The next frontier of responsible business
Paris — 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 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 nonfinancial reporting directive, which requires large companies to disclose information on how they operate and manage social and environmental challenges.
What we need is a set of truly global ESG standards with clear, harmonized 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 emphasize 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 recognizes 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.
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. Project Syndicate—————-
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.
