ESG podcast episode 2

In today’s changing ESG landscape, many of our clients are asking the tricky questions: How do you measure impact? What does a reliable strategy look like? How can you best present yourself in the market? As legal and regulatory professionals, it is important to consider how we can collaborate with other sectors to best support our clients and see the possibility for our businesses, our people and our planet.

Our partners at Paragon Impact and Stories Evolved have seen that sustainability impact can be hard to measure, and isn’t always straightforward. We live in complex social and environmental systems which have unique behaviours that can be hard to predict. But this complexity doesn't mean impact measurement should be avoided. Measuring impact means clearly understanding exactly how your business activities strengthen or weaken essential resources over time, which directly influences your ability to remain profitable, competitive, and resilient.

This is made more complicated by the various ESG frameworks that lack the ability to embrace the complex system reality that we live in. We have seen that ESG frameworks alone are often insufficient to reflect and measure real world impact. This is largely because impact measurement requires additional questions to be asked: How bad or how good is my performance? Am I doing better than my peers? Am I doing worse than my peers? 

In order to start to answer these performance questions, we could begin by looking at the most material issues to a particular business and understand which issues the business is most likely to be impacted and exposed to through a double materiality framework. This would then allow us to prioritise what to measure instead of investing vast amounts of effort into capturing metrics that are only a very peripheral impact or risk to the business.

Measuring impact helps answer three vital questions:

1. Risk and compliance: Is your business legally compliant and avoiding unnecessary risks?
2. Integrity and trust: Are you genuinely doing what you claim
3. Competitiveness and resilience: Are you strategically investing in resources that make your business stronger, more competitive, and future proof, and therefore more attractive to future funders?

Effective governance is crucial to proper impact measurement. In professional services companies, we have seen the most common thread is that sustainability teams are still solving the how, who, and what of impact measurement. For example, who is in charge of managing the sustainability impact measurement, and do they have a clarity on their role or have a good reach within the organisation? And if they have the right kind of reach across the upstream and downstream of the organisation, then do they have the right competencies to set expectations with the stakeholders to understand, manage, and report impact arising from their activities within the value chain?

One of the other governance areas is to ensure there are mechanisms and tools to measure and report sustainability impacts with the stakeholders, and this is besides developing and improving competencies. This is a big collaboration exercise and, without these systems in place, impact measurements could be marred with data gaps and inconsistencies. 

Frameworks used well can be used as one of these governance tools and can help shape the information you are using. This being said, we have seen that when businesses decide what to measure and which frameworks to use, a couple of considerations are often overlooked. The first is that any metrics and frameworks you choose should align directly with your legal obligations as well as the commitments your business has made through its public policies and statements. Today, key partners and customers increasingly require sustainability information for you to stay part of their value chain or for them to consider investing in your business.

Second, the sheer variety of ESG and double materiality frameworks available can be overwhelming. A strategic pause is therefore often needed to select frameworks that truly align with the scale of your business, with your operations, and again, the specific impacts that you create. Focusing on metrics that genuinely matter to your profitability, to your brand reputation, and to your long-term viability ensures that you are investing in areas that strengthen your business rather than simply ticking boxes. 

Integrated ESG risk management based on understanding of an organisation's interactions with their wider stakeholders, and their understanding of impact, could create trust between the organisations and their stakeholders, which can ultimately set the organisation up for long-term value creation.

Mandatory and voluntary reporting

Understanding the difference between mandatory and voluntary monitoring and reporting can be challenging, as we are seeing huge amounts of variation between jurisdictions on what is voluntary and what is mandatory to disclose. When it comes to impact measurement, there is very little mandatory disclosure out there. This is because most regulation is expecting firms to disclose the ESG data, which alone doesn't fully explain the outward impact that a firm is likely to be having on environmental or social systems.

We know that the international policy challenge is that we are trying to find interoperable frameworks that mean the sustainability performance of one business, or one asset, is equivalent and can be compared on equal grounds to another. We've recently seen some legislative proposals from Senate Republicans in the US, for example, against the EU's Corporate Sustainability Due Diligence Directive, citing competitive disadvantages. We are also waiting for the final amendments that are going to come out of the EU. So, it's going be interesting to see what happens in that regard. 

Another challenge is that many businesses feel overwhelmed by reporting fatigue and have found that what many of these regulations and frameworks introduce is a large administrative burden. There is also the cost associated with reporting, and fears about losing competitive advantage because of the information that is disclosed and put into the public domain, in addition to associated concerns of accusations of greenwashing. 

Despite all of these legitimate concerns, we think impact measurement is valuable for three clear reasons: 

1. Opportunity and performance: having the right decisions at your fingertips to make smarter, more strategic business decisions.
2. Governance and risk management: impact measurement equips your board and leadership teams with the insights necessary to identify and manage significant medium and long-term risks and, increasingly, short-term risks.
3. The complex transition towards a new operating reality: while sustainability disclosure standards currently focus more on ESG than on impact, the line between the two is going to become increasingly blurred as we see sustainability becoming integral to mainstream business strategy.

Podcast

Tune in to our ESG podcast to hear about how Weightmans is collaborating with key partners Stories Evolved and Paragon Impact to support businesses navigate their sustainability challenges and disclosure requirements. 

Also included in Part 2 are multiple real-life case studies that show how operationalising sustainable impact doesn't just fulfil commitments but can reduce costs, strengthen reputations and build community trust and position the business to thrive long term. And, in some cases, can lead to new revenue streams through great products.

By working as a team with our partners, we offer businesses a “one stop shop” to close the gap between where they are now, what they are required to do and where they aim to be.

If you’d like to know more about how to navigate the challenges of future proofing your business, please get in touch for an initial conversation with our ESG Team.