A few weeks ago, I wrote about different types of finance and, because I mentioned Impact Investing as being the highest standard – at least in the eyes of an environmental or social value practitioner – I’ve since had a few questions about impact versus ESG.
Like others who follow my blog, you might be asking: “Well, G, what is the difference between Impact and ESG?”
This is a good question, after all they both push us as leaders to think about the environmental and social aspects that affect how we run our business.
Lots of people use these words interchangeably, but for me, there is a crucial distinction between the two:
ESG is about how a company operates.
Impact is about what a company does.
Remember, ESG is about assessing exposure to risk. A tool for financial decision-making. ESG tells investors how a business works.
Impact is less easily quantified; it tells the story of what a company is, and what difference they make.
Let’s look at some examples.
I’ve spent a lot of time in recent years working with the British National Health Service. The NHS doesn’t need to disclose in the same way that a listed company does, but if they did produce an ESG report we should expect to see sections on things like:
Energy – how much energy does the hospital use?
Waste – how much do they throw away, and how do they handle the hazardous stuff?
Procurement – what do they buy? who from? why them? what are the emissions associated with each of these products?
Recruitment - do they have gender pay gaps? Do they have similar numbers of men and women at every level of seniority – from cleaner to consultant surgeon?
We wouldn’t expect details on how many operations they carried out, or the number of people treated for chronic conditions, nor how successful those treatments were.
Equally, if we went to a tobacco company’s website, we’d expect to find information on how they’re working to eliminate human rights abuses in their supply chain and reduce water consumption. They will hopefully have very clear information on corporate structure, as well as data on governance issues such as gender parity.
An investor can look at this information and make a clear assessment of the exposure that organisation has to risks, be that a physical risk from climate change, or compliance risks from non-adherence to environmental and labour laws.
The tobacco company will probably score high in most ESG ranking methodologies, because they can show how they consider the factors set out in the rules for reporting, and have the data to hand for investors to make that assessment.
Impact goes a step further.
Impact looks at what effects the business has on its workers, its environment or society at large.
In reality, a tobacco company sells a product that’s highly addictive and is linked to a whole range of negative health outcomes. They could be an amazing company to work for, paying the farmers well, sponsoring local schools, buying only renewable electricity. There would still be legitimate questions and concerns around the company’s impact on society.
Now, determining impact is extremely complex.
Think about a renewable energy company. Thay have a positive impact, right? They generate low or zero carbon electricity or heat.
But what about the materials that go into making their assets? A wind turbine needs a lot of concrete in the base and steel in the supporting mast. Steel and concrete are usually both very emissions intensive.
Or what if there are human rights concerns in the way some of the raw materials are sourced? I worked for a while in the electricity storage industry; some battery producers make a lot of effort to understand their supply chain. Others, especially in less regulated parts of the world, do not.
What happens when the asset reaches its end of life? Wind turbine blades and solar panels are a pain to recycle.
Impact assessments consider both ESG-style metrics from the company’s production activities (building a wind farm, or making a cigarette) AND the ripples of effects that product has on the world (generating clean energy, or contributing to lung cancer diagnoses).
Some of these impacts may only be anecdotal, but qualitative information is every bit as useful for those of us who want to make good decisions as the quantitative. Story telling matters here.
So, is ESG a bit… well… blinkered?
I want to make it clear that I think ESG is important. If businesses know and improve their ESG metrics – even if only to make sure they tick all the boxes – we all benefit.
And using the example of the energy company again, for the company to talk honestly about its impact, it must consider the ESG factors in its manufacturing operations and not just shout about the super-duper low carbon output.
Like with everything that’s regulated, some businesses will see ESG as a chore, another form to fill.
Others will start to get creative and see what they can get away with – but eventually things will turn out not so well for companies that play that game.
For me, ESG is just one step towards better business. And for many, not even the first step – those leaders who have integrated environmental management systems and sustainable procurement practises are already doing far more than simply reporting datasets.
But, my love of international standards and management systems is a story for another time.
Both ESG and impact are important, and true (positive!) impact is the goal.
Whatever approach you’re taking, whether you’re a hardened disclosure fiend or tentatively writing your very first report, good luck.
Tell your story, and use any gaps or poorer metrics to push for improvement before next year. This is how we make a difference. Disclosure simply helps us bring the accountants along too.
Wishing you love and profit,
G
A note on NHS Green Plans
By the way: Instead of ESG disclosures, NHS Trusts and Integrated Care Boards write Green Plans.
A Green Plan is kind of half-way between an ESG and an Impact report. They include hard metrics, and also provide narrative information on the positive things that happen as a result of that Trust taking steps to reduce their environmental impact… or even just existing and going about their day-to-day work. Statistics on health outcomes is an obvious one that many Trusts choose to include.
NHS Green Plans are public documents, and I’d recommend reading a few for inspiration if you’re looking to write an impact report for the first time. The NHS has taken a pretty good approach.
I oversaw the production of a lot of these as a Director for a large consultancy. But before taking on that Corporate role, I had my own business for a while. Some of my favourite Green Plan customers were Trusts that let me use my Scope of Work approach and content skills from my own business, to turn the Green Plan into a video. My team initially thought I was bonkers but soon warmed up to it and loved recording them. You can check some out on YouTube, designed and delivered by the Department I ran at my old job.
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