• Nuno Moreira da Cruz

The distinction between financial and non-financial (ESG) metrics will be over soon

For the benefit of the People and the Planet

May 23rd 2021

I believe that we are not far from the moment when we will definitely stop talking about financial metrics and non-financial metrics. For context, until about 10 years ago (let's call it Phase 0) the reference to ESG (Environment, Social and Governance) measures was practically nonexistent, all that the companies reported were simply the traditional financial indicators. It was only at the beginning of the decade of 2010 that, due to the first signs that the corporate world really had to start reacting to the climate emergency and to the growing social inequalities, did the ESG indicators begin to be defined (beginning of Phase 1), being the SASB's “Materiality Map” the most recognized ‘work base’. Since then, many companies have used it (and other similar platforms) to communicate non-financial indicators. The lack of standardization and mandatory reporting led to the obvious: most companies only report “where I look good” - if I have good numbers in terms of “diversity” or CO2 reduction… I report; if I don’t have it… I will look for others with better numbers to report”. A bit of exaggeration but not that much. This is the reason why there is a need to move definitively towards standardization that will allow greater transparency for those who invest and will make the benchmark between companies and industries possible. This is Phase 2, where we currently are. In this context, the World Economic Forum released last year, during the summit in Davos, a report proposing a set of ESG metrics that companies should report, regardless of their industry or geography. Organized around the pillars of the principles of governance, planet, people, and prosperity, the identified metrics align the various existing standards. Since then, 120 members of the Forum's International Business Council have shown strong support for the proposed ESG metrics (29 “core metrics” and 37 “expanded metrics”), with several companies already starting to incorporate them in their reports. As stated by Klaus Schwab, founder, and president of the World Economic Forum “This is a unique moment in history to walk the talk and to make stakeholder capitalism measurable. Having companies accepting, not only to measure but also to report on, their environmental and social responsibility will represent a sea change in economic history.” This standardization and regulation is a fundamental step in the path of transparency for corporate action, but it is not yet the final necessary step. This final and define step will only be achieved with the adoption of the Impact Accounting, in which the ESG metrics definitely become financial metrics due to their direct inclusion in the companies' accounting results. And this will be Phase 3, in which the distinction between financial and non-financial disappears, where externalities (from the environment to the social) appear fully included in the accounts of companies, where the consequences of our actions, not only for financial capital but also for human and natural capital are accounted for. As far as I am concerned, I believe this is probably one of the biggest obstacles to the definitive implementation of the notion of “Responsible Business” throughout the business world. A difficult task, but absolutely necessary. As someone recently said, "also, nobody believed 100 years ago that it was possible to have a single and universal accounting, and it happened". We are now at the turning point where we need Impact Accounting - and history repeats itself: a few beliefs, but it will happen. For the benefit of People and the Planet. Nuno Moreira da Cruz Executive Director Center for Responsible Business & Leadership