There’s no silver bullet in the just energy transition, and solving for the ‘S’ in ESG is a collective effort
Reactions to the 2024 UN Climate Conference (COP29) held last month in Baku, Azerbaijan, were mixed, with some seeing it as a step forward while others viewed it as a disappointment. While the agreement to triple climate finance to $300bn per year by 2035 was a welcome step, the conference failed to find agreement on the just transition work programme.
A just transition is crucial as it centres on shifting to a low-carbon economy in a way that supports affected workers, communities and industries, to ensure both environmental sustainability and social equity.
The private sector is increasingly being called upon to play a greater role in funding the transition and aligning climate action with the upholding of labour and human rights, decent work and social dialogue. This is in response to fiscal constraints faced by both developed and developing nations and a growing realisation that non-governmental stakeholders need to play a more meaningful part in the transition — to achieve justice and avoid the continuation of injustice.
The big question, of course, is the “how” and “what” the private sector can do to deliver just transition strategies. We believe part of the challenge of defining this lies in the structures and standards the private sector uses to measure and benchmark their social impact footprint.
Time for a social impact measure overhaul
The accepted method of sustainability reporting in the sector — environmental, social & governance (ESG) reporting, which is subscribed to by 96% of the world’s top 250 companies — is increasingly being questioned for its effectiveness and accuracy in measuring a corporation’s true impact on sustainability. It is a limited framework with an overreliance on public disclosures that the investment community uses to assess a company’s vulnerability to risks caused either by the company or to the company.
Our proposition is centred on our Social Impact Footprint Framework, which provides a consistent set of actionable and decision-useful social impact metrics that solves for “S” in ESG reporting and offers a standardised set of key indicators for comparison and continuous improvement.
A recent paper published by Insead proposed the reintroduction of the “triple bottom line”, advanced in 1998 by John Elkington, with the condition that greater standardisation be established for the measure to be meaningful. The authors argue that using clear and transparent impact measures for the triple bottom line approach will provide a uniform system to assess and compare corporate sustainability efforts.
Simplicity is great… but it’s complicated
While the idea of clear and simple metrics in three key areas — the paper suggests greenhouse gas (GHG) emissions, living wage across the value chain, and impact on biodiversity — is a good start, we contend that simpler metrics won’t bring about the desired sustainability shifts if they do not provide a more holistic view, or if they can’t be implemented successfully. The matter is considerably more complex — particularly around social impact metrics — than the authors suggest for several reasons.
Breaking the comparison barrier around social impact metrics is complicated. For example, the “living wage” metric cannot be used without agreement on the methodology for calculating real living wage — for example, which indicators are in the basket and what is the size of an “average” family?
In addition to this challenge, implementation of a living wage cannot be the responsibility of producers and employers alone. As the Global Living Wage Coalition argues, “each player in the supply chain needs to support a living wage in their own capacity, including standard systems, retailers, brands, supplier companies, unions and other labour groups, industry organisations, governments, civil society and academia.”
Further, regions have different strategic contexts and social impact focus areas vary. In Africa, for example, social issues include food insecurity, lack of sanitation and clean water, high unemployment rates, gender-based violence and extreme poverty. How would a living wage metric — uniformly applied — recognise a company’s contribution to solving these localised problems?
Would the living wage metric promote equitable pay?
Even if a living wage calculation methodology is agreed, how would this information be used in the entrenched and established practice of remuneration benchmarking in the formal sector? Would having living wage data promote more equitable distribution of profits to employees versus management?
It’s clear that the practice of reward and incentives needs to be reconsidered because it has disproportionately benefited CEOs over employees for decades — according to the Economic Research Institute, CEO take-home pay increased by 1,200% between 1978 and 2019, compared to average employee pay which grew by a marginal 13.7% over the same period.
It is evident that the private sector needs to embrace a fresh approach to sustainability reporting. As the British Academy notes in their Policy & Practice for Purposeful Business report, current reporting metrics are focused on the financial bottom line, and valuations are predominantly restricted to future financial earnings. Nowhere is a company required to account for the total costs that it incurs or is likely to incur in avoiding or rectifying the problems it inflicts on society or the planet.
This has led to an early-adopter penalty, where companies that are accounting for the cost of sustainability — and therefore whose profits are lower — are penalised by the market compared to companies that don’t account for sustainability costs and have higher profits.
Evaluation of nonfinancial performance is challenging and requires a broader range of techniques than has been the case to date, including qualitative approaches. There’s no silver bullet and solving for the “S” in ESG is a collective effort that must give rise to meaningful benchmarks on a company’s universal social impact footprint and not just single-dimension, stand-alone metrics.
Article Credit: businesslive