are purely profit motivated with very little attention paid to social impact. Whilst these companies have contributed to Nigeria's economy by creating jobs, they have also faced criticism for various unethical practices such as environmental pollution, human rights violations, and labor exploitation amongst others. Some notable examples include the international oil companies in the Niger Delta region in Nigeria. There are more than enough publications on that so I would prefer not to dwell, but the decimation of the environment in the region has created numerous socioeconomic issues that will undoubtedly have ramifications for generations to come.

The traditional financial services sector (especially banks) in Nigeria, hamstrung by stringent regulation and shareholders pressure, are limited in their ability to make social impact and therefore tend to focus on meeting profits and shareholder interests. The multitude of previous bank failures and losses of depositors funds forced the apex bank (CBN) to enforce stringent regulatory guidelines to banks and other financial institutions with an emphasis on risk management over encouraging social impact, growth and innovation.

Profit maximization

Amidst tight margins and a riskier economic environment, banks have shied away from creative lending solutions or deploying enough strategies and resources to encourage financial inclusion and socially impact the economy. The focus has mainly been on profits, by concentrating on short term fee-based transactional banking and increasing charges for traditional banking services. Fees and commission income in five tier-one commercial banks rose by 18 percent to N567.2 billion in nine months of 2022 from N480.4 billion in the corresponding period of 2021. However, GDP per capita has dropped by 35% between 2014 to 2021.

Why should businesses care?

Technically, there is absolutely nothing wrong with businesses being purely profit focused. In fact, in developed capitalist economies, profitable companies are a sign of a blossoming economy and attracts more investment, provides employment, and greater government revenue through taxation, which can then be channeled towards public expenditure and social services. However, this "corrective" mechanism is somewhat flawed in a country like Nigeria. Systemic inefficiencies, massive corruption and a frustrating legal system have meant that the large corporations and established businesses are able to evade tax with impunity and use other unethical practices to maximize profits thereby exacerbating the income gap, damaging the environment and depriving the government of much needed revenue... All to the detriment of the society.

ESG Investing

Nigerian companies may also find it more difficult to raise cheap funding from foreign markets, due to their risk rating being pegged to the overall country rating. i.e. The company may be the most profitable in the world, but the country (sovereign) risk will often supersede the business/market risk due to its operating environment. If Nigeria is rated BBB in the international markets, then all Nigerian businesses that seek to get funding from those same markets will be rated BBB or worse.

Furthermore, with the emergence of Environmental, Social and Governance (ESG) and social impact investing frameworks, businesses that are purely profit motivated may miss out on crucial funding opportunities, experience financial losses or may face crystallization of regulatory threats in the future as governments, asset owners, and high-net worth investors consider the impact of ESG factors on their investments and local markets.

Companies that carry out large corporate social responsibility (CSR) initiatives may often feel like that is sufficient in demonstrating their commitment to social responsibility and build goodwill with customers and stakeholders. However, the scope of CSR initiatives is usually limited to the company's operations, supply chain, and community. In contrast, social impact-focused businesses often seek to address systemic social and environmental challenges through their products, services, and business models.

Short term gains, long term problems

For a post independence economy that was amongst the top globally emerging economies, Nigeria sure has regressed economically. Whilst a large part could be attributed to government policies and other factors, significant elements could be blamed on the scarcity mindset of business leaders (and public officials) who (given the volatile political/socioeconomic environment) were more inclined to focus on immediate gains and securing their wealth offshore rather than the longer, slower and certainly more risky play of social impact and local content development. For example, stifling local production in favour of cheaper importation, meant fewer jobs, reduced GDP growth, pressure on foreign reserves and exposure of the economy to global supply shocks, which ultimately has led to crippling cost push inflation which monetary policy will struggle to control.

With the myriad of social issues faced in Nigeria, it is obvious that relying on the government alone to solve the myriad of socioeconomic issues is a recipe for hypertension and mental illness (aka "kolomental"). Hence, the "japa" phenomena perhaps?

The profit versus social impact debate is an ongoing one, and businesses in Nigeria are not exempted. While profit is essential for the survival and growth of businesses, there is an increased need for businesses to prioritize social impact and include it into their values, strategy and growth plan, especially in a country like Nigeria, where socio-economic challenges are prevalent. Worldwide, more and more business owners are gravitating towards the social impact business model, which goes against the conventional wisdom of profit first. The model's basic premise is that entrepreneurs may offer innovative solutions to society's most urgent issues, and that doing so will benefit citizens and generate profit. Positive effect is a core component of social impact businesses, which go beyond CSR.

Thanks for taking time out to read this article. Please feel free to send me a message or comment on the article. I am always happy to discuss other perspectives and explore different philosophies.