Going Beyond ESG: Understanding and Managing the Economics of Impact

How much does true change cost? Who is best placed to invest? What are the win-wins and trade-offs? Economics of Impact is an emerging practice by which purpose-led companies are answering these questions, pushing the impact measurement and management frontier, and starting a whole new conversation with their ESG investors.

We had the great pleasure of hosting a panel session at the Building Bridges Week 2021 in Geneva, together with leaders in the food and pharmaceutical industries, David Pendlington and Michael Fürst, who shared their journeys in understanding and managing the consequences of meeting bold environmental and social outcomes.

Watch a recording of the session >

The need to accelerate the transition to an economy that truly addresses our global social and environmental challenges cannot be overstated. Corporations are making bold commitments: 90% of Fortune 500 companies publish sustainability reports, and at least 30% of the largest 2000 companies in the world have made net zero pledges. Investors’ interest in these companies is growing exponentially, with annual cash flow into ESG funds more than doubling from 2019 to 2020 and increasing tenfold since 2018.

However, the reality is that companies do not have clarity on what those pledges mean for business, or have concrete plans on how to meet them. Companies’ social and environmental commitments are disconnected from their financial targets. Sustainability is disconnected from business.

Despite more than a decade of efforts to focus ESG ratings on materiality, ESG ratings are still disconnected from key business drivers. ESG investors make decisions on an ever-growing number of ESG ratings’ and standards, whose noise to signal ratio is too high to have any meaningful impact on the real economy.

“Until we systematically link our progression on societal outcomes with our financial projections and outcomes, we just won’t make it. We will under-resource the change or we will greenwash the change, setting targets that will be quietly dropped as soon as market cycles get tougher. We need real pragmatic and timely solutions, without waiting another decade for potentially a new accounting system or for government to intervene. And what we can do now is focus on the fundamental two or three impact areas that are most in line with companies’ business model and purpose, and systematically understand the true cost and value of reaching key societal and environmental outcomes.”Marc Pfitzer

There are leaders within purpose-driven companies who are doing the math of the true cost and value of meeting bold societal and environmental goals. In the food sector, leaders are starting to realize that climate change threatens their supply chains, and that investing in efficient resource management for climate change mitigation and adaptation is a must. They are also starting to have more traceability of their supply chains, shedding light on persistent human rights violations and living income gaps within agricultural communities, which if not addressed pose a threat on farming inter-generational continuity and labor supply.

“The true cost of change is only going to get larger. So it is better to be deeply invested and deeply understand it. In the food industry, that understanding needs to be embedded within the business, at the procurement teams’ level. It cannot be at the sustainability teams’ level only. Knowing the investment needed in making a positive impact to secure future supply—and how it compares to the cost advantage of sourcing—helps make informed business decisions. It will unlock ‘procurement with purpose,’ enabling true social and environmental impact by dealing with problems at the source and with the appropriate level of detail.”David Pendlington

However, while leading corporations are starting to do the math on the economics of impact, linking these efforts with the investor world remains a challenge. Corporations need to report on multiple standards that are often irrelevant for those areas where they can drive the most impact. This reporting is cumbersome and in most cases is not helpful to unpack the economics behind companies’ efforts. In the pharmaceutical sector, leading companies are starting to re-think key impact metrics, going beyond patient outreach to quality-adjusted years of life. However, investors’ attention is still focused on completely different topics, which, while important, are not where the industry can drive the most impact.

“There is almost no conversation, even with mainstream investors, where the topic of ESG is not mentioned. That is a very positive change with respect to previous years. However, it is surprising how erratic and sometimes irrelevant ESG conversations are. In the pharma sector, they should be guided by what is really material to the industry, which is first and foremost access to medicine. However, they are often focused on not so material topics (e.g. waste management). This is an important topic but not the most important topic in terms of value creation and societal impact. There is rarely a discussion on how to drive access for underserved patient groups in a way that could also drive revenue and at the same time create new positive societal outcomes. If we do not show this, we will not be able to know what is the right thing to do from a capital allocation and access to medicines perspective. We have many tools available to do this and we should use them to make informed choices.”Michael Fürst

Doing the math on the economics of impact allows companies to focus and truly understand when business models create positive synergies or trade-offs between financial and societal outcomes. It can give them the insights to deliver on their societal purpose more profitably, efficiently, and effectively. It can also enable companies to have more meaningful conversations with proactive investors from the impact investing and the ESG investing world, who may be willing to engage with them to truly understand how impact aligns with business.

“A deeper understanding of the economics of impact can truly drive investment where it should go. It could take all the excitement behind impact investing and ESG investing and put it at work to really change the world. This approach can help investors engage with companies in a more proactive way to find investment opportunities with clear impact that is sustainable over time, because that impact will be aligned with the economic incentives of the company and all relevant stakeholders. It is not just about throwing money at the problem, because money never solves anything by itself. It is about understanding how we can use that money by having a systemic view of the things we should be pushing for.”Catalina Martinez

Economics of impact can help companies do the math on what bold ESG commitments truly mean for their profit and business, and thus establish a genuine engagement with the sustainable finance and impact investing world to achieve real impact. At FSG, we are working with industry leaders in key sectors who are starting their economics of impact journey. If you are interested in this work, please contact our team:

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