The Economics Of 'Impact Toolkit' For A Truly Effective ESG Strategy
Much of what we know about companies’ Environmental, Social and Governance (ESG) reporting focuses on the small number of firms that occupy either one of two extremes, the true torch-bearers of corporate responsibility and the greenwashing culprits. In reality, the large majority of companies occupies the great ESG middle ground, and therein lies the rub. Far too many among them undertake the process of compiling and publishing ESG reports half-heartedly, outsourcing where possible, viewing it as a compliance requirement or, worse, as a public relations exercise.
This approach is a gestation ground for a real danger to sustainability commitments, because the mandated reporting and disclosures quickly become the goal, rather than a means to an end, which is a roadmap to resilience and profits in a changing world.
This trend is growing because companies find it difficult to gear the cumbersome ESG reporting work towards using their performance on societal and environmental parameters to drive growth.
Once boardroom leaders establish that a purpose-led business strategy builds positive business outcomes over a period of time, ESG reporting will no longer be a chore. Quite to the contrary, internal data collected for mandatory disclosures—for example, the impact on emissions per rupee spent on renewable energy, on circular economy principles, on carbon offsetting programmes, on improved labour practices, on reducing emissions in a portfolio of businesses/investments—will be an asset. This data will provide valuable indicators for course corrections, and thereby better profits.
But before such a profit-planet synergy crystallises on the bottomline, many companies are hand-wringing about giving up near-term profits ripe for the picking, and on the other hand find themselves having to navigate a maze of abstruse social impact measurement metrics and baffling investment decisions.
In that regard, companies that have made bold emission reduction pledges and those just going through the motions of ESG compliance both have similar questions. When in the future will it be a win-win? What will be the cost incurred by then? Will it be worth it?
Answers can be found, particularly for purpose-driven companies that are seeking to create value not only for shareholders but for a wider community of stakeholders including employees and consumers, in the Economics of Impact. At the heart of an impact economy is decision-making aimed not at profits alone but also on improved social and environmental outcomes of the business, and long-term profitability and sustainability through those common-good outcomes.
To do this, companies must connect the dots between their most significant social impact from doing business differently and the economic impact over time on their bottom line, in other words tapping the power of social impact for long-term growth. Naturally, the tweaks must be to choices that are material to the business, or core to its business.
For example, a coal operator with a wide range of impacts on biodiversity, local water quality, community relations and human rights may significantly mitigate these effects with an honest environment management plan, and may thus stanch local communities’ resistance to new mining areas, consequently averting delays, engendering long-term resilience and profitability. This eventually establishes a causal link between the coal operator’s social impact and its bottom line.
This is not an investment in an ESG report, it is an investment creating a powerful social impact that secures future business prospects. As the climate crisis and rising inequality prompt more and more people and institutions to commit to goals around better social impact, coal operators (and indeed every other business) with a proven performance record on emissions, inclusion and equity are able to showcase themselves as creating value beyond immediate profits.
How can companies identify this critical link between current common good and sustained future profitability? By and large, companies that crack the code on managing their material sustainability issues will find it easier to make the business practice and investment changes required.
Materiality is an assessment of ESG issues core to the business, to the company’s financial performance, to its brand value, reputation and ability to create long-term value for stakeholders. By assessing revenue-side and cost-side impacts of a change in business practice with regard to these material issues, companies can view how a particular shift in portfolio or practice or supply chain element may affect profitability levels.
For example, a packaging manufacturer may identify that shifting to raw materials from recyclable and renewable sources is the most critical core business practice change to undertake. He may choose to evolve to 100 per cent recyclable material in phases, anticipating long-term value from committing fully to the circular economy. Elsewhere, an agri-business owner may identify water reuse, a costly investment in the early stages, as central to maintaining sanitary and hygiene standards for his produce. An electrical goods manufacturer may even add reduction of customers’ greenhouse gas emissions as a core goal. Transparent and accurate disclosure of these strategies in ESG reporting can be a game-changer.
A truly impactful ESG strategy will require clarity of foresight, and extensive impact measurement and management. For these, companies need better data, and much better analytics using hybrid performance metrics on social impact measurement. Along with well-defined targets, an ESG reporting regime equipped with these will be able to predict when purpose and profits will converge.
Complex modelling systems to assess different pathways for business process transformation and the return on sustainability investment are now available. Cross-referencing these results with internal research on the business strategies of sectoral peers is possible too. Despite the complexity, purpose-driven companies must invest in insightful understanding of the economics of impact as a tool to advise their capital allocation.
ESG reporting and global reporting initiatives should be viewed as a form of navel-gazing. The process helps shared value-driven companies to assess their role in reducing the global carbon footprint. But beyond the moral and ethical motivation, the process also drives positive business outcomes through greater incentives from carbon reduction, leaner operations, better workplace safety standards, greater productivity and real stakeholder-building—the community that will keep the business running profitably in the future.
