July 15th – The Impact of Diversity on the Global Economy

Home 9 Editor's Picks 9 Moving from ESG to Impact

Moving from ESG to Impact

The case for unleashing the power of SDG 16

Russia’s invasion of Ukraine has further brought into question the Environmental, Social, and Governance (ESG) system that is meant to guide private and public companies towards more responsible behavior. The E lost some legitimacy with the exposure of the extent of fossil fuel dependency on Russia’s oil and gas, and has recently come under further suspicion following Tesla’s ESG ratings.

Perhaps even more worrying is the light that it shed on the nebulous G. Definitions vary but Governance was meant to include ‘governance and corruption’, ‘transparency and risk management’, and ‘geopolitics’, some argue. However, the quasi-universal blind eye turned to Russia and its oligarchs’ less-than-transparent practices brings into question whether any of these criteria were considered material to companies. Do ‘geopolitical responsibilities of companies’, ‘corporate political responsibility’, or human rights standards matter? Rather than ceasing operations in Russia or divesting post-facto — whose unintended consequences may be counter-productive — could or should companies have been more cautious, more diligent in their application, and enforcement of the G criteria?

abstract landscapeHow can corporations, from now on at least, better metricize for political stability, and ultimately, for peace?

Before providing some suggestions, let me point out possible reasons why corporations have not moved forward in this regard.

First, some of the most lucrative markets in the world, let’s call them ‘post-cold war markets’, would probably not pass a first level governance screening – from the ‘stans’ and Russia, to China and many Gulf countries. Corporations are generally required to increase revenues, and not maintain world peace – hence the moral dilemma or plain conflict of interest.

Second, the energy and/or manufacturing dependency largely created by globalization, essentially means that isolating a country or an economy may equate to self-harm – a point debated by European countries with regard to their dependence on Russian gas.

Third, in setting criteria for ‘good’ regimes, the question of relativity and ‘who is in charge of setting the standard’ arises. Who is ‘the West’, given its colonial past and questionable foreign policy adventures, to screen and filter who is, or who is not, included in the brave multipolar new world we all live in? Russia’s seat, and those of the permanent five members of the Security Council of the United Nations, is itself a rather disturbing reminder of the archaic peace infrastructure in place since 1945.

The energy and/or manufacturing dependency largely created by globalization, essentially means that isolating a country or an economy may equate to self-harm – a point debated by European countries with regard to their dependence on Russian gas.

Notwithstanding these issues related to the geopolitical implications of enforcing ‘geopolitics’ as a Governance criteria for investment, it could be argued that better metrics for screening investments and engaging with countries could move us forward to finally consider not just prosperity, but people and planet (the 3Ps) – the new paradigm of our era. After all, if not now, then when?

Secondly, setting an intent to consider the 3Ps, much like a New Year resolution in our personal lives, may not result in immediate changes in behavior, but it has the merit of crystallizing awareness and perhaps of liberating and/or pushing forward companies to address these strategic issues at the Board level, i.e. who should we do business with, why/why not, and how?

Russia’s seat, and those of the permanent five members of the Security Council of the United Nations, is itself a rather disturbing reminder of the archaic peace infrastructure in place since 1945.

Finally, and perhaps most importantly, the issue of ‘corporate political responsibility’ could help us finally reconcile where human rights fit in the multitude of frameworks used, from ESG to the UN’s Sustainable Development Goals (SDGs). Human rights are almost always referred to as an add-on, a nice to have feature in a gigantic checklist of moving towards ‘good’ or ‘responsible’ corporate behavior.

If ESG has a questionable record, notwithstanding current efforts on ‘responsible political engagement’ by the UN Principles of Responsible Investment (PRI) which counts some 3,750 signatory companies and asset managers, perhaps the field of ‘impact’ offers better holistic avenues for thinking about tomorrow’s world today.

The ESG framework is both conceptually deficient and detrimentally competing with ‘impact frameworks’, where linkages between SDGs and the formulation of global goals are clearly more aspirational and aligned with the reality of our globalized, inter-dependent world.

If ESG has a questionable record, notwithstanding current efforts on ‘responsible political engagement’…perhaps the field of ‘impact’ offers better holistic avenues for thinking about tomorrow’s world today.

When looking at the impact frameworks organized around the United Nations Sustainable Development Goals (SDGs) such as the Impact Management Platform (IMP), Iris+ and the Global Reporting Initiative (GRI), it becomes evident that SDG 16: Peace, Justice and Strong Institutions has been under-metricized and under-utilized.

street with yellow and red banners

Here are three possible ways to move forward and untangle what has been arbitrarily thrown into baskets S or G, or fallen through the cracks, but can better be addressed through the holistic SDG framework.

  1. Embed a set of human rights standards such as labor standards, living wage, child labor, slavery, and trafficking, in SDG 8 Decent Work and Economic Growth and/or SDG 5 on Gender Equality. This relates to the S in ESG but in practice remains poorly metricized and further delayed by emerging complex ESG disclosures around supply chain traceability.
  2. Activate political/peace metrics linked to SDG 16 such as: regime type, rule of law, organized crime, non-discrimination, freedom of the press; and actively use human rights metrics such as number of disappearances of individuals, death penalty and arbitrary deprivation of life, building on the thoughtful work done on Human Rights Indicators,by the United Nations Human Rights Office of the High Commissioner.
  3. Address the potential conflict between climate-related action and peace. Divesting from Russia, for instance, may lead to geopolitical trade-offs that may not be more appealing: a renewed dependance on petro-states such as Saudi Arabia, Venezuela, etc. Moreover, a hurried transition to a fossil-free world may also ignore the ‘energy security’ needs of our global population, with ramifications on cost of living, poverty, and conflict. Finally, the overwhelming consequences of climate change on developing countries cannot be ignored given the imbalance between producers of emissions and those left behind (i.e. the developing world). In sum, there is an urgent need to embed climate justice, in its multi-dimensionality, in SDG 16 on Peace, Justice, and Institutions.

In our world where some, but not all, private, public, and civil society interests are converging, we must seize the opportunity to move beyond a fragile, if not deficient, ESG construct.

The time for defining and intelligently metricizing SDG 16, and others, to embed human rights and peace as metrics for doing business, has arrived — albeit unexpectedly. In our world where some, but not all, private, public, and civil society interests are converging, we must seize the opportunity to move beyond a fragile, if not deficient, ESG construct. While transitioning to an SDG-based impact framework, which is increasingly widely adopted, unleashing the power of SDG 16 is a key first step to making the ethical and reputational cost of doing business against one’s broader corporate self-interest much greater than ever before.

Farahnaz Karim is a Harvard-educated social entrepreneur, political scientist, and humanist, with decades of field experience designing and managing development programs in countries such as Afghanistan, India and Kenya. She is founder and CEO of Insaan Group, a boutique impact investment entity that allocates philanthropic capital to tackle poverty.

Comments

0 Comments

Submit a Comment

Premium Monthly

Deep Dives

RECENT

Editor's Picks

No posts found.

No posts found.

Webinars

News & Events


More News & Events

Subscribe to our newsletter.

Subscribe to our newsletter to receive updates about new Magazine content and upcoming webinars, deep dives, and events.

Access all of Impact Entrepreneur.

Become a Premium Member to access the full library of webinars and deep dives, exclusive membership portal, member directory, message board, and curated live chats.

ie frog
Welcome to Impact Entrepreneur MagazinePlease join us!

While all magazine articles are free to view, you need to choose a membership option to continue using the site. Basic Membership is free and gives unlimited access to articles. Premium Membership brings a host of rich offerings and collaborative opportunities.

Or LOGIN HERE if you are already a member.

Click