Book review: Measuring Good Business - Chap. 5

Book review: Measuring Good Business - Making Sense of Environmental, Social and Governance (ESG) Data - Chapter 5 - Solutions for inclusive impact

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In my introductory post, I explained that I have endeavored to summarize key insights and takeaways from this book (which I highly recommend) in five weekly posts, each one corresponding to a different chapter. This week is – the last one! – Chapter 5: Solutions for inclusive impact.

(I offer my gratitude to the author Richard Hardyment for his thorough research and captivating narrative.)

This chapter is about finding a better way of measuring ‘good business’, one that involves people. 

A required shift in mindset

The author proposes four principles to guide us to measure better:

1. Humility – acknowledging the limitations to measurement, presenting risks more honestly, identifying what is ‘not known’ rather than just ‘not disclosed’

2. Openness – approaching reporting as less of a compliance exercise and more of a transparent discussion on the trade-offs and dilemmas of sustainability, such as when decisions are made for ethical reasons, areas of uncertainty – “part of building an ecosystem with greater tolerance for ambiguity and failure”

3. Inclusivity – getting closer to the site of impact (locally, at the people level), to measure change that is often abstract, ambiguous, and subjective

4. Pluralism - adopting multiple methods and perspectives to address the intricate systems of people and planet, balancing necessary quantification with equally necessary qualitative insights

The author also proposes moving beyond binary thinking: “Just like good and bad, “sustainable” [and “unsustainable”] are too categorical to be of much use [...] we should break sustainability down: better on climate; worse on human rights; strong on transparency; weaker on social justice; more inclusive in procurement; less prepared for the transition. We should measure business in ways that reveal all the shades of gray as well as the uncertainties and unknowns. Is an asset positive for water, but unknown for diversity? Is a fund strong on nature but not measured for social issues?”

A rigorous definition of ESG

I fully agree with the author’s assertion that we need a rigorous definition of ESG and I very much like the one he proposes: a process of integrating environmental, social, and governance considerations into decision-making with the goal of improving risk-adjusted financial returns. While ESG can have positive social and environmental outcomes as a by-product, it should be understood as a subset of responsible business / sustainable finance.

A more rigorous – and widely shared – definition of ESG also helps to understand that it cannot transform the world, nor can it reflect social, political or cultural values. (💡 aha moment) 

Measuring the right thing

The author very interestingly borrows an emerging shift in macro-level perspectives to apply it at the micro level, stating that “just as GDP is an incomplete picture of what we value in society, enterprise value creation is a partial story about what we seek from commerce”. 

He goes on to state:

“There will always be topics, often human ones, where there is a weak evidence base for action based on commercial criteria. If we leave sustainability to the forces of markets, we are accepting that such issues don’t matter. Or that regulation will solve them – in spite of business, not because of it. But many corporate leaders tackle diversity, enhance safety, train staff or improve product safety not for financial reasons but for ethical ones. Of course, the two motives are linked. But we shouldn't incentivise a system where the starting point is always the financial one.”

Beyond the business case, there are business ethics, and good business is about values as much as social and environmental impacts. But this then begs the question of how do we know what is good, and who gets to decide what is right or wrong.

“An ideal measurement framework captures both quantifiable outcomes and also something of the rationale, reason and culture behind business decisions. A framework for measuring responsible and sustainable business must encompass social obligations and ethical duties as well as the social, environmental and economic consequences of business [...] to do this, we have to involve people through participatory measurement.”

Indeed many impacts are subjective and unknowable without participatory approaches. The author advocates involving stakeholders across the full spectrum of commerce in the design, data generation, and judgment of good business. “People’s realities - their lives and livelihoods, relationships, values and aspirations - are the source of knowledge that we seek.”

For example, suppliers and workers can be involved in describing the issues that matter to them (scope), suggesting how to capture them (metrics), discussing what good practice looks like (scoring), and how to balance competing priorities (weighting). 

The author speaks of sampling stakeholder perceptions as “the best way to bridge the gap between the numbers we need and the reality we seek” and to empower them to shape the information flows. “Food is affordable and potable water is available only if somebody perceives them to be. We can extend the same idea to anything described as “responsible”: working hours, political engagement, consumption, tax, marketing. Whether any such things are “responsible” is best defined through criteria and insights generated by people who know and experience the business.” (It does give pause, when we consider how stakeholder engagement is currently being practiced; perhaps we would do well to revise such practices to try to capture what the author is proposing here.) The author also posits that “the most transformational impacts of big business are often through its products: think of medical equipment, vaccines, infrastructure,  communications or access to finance. Products and services transform lives - we just don’t know how much because hardly anyone ever asks those that use them.”  He reckons that If so few companies are asking, it’s likely because they would not like the answers.

Final thoughts

Tying it all together, in measuring good business both Newtonian precision and participatory measures are needed, but complexity and uncertainty remain, and what we don’t know or cannot measure may sometimes be more important than what we can – including impacts and ethics. Ultimately, the type of society we aspire to will determine good measurement (or measuring good). But good can only be defined in relation to how we see the purpose of the company.

“Why does a corporation exist? It must be for the sake of society – the useful products, the meaningful work, the social value and the economic surplus that is created by people and for people. We must aspire for a world where business powers a regenerative economy that enriches life. Our task must be to capture this social value through data, through people, for people, as best we can. It’s then that our true endeavour can begin. Because the numbers are never the end. It’s what we do with the data that counts.”

Introduction

Chapter 1 - Moral Merchants

Chapter 2 - ESG World

Chapter 3 - Good measurement

Chapter 4 - Making a difference

About the book

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