Companies need more than legal permits to operate successfully: they need a “social license to operate. This means that communities and society at large accept and support their activities. Without this license, a company can face resistance, protests and a bad reputation.

The book “Strategy and Competitiveness in Latin American Markets: The Sustainability Frontier”, published by Edward Elgar Publishing and co-edited by Vijay Sathe, professor at Claremont Graduate University in the United States, and Urs Jäger, Research Director at VIVA Idea and professor at INCAE Business School, discusses how business strategies can maximize profits while being beneficial to people and the planet.

Businesses operating in Latin America must be able to function despite the existence of informal markets, weak institutions and poor infrastructure such as bridges, roads and security systems.

Competitiveness is the ability of companies to offer products and services that generate as much or more value for customers than their competitors. In the words of Vijay Sathe and Urs Jäger, “This is true for companies in industrialized countries. It is also true for companies operating in less developed countries, such as those in Latin America, but these companies also face two other challenges before they can compete.

So their first challenge is viability. Their second challenge is legitimacy within local communities and societies. In the less developed countries of Latin America, where more than 30% of the population lives in poverty, and the growth and financial success of companies must be legitimized to ensure their optimal, smooth operation.

After World War II, the welfare state model in Europe led the developed world to believe that governments could handle all social issues. At the end of the last century, the development of civil society in these countries reinforced this idea, showing that non-profit organizations could also solve social problems.

However, this is not the reality in Latin America, where governments are weak or ineffective and foreign NGOs find it culturally difficult to make their services sustainable. In this context, local companies often become the only ones with the capacity to address social and environmental problems, collaborating with government and NGOs to fill these gaps.

Sathe and Jäger point to the case of Natura, the Brazilian cosmetics company that has expanded into many neighboring Latin American markets. In view of the shortcomings of the Brazilian state, Natura has undertaken initiatives to provide educational services that in more developed countries would be provided by the government.

Considering that Natura is considered one of the best places to work in Brazil and that the deficient educational system has not prevented them from growing to the point of having more than 1.2 million people in their team of direct sales consultants, why does Natura invest in these Corporate Social Responsibility initiatives when they are not necessary to train their workforces and imply a cost for the shareholders? In the authors’ opinion, these are sustainability strategies that work to ensure the company’s viability, legitimacy and competitiveness.

In Brazil, as in other Latin American countries, strategies to create social or environmental value may entail short and medium-term costs that are not immediately rewarded because transmission mechanisms or feedback loops from markets, governments and other societal institutions are weak or non-existent.

However, even if this is the case, investments to improve social and environmental performance may be necessary in the short term to ensure the viability and legitimacy of the company.

In the words of the authors, “sustainability strategies must ensure company viability (‘we need to do this in order to operate’), legitimacy (‘the company needs to help the environment and society to secure a license to operate’) and competitiveness (‘our products and services create more value for our customers than our competitors’ products and services’)”.

Social license to operate is an implicit agreement between a company and the various stakeholders within a community, such as employees, unions and local residents. This agreement implies a positive endorsement of the company’s operations and long-term goals, based on leadership that promotes social welfare and sustainable growth.

This concept also refers to the level of acceptance and support that a company receives from stakeholders in relation to its activities and projects. Social license implies that the company has the legitimacy and approval of the community to carry out its operations.

Viability, legitimacy and competitiveness are three vital elements for a company. For Jäger, social license is directly related to legitimacy, but it can affect both viability and competitiveness.

“The social license is not only a question of whether I have the legitimacy to operate in a certain context, but also on many occasions it guarantees viability and even puts the company at a higher level of competitiveness,” Jäger explained, ”and sustainability integrates those elements, it is not just an environmental issue.”

One of the first big steps in integrating sustainability as a business strategy and competitive advantage is knowledge of the context.

It is necessary to identify the issues facing the region or country in which the company operates and to this end, the authors highlight the reports of the non-profit Social Progress Imperative, which has published its framework, methodology and data on an initial set of 50 countries using the beta version of its Social Progress Index (SPI), which measures the extent to which a country meets the social and environmental needs of its citizens.

The SPI is based on 52 indicators in the areas of basic human needs, foundations of well-being, and opportunities for all individuals to reach their full potential. A country’s social performance can be compared with that of other countries not only on the basis of the GPI score, but also on the basis of each of its 52 components.

In this way, a company can use the GPI to learn in which areas it can contribute most to the social and environmental needs of the people in the countries in which it operates and seek data, such as ESG “materiality maps,” to learn which environmental outcomes should be prioritized as having the greatest impact on the company’s financial performance, or as being the most important from a long-term perspective.

Even with this foundation, the authors acknowledge that companies and managers wonder how simple it is to make these changes, what other resources they must rely on to do so, or, if they have already implemented sustainability strategies, what happens when they have exhausted their financial growth possibilities with social or environmental impact initiatives? “It’s about sustainability for strategy and not strategy for sustainability.”

Vijay Sathe and Urs Jäger also reflect on the importance of turning research and knowledge into viable initiatives and resources that enable managers and companies to solve real issues today.

The social license to operate can be crucial for the operation of the company, as well as for its competitiveness. Both because of the possible impossibility of operating, as well as the bad reputation that not having this social license, i.e., the approval of the community in which it is installed, may cause.

Urs Jäger, PhD in strategy and management of organizations, is Swiss and lives in Costa Rica, where he directs the research area of VIVA Idea and the VIVA Idea Schmidheiny Chair in Impact Management at INCAE Business School.

“This is part of the vision we apply at VIVA Idea,” he explained. We use research not only to understand the context, but also to propose tools and solutions to problems faced by the population that can be successfully applied in the field.

VIVA Idea is an organization committed to sustainable development in Latin America and uses knowledge to enhance impact through research and the creation of tools that allow scaling particular action. With more than a decade of research in the region, VIVA Idea proposes solutions based on a deep knowledge of the context, designed specifically for companies. These strategies integrate sustainability as a competitive advantage, based on the premise that actionable knowledge and alternatives to current challenges must be generated from the context, using research and technology.

VIVA Idea has digital tools that allow it to provide consultancies to companies and actors in various locations in Latin America to understand where their impact is most needed in the locality, how to align related actors, even if they have different objectives, and how to understand the impact potential of the company.

It is crucial that companies in Latin America not only seek financial success, but also engage in social and environmental development. This not only helps them gain the social license to operate, but also enables them to create a lasting positive impact in the communities where they operate.