New corporate reporting approach to unite impact and profit
14 September 2020 at 6:11 pm
A new shared value approach offers a way to better combine companies’ social and environmental outcomes with profitability
Current corporate reporting systems mean that for many companies, environmental and social outcomes run seperate to their financial outcomes. But a new hybrid approach could change this.
The Hybrid Metrics approach, detailed in a new report by one of the founders of Shared Value, Mark Kramer, would see corporations combine their social and environmental impact with standard measures of financial performance, making the connection between the two explicit.
This is something that was not currently happening under separate environmental, social and governance (ESG) and finance reporting methods.
ESG reporting was developed to hold companies accountable for their impact on people and the planet, but financial performance or profitability wasn’t part of that – something the report said was a missed opportunity for business, investors and society.
Italian natural gas company, the Enel Group, was highlighted in the report as one example of the approach in action.
While Enel had long communicated its shift to renewables in its sustainability reports, this year the company made sustainability a key part of a strategic meeting that it presented to the global finance community.
Investor communications in late 2019 and early 2020 also highlighted the specific financial values driven by the renewables business model, including revenue, profitability, and reduced risk.
And this paid off, with the company seeing a share price increase of 24 per cent at the start of the year, (at a time when the pandemic deflated the market) with management attributing the increase to better communicating the economic benefits of its renewables strategy.
Lessons to be learned in Australia
Helen Steel, the CEO of the Shared Value Project, told Pro Bono News that while this wasn’t a “silver bullet” in fixing bad corporate behaviour, it was another tool companies could use to bring impact and their bottom line together as one.
“If I think about things like the Modern Slavery Act and other reporting requirements that Australian companies now have, I think that they are still, for the most part, just box ticking exercises,” Steel said.
“This new thinking around hybrid metrics might actually be a means to be able to show the real value of all of this kind of work.”
She said that corporations were now in a unique position whereby they were all dealing with the same social issue, and needed to be thinking about longer term sustainable strategies that didn’t just help their bottom line, but the communities they served as well.
“Every company in the world is actually trying to deal with a social issue, the pandemic,” she said.
“What the pandemic has really put into focus is that companies really do need to be thinking longer term and I think tools such as shared value, impact investing, and now hybrid metrics are all ways they can now [deliver] on their purpose profitably.”
A full copy of the report can be found here.
This is not a new approach. John Elkington is the father of the Triple Bottom Line, he coined the phrase in 1994 to include social and environmental bottom lines. He did a product recall after 25 years because it wasn’t properly understood nor widely adopted. ESG, Shared Value, Social return on Investment, multiple capital models, Full Cost Accounting, Environment P&L, Integrated reporting, Impact Investment, Total Societal Impact Frameworks etc are all just spinoffs. Elkington calls them “alibis for inaction” and identifies a “hard-wired culture problem” whereby CFOs and CEOs move “heaven and earth” to hit profit targets but do not work at the same level to deliver people and planet targets. It’s about time they did.