Some companies have also been trying to embrace the idea of ESG materiality in their reporting. One approach has been to break out what is financially material and sustainability reports, but others have sought to go further. They've sought to quantify the impact of firm activity on the natural environment. To calculate the multiplier effect of poverty levels, employment and tax payments on the wider economy. To measure the upside of worker benefits trainings and other non monetary compensation, say, in terms of reduced injuries, are improved quality of life. And to catalog measures like a company's impact on customer welfare or customer willingness to pay. Notably each of these are measured in dollars. Early adopters of this effort include Puma, with its environmental, profit and loss account, Unilever with assessments of its total impact on poverty in Indonesia. Which grew into a brand imprint assessment globally. Standard chartered, Newmont gold with their effort to assess the total contributions of their operations to the Ghanaian economy. Consultants and accountants are coming into the mix as well, PWC has developed a total impact measurement and management system. EY has a total value framework. Deloitte has a social impact measurement model, and KPMG has a new vision of value. Each of these strives to synthesize and standardize the methodology for estimating the impact of corporate actions on the natural environment, on economies, on workers, on consumers in dollars. And reported in an integrated manner. In the academic sphere, the return on sustainability investment framework and its tool kits developed by Than Wheelan at the center of sustainable business at New York University Stern school of Business. Provides off the shelf spreadsheets and guides for identifying and measuring the mechanisms by which sustainability investments can improve financial performance. ROSI Framework provides industry specific spreadsheets which capture a range of specific revenue or cost drivers. Including factors like customer loyalty, employee retention, innovation, media coverage, production efficiencies, risk avoidance and more. While the logic behind these revenue and cost drivers is sound and the tools incredibly helpful to the practitioner, the data left to complete them is substantial. The impact weighted accounts initiative led by George Serafeim at Harvard Business School uses a different approach. He relies on voluntary reported corporate data to assess thousands of companies total impact across a range of ESG factors. Given the data challenges, and the competing frameworks, we quickly arrive at a similar problem to what we experienced on the investor side, or perhaps even worse. Take a look at this visual representation of the integrated reporting choices made by 14 companies, who adopt some variant of a total impact methodology. Each column in the figure represents a company, and each row a reporting item. The blue section covers the firm's economic impacts, the orange social, green, environmental. Almost every firm in this chart, but not all, reports carbon emissions and water use, as well as taxes and payroll paid, and employee training provided. But outside of those five items, not a single other item on this list was reported by even the majority of these 14 companies. Furthermore, when you dive into it and look at how they assess the total impact of carbon water and other factors, you find huge discrepancies in the way they monetize these factors. For example, is the social cost of carbon $30 a ton, $100 a ton, $150 a ton, 200 or even 1000. Is the cost of water used $1 or $11 per cubic meter? Is a ton of landfill $20 or $170 in terms of its social cost. What about particulates of 10 micrometers in size, $980 or $15,000 per ton. We could go on, so long as each firm is allowed to choose what it reports, how it measures it and the methodologies that uses in that reporting. They're going to be tempted to make choices that make their company look better in the eyes of their stakeholders without changing what's actually happening inside the firm. Standardization of all these frameworks and all these conversion factors. Is this a vital next step in the evolution of ESG reporting? The financial world has been flooded with new ESG data in recent years with no end in sight. But despite the growing amount of ESG data and the sophisticated nature thereof, there's still three fundamental challenges. The metrics aren't standardized. The ratings are uncorrelated and the analysis is disconnected from other financial and operational analysis conducted by investment analysts. Overcoming this challenge requires investors to develop a new way of seeing value.
