The next frontier of responsible business

Besides ESG-based risk disclosures, businesses should assess their impact on the environment and society, reporting both negative and positive externalities.

climate strike san francisco
Protesters in San Francisco on strike for climate justice. Businesses need to measure their wider impact. Image: Peg Hunter via Flickr, CC BY-NC 2.0

The Covid-19 crisis has revealed how intertwined all of our major challenges are. Biodiversity loss and rising inequalities have contributed to a global public-health disaster and the worst economic crisis in almost a century.

As often happens during such moments, people are suddenly open to changes that they previously would have rejected out of hand. For example, there is a major shift underway in the corporate world, where many managers and investors are eager to adopt more sustainable and responsible practices and business models.

The task now is to ensure that this new mindset itself goes viral. How can we ensure that all businesses are getting on the right page, given that they will remain beholden to the demands and interests of shareholders and investors? One obvious answer is through environmental, social, and governance (ESG) standards. But ESG offers only a partial solution. Precisely because this field is now booming, it has become crowded and confusing, leading to complaints about “sustainability reporting fatigue”.

Fortunately, there has been some consolidation recently, with major ESG standard-setters such as the Global Reporting Initiative and the Sustainability Accounting Standards Board announcing that they will work together. Their goal is not to create a single standard, but rather to “help stakeholders better understand how the standards may be used concurrently”.

Similarly, in the interest of clarity, comparability, and consistency, the World Economic Forum’s International Business Council recently issued “Stakeholder Capitalism Metrics” that aim to accelerate convergence among the leading private standard-setters. And the European Union has launched a review of its non-financial reporting directive, which requires large companies to disclose information on how they operate and manage social and environmental challenges.

This is all well and good. The ESG financing sector is growing quickly and will likely continue to expand, now that companies with reputations for ethical, sustainable practices are proving to be more resilient during the Covid-19 crisis. But this progress could be derailed if investors cannot easily compare one set of corporate ESG disclosures with another.

When more companies are offering rigorous, verified, transparent impact data to investors who are responding to client demands for responsible investments, capital flows will adjust accordingly, delivering positive knock-on effects far down the line.

What we need, then, is a set of truly global ESG standards with clear, harmonised metrics and disclosure rules. This doesn’t mean there needs to be only one set of standards. Some reporting standards will give more information than others; some will focus on topics that are important for enterprise value creation; and some will emphasise a company’s impact on the world around it. There would still be different approaches to ESG reporting, but all would rest on the same foundation.

Moreover, clear ESG reporting is only one part of the puzzle. Businesses also will need to complement ESG-based risk disclosures with metrics for assessing their impact on the environment and society, reporting both negative and positive externalities. Put another way, we must move from a culture of declarations and stated intentions to one of real-world results, based on impact assessments.

Measuring a company’s wider impact is the first step toward proper corporate accounting. Going beyond immediate output, such metrics focus on broader outcomes stemming from a company’s behavior. This type of framework encourages corporate leaders to integrate impact objectives into their core strategies, thus accelerating the shift in capital toward responsible investments. It also makes it easier for governments to fine-tune policies affecting corporate activities.

Impact accounting is the best way to create the kind of level playing field that stakeholder capitalism requires. It formally recognises the value of decisions motivated by climate and biodiversity concerns. It accounts for employment issues such as wage equality, benefits, career advancement, and occupational health and safety. It encourages companies to promote sustainable practices throughout their supply chains, which can yield returns by making them more resilient against sudden shocks. And, last but not least, easy-to-understand impact metrics are the key to building trust with customers, local communities, and all other stakeholders.

Of course, not all companies will have a positive impact on the world. In some industries, impact measurements will be consistently negative. The point is to draw a line between companies that are truly committed to maximising their net positive impact, and those that are merely greenwashing. When more companies are offering rigorous, verified, transparent impact data to investors who are responding to client demands for responsible investments, capital flows will adjust accordingly, delivering positive knock-on effects far down the line.

A final question is whether impact accounting can function as a complement to financial accounting. After all, measurements of impact are complex, and seem to rest on assumptions that can easily be challenged. Nonetheless, as John Maynard Keynes observed, “It is better to be roughly right than precisely wrong.” Besides, it is not as though today’s long-established financial accounting methods are perfect. They, too, are merely estimating underlying economic realities. We should not shy away from pursuing the same kind of solid approximation when it comes to measuring a company’s social and environmental impact.

Since efforts to measure and monetise impact began with a small set of simple metrics developed by the OECD (based on the work of the Business for Well-Being Initiative), more advanced frameworks have emerged and will continue to evolve and expand. With robust impact accounting of direct operations, supply chains, and environmental and social assessments of goods and services in place, governments will be able to craft policies to encourage responsible behavior and increase the costs of negative externalities such as greenhouse gas emissions.

The stakes are high, and governments and businesses must come together to take impact accounting mainstream. A global roadmap could cover key issues such as transparency and disclosure rules, in turn enabling faster progress toward common metrics and a shared methodology that could align the interests of corporations, investors, and governments around addressing the major challenges of our time. A new frontier of responsible business awaits.

Bertrand Badré, a former managing director of the World Bank, is CEO and Founder of Blue like an Orange Sustainable Capital and the author of Can Finance Save the World? Camille Putois is CEO of Business for Inclusive Growth.

Copyright: Project Syndicate, 2020.


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