What gets measured gets managed: How sustainability reporting can help save the planet

The COVID-19 pandemic, climate change and the destruction of biodiversity all require our attention in 2021. Do businesses have a role to play in tackling these global challenges and if so, how can they make a difference? Perhaps as important, in an era of marketing and information overload, how can we trust them when they tell us they are making a difference?

The past two or three years have seen a tectonic shift in the way companies view their purpose. The idea that a company’s only role is to deliver financial returns to its shareholders has begun to expand into the more inclusive notion of “stakeholder capitalism”, which seeks to align corporate purpose with the values of wider society. And society’s values are centred around not profit but inclusion, equality and a healthy planet.

The reasons are not hard to see. The reality of climate change is hitting home, as ice caps melt and wildfires ravage forests, wilderness and real estate from California to Australia to the Amazon. COVID-19 has exposed and widened existing fault lines of economic exclusion. The Gilets Jaunes and Black Lives Matter movements have channelled popular anger at social and racial inequality.

Data backs up these trends. The percentage of US adults who say it is a priority to deal with climate change climbed from 30% to 52% between 2009 and 2020, while the percentage who said it was a priority to protect the environment rose from 41% to 64% in the same period, according to the Pew Research Centre.

These trends find expression in consumers making more sustainable choices, employees preferring companies that embrace social purpose and investors asking corporate boards awkward questions.

Companies find themselves having to adapt rapidly to this changing environment. In the past year, for example, the number of businesses, cities, states and regions announcing pledges to cut their carbon emissions to net-zero has doubled. This is not just about “doing the right thing” – it is driven by a clear-eyed appraisal of the risks and opportunities global businesses now face. As Larry Fink, CEO of BlackRock – an investment firm with nearly $7 trillion of assets under management – put it recently: “Companies focusing on all stakeholders are the companies that can have durable, long-term profitability.”

In its 2021 Global Outlook report, BlackRock announced a “new investment order” in which sustainability is set to become a key component of portfolio allocations for decades to come. “A commonly held view is that a return sacrifice is needed when adopting sustainable investing – we disagree,” stated the company. They predict high carbon emitters may face “regulatory penalties, higher taxes and financing costs”, prompting investors to shift towards sustainable assets.

Brian Moynihan, Chairman and CEO of Bank of America, shares a similar viewpoint. “Over the long term, what matters to society matters to investors,” he says. Moynihan has spearheaded a new initiative: the Stakeholder Capitalism Metrics initiative, developed within the World Economic Forum’s International Business Council (IBC), of which he is chair.

In September 2020, the initiative published its report summarising more than a year of work to define a set of common metrics for sustainable value creation. In 2017, the World Economic Forum issued the Compact for Responsive and Responsible Leadership with 140 CEOs pledging to align their corporate values and strategies with the UN’s Sustainable Development Goals. But conscious that it takes more than fine words and photo opportunities to improve the state of the world, Moynihan and the IBC sought a way to lock in this new spirit of corporate commitment to society.

The answer at which they arrived first appears as rather dry: metrics and disclosures. But fuelled by the knowledge that “what gets measured gets managed”, the IBC and the Forum worked with the Big Four accounting firms – Deloitte, EY, KPMG and PwC – to develop a set of universal metrics that would enable companies to measure and disclose how they are creating sustainable value.

Why is disclosure so important? Because it builds trust and credibility, both vital to furnishing a company with its social “licence to operate”. Fink puts it this way: “Companies evolve faster through disclosure – transparency reveals the good and bad parts of everyone. Better financial disclosure forces management and the board to have a greater laser focus on these issues.”

However, as the popularity of sustainable investing has spread, so the number of organizations, standards and acronyms around “environmental, social and governance” (ESG) reporting has increased. This has led to a heavier burden of corporate reporting while fragmenting the picture of business performance for investors.

The Stakeholder Capitalism Metrics initiative attempts to address this issue by curating – out of the many hundreds of standards available in the market – a core set of just 21 universal metrics, against which all companies can (and in some cases already do) report. More importantly the initiative demonstrates that, as Janine Guillot, CEO The SASB Foundation, has said ‘sustainability has climbed the corporate ladder’.

The core metrics address issues across four pillars: Principles of Governance, Planet, People and Prosperity. The final pillar is important, because it embeds the notion of sustainability at the heart of what it takes to create value now and in the future. Furthermore, the World Economic Forum encourages companies to reflect these metrics when possible in their mainstream reports, transforming sustainability from corporate window-dressing to a board-level priority.

On 26 January 2021, 61 CEOs of some of the world’s largest companies publicly endorsed the Stakeholder Capitalism Metrics, heralding the next stage in rolling out this initiative. The project sees itself as contributing to the world of sustainability standards in three unique ways:

1. Convergence: In distilling a set of core metrics and disclosures considered critical for long-term value creation the World Economic Forum and the IBC aim to catalyse the convergence of standard-setters, investors and other interested parties around a globally accepted international standard for sustainability reporting.

2. Voice of business: In signalling that leading CEOs view sustainability as critical to the long-term success and viability of their businesses, this project gives the private sector a strong, unified voice in the discussions under way on a global solution for sustainability reporting.

3. Leadership in action: In adopting the metrics, the IBC seeks to turn fine words into meaningful actions. The quest to achieve an internationally-recognized system of comprehensive corporate reporting that covers both financial and non-financial information could take several years – but the world cannot wait, so the IBC’s subset of existing metrics provides a starting point on the journey towards that universal system.

The main objective of the IBC’s initiative is to show that the private sector takes sustainability seriously and is an engaged and willing party in the dialogue leading to a converged set of global standards for sustainability reporting.

More broadly, the goal of the World Economic Forum is to encourage all businesses, large and small, to adopt these metrics to demonstrate to investors, regulators and society at large that stakeholder capitalism can be a force for good, both for people and the planet.