Measuring ESG impact

Taking aim

Although many companies are now responding to their statutory obligations on sustainability – such as environmental, social and corporate governance (ESG) reporting – this gains them little more than compliance: simply getting over a raised bar, rather than reaching for the stars. Policy agendas and regulations are slow to develop, and often lag behind social awareness and expectations, so a business that demonstrably thinks and acts independently will stand out from those that simply jump through hoops. You might know your carbon emissions, but do you also know what the benefits are of reducing those emissions for communities they affect, the value of risk reduction from avoiding upcoming regulations, and the effect of lower energy costs? Rather than simply disclosing information, are you examining it more closely to understand what it really means for the world, and your business?

Taking a stand

Although sustainability regulations can offer prescribed routes to compliance, they can also pull focus away from the broader question of how an organisation’s own values and purpose in the world are articulated and exercised, and how they relate to the planetary boundaries and social floors. When ESG requirements are shouldered by one officer or department – and separated from core business interests – it’s hard to make sure the ethos underpins all thinking and action at the company, and throughout the value chain.

Taking a lead

There’s a pragmatic business case for having a clear and well-calibrated moral compass. The best talent now emerging from education will be alert to, and favour, employers that reflect the spirit, rather than simply the letter, of their own values. Customers who want themselves or their children to live in a better world might choose products, services and brands that embody their vision; while shareholders and stakeholders are increasingly alert to such market demands. Longer-term, a well-developed strategy for sustainability will represent a more stable proposition for investors, and help future-proof a business.

Taking interest

For more than a decade, we’ve been curious about how organisations can measure their impacts on the world holistically; find a common language through which such impacts can inform strategy, decisions and planning; and monitor and communicate the impact they make both internally and externally. In the next blog in this series, we’ll share our thinking about how to make the holistic measurable.

A holistic perspective on sustainability is great to follow in principle, but tricky to measure and weigh up in practice.

The bigger picture

Holistic thinking does not mean woolly thinking and, while it might be driven by broad principles, it ultimately needs to be unpacked into measurable variables. Although existing ESG approaches might help in selecting and quantifying several environmental, social and governance indicators, we challenged ourselves to identify and measure data that provides deeper insights into the impact organisations create for their broader stakeholders. In turn, that knowledge can be used to help a business identify the hidden risks and opportunities arising from its actions, and how they affect those stakeholders. 

Taming complexity

Greater clarity involves scale and complexity, bringing the challenge of how to manage a much richer variety of variables. Our starting point is to consider the impacts of an organisation’s whole value chain, in terms of six broad realms, or capitals: human, financial, intellectual, social, manufactured and natural. Within each, we identify specific impacts, which can be measured, monetised and aggregated, to quantify each capital. 

The value of language

Every business seeks to create value, and the language of financial value is widely recognised and understood. Historically, though, most social and environmental impacts have been expressed in a wide range of units, making them hard to compare. To address this challenge, and put all impacts on a comparable footing, each impact is measured and then converted into the same monetised units as conventional business results. Underlying our thinking is a more widely aligned concept of value and its beneficiaries: traditionally, these might be immediate shareholders and employees, but our approach also considers how such value is created or lost for the wider world. 

Language is collaborative and evolving

We are not alone in this arena, and our questions around impact measurement are now being asked by multiple organisations. Deloitte is part of the Value Balancing Alliance, along with other consultancies, universities and major global businesses, Harvard has launched the Impact Weighted Accounts initiative, and many more other platforms seek to have a standardised methodology in place for all organisations to adhere to. Although these initiatives are relatively new, they’re an early indicator of moves toward more holistic, multi-capital accounting, which consider economic, societal and environmental impacts on the same basis, and deliver a more complete account of profit and loss. 

Framing the big picture

This approach to quantifying impacts lies at the heart of our Strategic Impact Assessment (SIA) framework, which we will describe in out next blog, to be published soon.

We’ve put our thinking into Deloitte’s Strategic Impact Assessment (SIA) framework. Here, we outline the overall journey from good intentions to practical change, and how this is getting the attention of the whole C-suite.

The road to progress

Our SIA framework comprises three key stages: assessment, strategising and reporting. In the assessment stage, we identify the key impacts, and measure, monetise and aggregate them in line with recognised standards from, for example, the Value Balancing Alliance, Natural Capital protocol, Social Capital protocol and Impact Weighted Accounts Initiative. This helps a business answer the question: “Where are we now?” 

Strategising identifies the road to change, or “Where are we going – and how will we get there?” Once all the relevant impacts are identified and monetised, targets for each can be set, and business cases can be developed to identify the most cost-effective areas for change. A roadmap and action plan then chart out the clear, practical steps needed to move forward. 

Having established data and aggregation mechanisms for the assessment stage, these continue to be used for ongoing monitoring of progress being made (through interactive dashboards), which can be used for communication purposes, both internally and externally, and, essentially, to answer the recurring question: “Are we there yet?” 

The art of being heard

Our approach has received a very positive response. When we started out, our conversations were mostly with sustainability officers, but they’re now also with CFOs, who hear us talking their language; CEOs, who recognise the potential for market differentiation; and procurement officers wishing to identify the suppliers that can bring a positive impact. Once such suppliers start being asked for impact data, those wishing to stay competitive (in these holistic terms) will also need to change, and thus the effect will ripple throughout the value chain. 

Getting started

If you’d like to find out more about how you can assess your organisation’s overall impact on the world, feel free to contact us. We’re very proud of this work, and look forward to sharing its potential.