Blanket Statements, Brick and Mortar of ESG Integration

Standardized Rebellion?

Although we arguably live in the world that finally encourages us to be misfits, the original rebels of finance and investing industry – ESG Investors – are increasingly looking to fit in. What was once a literal protest against the apartheid in South Africa, is now almost routinely proclaimed to be “mainstream” by the likes of the FT and “The Economist”. This trend has shot through the roof during the pandemic with Google indexing 277,000 results for “ESG mainstream” keyword combination generated since February 2020. And like everyone, who is coming of age, we are bringing ourselves in line for the sake of streamlining the processes.

Lost in Calculation

Between the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the Climate Disclosure Standards Board, the International Integrated Reporting Council (IIRC), and various taxonomies like the EU’s Corporate Sustainability Reporting Directive (CSRD), it’s easy to start equating impact to disclosure and reporting.

As Carol A. Adams and Subhash Abhayawansa have noticed, recent pushes for standardization of extra-financials serves data providers, who have been in dire need for more comparable information. At the same time, it is not a given that this is bound to serve companies, which are genuinely trying to make an impact. For example, a company that chooses to use seawater instead of freshwater to cool its data center will increase its reported water footprint. However, a deeper dive into the specific context might suggest an entirely different impact story.

Similarly, Justin Lyle of “Your Public Value” compares our current obsession with [frequently contextless] reporting with the US government efforts to increase fuel-efficiency standards for passenger vehicles in the 1970s. Back then, misplaced incentives for companies simply resulted in manufacturers bypassing the core issue entirely by producing more trucks and SUVs instead of sedans.

[Dis]Comfort Blanket

It is this similar spirit behind our laser focus on disclosure and reporting that has forced the co-Chair of the UNEP Inquiry Simon Zadek to remark that “we moved from “if you want to manage it, measure it” to “if you are clueless what to do, then measuring it is a good comfort blanket.”

However, measuring for the sake of measuring can turn out being a discomfort blanket (or dare I say the last ever blanket?) down the line. As Simon Caulkin once put it, when referring to the NHS (National Health Service) increasing heart-attack-related death rates in the UK as an inadvertent consequence of over-focusing on patient waiting times: “What gets measured gets managed – so be sure you have the right measures, because the wrong ones kill.”

What Peter Drucker Actually Said

The very dictum of “what gets measured, gets managed” is frequently attributed to the late Austrian American philosopher Peter Drucker. In reality though, there is no indication that the celebrated management thinker ever uttered those words. Yet, there is a definite record of Drucker writing a letter to another acclaimed management consultant, Russell Ackoff, who is said to have framed the following words:

By applying “the new methods of quantitative analysis to specific business problems… we had successfully solved major production and technical problems … but our work had no impact on the organisations and on their mindsets. On the contrary, we had all but convinced the management … that quantitative manipulation was a substitute for thinking … And then your work and your example showed us … that the quantitative analysis comes after the thinking – it validates the thinking, it shows up intellectual sloppiness and uncritical reliance on precedent … it does not substitute for hard, rigorous, intellectually challenging thinking. It demands it, though — but does not replace it … and your work in faraway days thus saved me – as it saved countless others from either descending into mindless “model building” – the disease that all but destroyed so many of the business schools in the last decades – or from sloppiness parading as “insight.” [emphasis added] [1]

Think What You Treasure Before You Measure

Those words that were written a couple of decades ago, could have been easily spoken by any of the 124 broadly European ESG experts (myself included), who spent the pandemic months trying to put the “thinking” back to where it belongs – alongside “quantitative manipulation.”

We embarked on the journey of co-creating the 9 Public Value Principles for ESDG (Environmental, Social, Digital, Governance) Integration and the subsequent Self-Assessment Tool for companies with a mutually shared understanding that:

  1. a) It’s certainly a good management practice to “measure what you treasure”;
    b) Yet, to do that meaningfully, one must never lose track of what it is that is treasurable and /or valuable in the first place.

In fact, one of the co-created principles outright states: “We seek continuous improvement and build trust by measuring, auditing, and sharing intentions, actions, and impact transparently and regularly.” The principles also refer to multiple concepts that imply presence of rigorous measuring: corrective action for any negative impact, positive contribution to society, systemic improvement, regeneration within planetary boundaries, inclusion, accountability etc.

Yet, with the principles build upon the concept of “public value” that was originally introduced by Harvard’s very own Mark Moore (“value preserved and created through positive action – for ALL and each of us, for society and the environment), this is an intellectualized, or perhaps contextualized, measuring. This is a truly Druckerian measuring that goes beyond the misattributed blanket statement of “What gets measured, gets managed.” It is informed by purpose, and it follows that thinking about said purpose.

Beyond the Blanket

As Robert Eccles rightly noticed, the use of engagement and voting has not only risen by double digits within the last decade and became the second most important responsible investing strategy after stock exclusion.  It is also expected to grow in popularity going forward. Andrew Behar goes even further claiming that, “2021 looks to be the dawning of a new era in which shareholders stand shoulder-to-shoulder on voting to empower change on climate, racial justice and other critical systemic issues.”

All of this means that it is the highly contextual ESG data that is going to have the most value going forward. Not just for investors choosing engagement as their preferred strategy, but also for the companies, that are to find themselves in position to contextualize their performance indicators.

Epilogue: Even Stonehedge Has Mortise

It might be all too easy to see the standardization we are hastily moving towards and an increasing need for context as contradictory.

Yet, if standardized reporting is a cornerstone of ESDG impact, we need some mortar of context to keep the bricks of sustainable business together.  By shifting focus to public value and corporate purpose without letting measurement and reporting out of sight, the principles become the mortar that carries the context of a given company.

On the chance you are a skeptic, believing that your business might sustainably thrive on bricks alone, it might be useful to recall that although Stonehedge had no mortar, even it only stood the test of time because it had mortise. Just like Stonehedge, the KPI bricks you report and measure might be held together by a rather unfamiliar kind of context. Simply assuming you know what context looks like would be akin to its own form of standardization disease. That’s exactly where I find instrument like the Public Value Self-Assessment Tool for ESDG Integration most useful:  It helps you determine what the bricks of your particular sustainable business are held together by, be it mortar, mortise or anything else.

 

[1] The full transcript of the letter is available in Drucker P. (2002/2007), “Managing in the Next Society”, “Routledge”/” Taylor & Francis Group”, London and New York, p. XII

 

Image courtesy of Flickr. Originally published by S&S on June 30, 2021.

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