ESG and the Importance of Measuring Outcomes

Environmental, Social, and corporate Governance are measures used to determine a company’s social impact and sustainability. According to Harvard Business Review, around $60 trillion worth of all managed assets are subject to ESG criteria.

But while the measurement of inputs relating to ESG is relatively straightforward, of greater import is the need to accurately measure outputs, outcomes, and impact. Understanding the outcomes is vital to understanding the value of the input.

Interest in ESG is growing fast and corporations are under increased pressure to implement ESG activities in their normal course of operation. If corporations become more responsible, conduct business in a more sustainable way, and ensure they are having a positive social impact as they generate profits, the benefits to the environment and society will be profound.

As long as we can quantify the impact of ESG-related endeavors and decisions.

A decision a corporation makes inline with its ESG commitments cannot be measured in isolation. We need to be measuring the desired outcome. If the desired — and desirable — outcome is not measured, with the input itself considered sufficient, we run the risk of assuming a causality between the input and an output that may not be present.

As investors are increasingly investing selectively based on ESG values, a more robust methodology for measuring outcomes is necessary. That applies especially to long-term outcomes, which will have more of an impact on the likelihood of the long lasting systemic change society wants to see.

Ratings agencies vary in terms of the methods they use to measure ESG. Different frameworks are inevitable and, in some ways, healthy. A uniform approach to measuring ESG performance may make navigating values easier for investors on the surface. But it risks creating a standard that miscues when it comes to the nuances required to measure ESG performance.

Also, different companies and different sectors need their ESG items ranked in terms of what is more salient to them. Important ESG goals for an oil and gas company are unlikely to be the same for a social media platform, for example. The former’s impact on the environment is more important to understand, while the latter’s social impact is a better measure of their ESG success.

Measuring outcomes and impact and measuring the most appropriate outcomes and impact for the sector are pivotal to our understanding of how corporations and their stakeholders are affecting our environment and societies.

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