Adidas, a clothing and footwear company with $20 billion in annual turnover, created a corporate venturing arm three years ago to access new business opportunities. This division, Hydra Ventures, makes seed investments in apparel brands and sports-related areas such as sports technology. The investment criteria are mainly financial, but they also give consideration to the environmental sustainability and social performance record of investees. Last year, Hydra Ventures invested nearly $1.8 million in CRAiLAR Technologies Inc., a company that provides sustainable, environmentally friendly fibers and fabrics for use in textiles, cellulose pulp, paper, and composites, such as sustainable hemp, bamboo, organic cotton, and soy for use in fabrics.

The approach Hydra Ventures is taking makes sense: Megatrends and new patterns of demand such as the $5 trillion base of the pyramid (BOP) market, the $546 billion global virtuous consumer segment, green growth, and the rise of the circular economy (cradle to cradle vs. cradle to grave), as well as a modernizing welfare state are all creating new market opportunities that offer a combination of profit and impact. To stay in the game over the long haul, companies must identify the innovations they need to compete, and systematically raise their social and environmental performance in the core business and along their supply chains.

We need new products and services. Deep industry expertise often enables companies to perceive many trends and business ideas before anyone else, but large corporations have traditionally found it challenging to bring innovations to market. Steve Jobs put it well when he famously argued that Xerox, the firm that invented the mouse and desktop computing, had vast potential: “If Xerox had known what it had and had taken advantage of its real opportunities, it could have been as big as IBM plus Microsoft plus Xerox combined, and the largest high-technology company in the world.”

Unlike in the early days of corporate venturing in the 1960s, sustainability is now increasingly driving value creation, and we need corresponding pathways for sourcing business innovations. The contributions corporate social responsibility (CSR) can make to this quest are limited, and corporate venture capital has traditionally not considered social impact. A fusion of the two is now starting to happen, and a clear roadmap for achieving the business transformation we need is beginning to emerge.

To help address this need, the global impact investment and strategy firm Impact Economy has just issued a report I authored, “Driving Innovation through Corporate Impact Venturing: A Primer on Business Transformation.” The goal of the report is to help businesses innovate quickly to serve the BOP, green growth, and the other markets of tomorrow I mentioned earlier, and build new sources of comparative advantage that are relevant to their core business. The report explains how corporate impact venturing (CIV) provides a solution by marrying corporate venture capital, and positive social and environmental outcomes. Creating new ventures and investing in existing ones with sustainable value creation logic can boost innovation, equip corporates for competition, and help achieve ambitious sustainability targets.

In a world where social and economic value creation is converging, venturing makes sense to drive both. However, the report cautions that there are a few questions to consider when contemplating engaging in CIV. One is how to deal with financial profit. When considering the relationship between the core business and impact, a CEO has the fundamental choice to: 1) interpret “impact” in a zero-profit sense and then reinvest any proceeds of the corporate impact venture, or 2) interpret “impact” in a for-profit sense, and focus on raising social and environmental performance through innovation that impacts some core aspect of the business but that allows for earning of the cost of capital. Companies such as Danone and Uniqlo, in their venture partnerships with Grameen, have championed the first approach. In the case of Danone, the venture produced affordable and fortified yogurts; in the case of Uniqlo, affordable clothes. This has the potential to create greater prosperity and serve poor consumers, helping achieve development.

While we can’t expect financial return in the zero-profit cases, the return on the image of the brand can be very substantial. Nonetheless, the zero-profit approach does raise questions about scale and mainstreaming: If an impact venture is designed not to cover the cost of capital, how will its value proposition ever attract additional capital, beyond subsidies? And we reasonably expect it to scale to a point where it has a chance to transform the business of the parent company or the industry, especially if it serves the BOP customer segment on low margins?

The opposite case holds true for the for-profit approach: The return on image is lower. For example, the global furniture retailer IKEA is planning to almost double revenues from €29 billion ($38 billion) in fiscal year 2012-2013 to €45-50 billion ($63-$70 billion) in turnover by 2020. To support its strategy, IKEA invested more than $2.8 million in sustainable fiber and fabrics producer CRAiLAR Technologies Inc. for the installation of equipment to support and expand CRAiLAR’s European production facility and to provide working capital for IKEA orders. The company undoubtedly did all of this with an eye toward CRAiLAR’s potential contribution to achieving the stretch goals that IKEA communicated as part of its 2020 strategy, including: all home furnishing materials, including packaging, will be made from renewable, recyclable, or recycled material, and all cotton will be compliant with the Better Cotton Standard.

In 2010, an overwhelming majority of corporate CEOs in the UN Global Compact-Accenture CEO Study believed that we could reach a tipping point that fully meshes sustainability with core business within a decade. Marrying the logic of investments and impact, CIV can be a powerful new pathway to systematically engage in corporate opportunity without neglecting corporate responsibility. It has the potential to drive progress toward transforming core business capabilities, processes, and systems throughout global supply chains and subsidiaries so that the tipping point finally comes within reach.