Gita Maharaj Opinion Piece – A new approach to metrics

How do we ensure theJust Energy Transition truly leaves nobody behind?

ByGita Maharaj

Reactions to the 2024 UN Climate Conference(COP29) held last month in Baku, Azerbaijan were mixed, with some seeingit as a step forward while others viewed it as a disappointment. While theagreement to triple climate finance to $300 billion per year by 2035 was awelcome step forward, the conference failed to find agreement on the justtransition work programme (JTWP).

A just transition is crucial as it centres onshifting 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 calledupon to play a greater role in funding the transition and aligning climateaction with the upholding of labour and human rights, decent work, and socialdialogue. This is in response to fiscal constraints faced by both developed anddeveloping nations, and a growing realisation that non-governmentalstakeholders need to play a more meaningful part in the transition – to achievejustice and, avoid the continuation of injustice.

The big question, of course, is the “how” and “what” the private sector can do todeliver just transition strategies. At Impact Institute, we believe that partof the challenge of defining this lies in the structures and standards theprivate sector uses to measure and benchmark their social impact footprint.

Time for a socialimpact measure overhaul

The accepted method of sustainability reportingin the sector – environmental, social, and governance (ESG) reporting, which issubscribed to by 96% of the world's top 250 companies – is increasingly beingquestioned for its effectiveness and accuracy in measuring a corporation’strue impact on sustainability. It is a limited framework with an over-relianceon public disclosures that the investment community uses to assess a company’svulnerability to risks caused either by the company or to the company.

Our proposition is centred on our Social ImpactFootprint Framework, which provides a consistent set of actionable and decisionuseful social impact metrics that solves for ‘S’ in ESG reporting, and offers astandardised set of key indicators for comparison and continuous improvement.

A recent paper published by INSEAD proposedthe reintroduction of the “triple bottom line” (TBL), proposed in1998 by John Elkington, with the condition that greater standardisation beestablished for TBL to be meaningful. The authors argue that using clear andtransparent impact measures for the TBL approach will provide a uniform systemto assess and compare corporate sustainability efforts.

Simplicity is great…but it’scomplicated

While the idea of clear and simple metrics inthree key areas – the paper suggests greenhouse gas (GHG) emissions, livingwage across the value chain, and impact on biodiversity – is a good start, wecontend that simpler metrics won't bring about the desired sustainabilityshifts if they do not provide a more holistic view, or if they can't beimplemented successfully. The matter is considerably more complex –particularly around social impact metrics – than the authors suggest forseveral reasons.

Firstly, breaking thecomparison barrier around social impact metrics is complicated. For example,the ‘living wage’ metric cannot be used without agreement of the methodology forcalculating real living wage – for example, which indicators are in the basketand what is the size of an ‘average’ family? In addition to this challenge, implementation of aliving wage cannot be the responsibility of producers and employers alone. Asthe Global Living Wage Coalition argues, "each player in the supply chainneeds to support a living wage in their own capacity, including standard systems,retailers, brands, supplier companies, unions and other labour groups, industryorganisations, governments, civil society, and academia." 

Further, regions havedifferent strategic contexts and social impact focus areas vary. In Africa, forexample, social issues include food insecurity, lack of sanitation and cleanwater, high unemployment rates, gender-based violence, and extreme poverty. Howwould a living wage metric – uniformly applied – recognise a company'scontribution to solving these localised problems?

Would the living wagemetric promote equitable pay?

Even if a living wagecalculation methodology is agreed, how would this information be used in theentrenched and established practice of remuneration benchmarking in the formalsector? Would having living wage data promote more equitable distribution ofprofits to employees versus management?  It’s clear that the practice of reward and incentives needs to bereconsidered because it has disproportionately benefited CEOs over employeesfor decades: according to the Economic Research Institute, CEO take-home payincreased by 1200% between 1978 and 2019, compared to average employee pay,which grew by a marginal 13.7% over the same period.

It’s evident that the private sector needs to embrace a fresh approachto sustainability reporting. As the British Academy notes in their Policy &Practice for Purposeful Business report, currentreporting metrics are focused on the financial bottom line, and valuations arepredominantly restricted to future financial earnings. Nowhere is a companyrequired to account for the total costs that it incurs or is likely to incur inavoiding or rectifying the problems it inflicts on society or the planet. Thishas led to an early-adopter penalty, where companies who are accounting for thecost of sustainability – and therefore whose profit is lower – are penalised bythe market compared to companies that don't account for sustainability costsand have higher profits.

Evaluation of non-financial performance ischallenging and requires a broader range of techniques than has been the caseto date, including qualitative approaches. There's no silver bullet and solvingfor the ‘S’ in ESG is a collective effort which must give rise to meaningfulbenchmarks on a company’s universal social impact footprintand not just single-dimension, stand-alone metrics.

Ends

Maharajis CEO of Impact Institute, an independent advocate for corporateaccountability in sustainable social impact reporting and originator of theImpactful Organization™ certification programme, which measuresthe social impact footprint of leading companies.

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