Measuring Social Impact: Key Approaches, Overcoming Challenges, and Best Practices

 

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The business and development landscape is undergoing a rapid transformation. Increasingly, companies are recognizing the importance of addressing pressing societal challenges—such as social justice, environmental sustainability, and community welfare—alongside their traditional business objectives. This paradigm shift has given rise to social enterprises and corporate initiatives specifically designed to leverage market-based solutions for tackling global social issues and generating lasting, positive social impact.

Organizations measure social impact to showcase their achievements while enhancing transparency, accountability, and credibility across their programs, projects, and initiatives. This process not only helps to demonstrate the effectiveness of their efforts but also fosters trust and legitimacy among stakeholders and the broader community.

While financial accounting benefits from established national and international standards for producing financial statements, the measurement and reporting of social impact—which spans ecological, social, and economic dimensions—lacks similar maturity and global consensus. This gap is largely due to the varying needs of diverse stakeholder groups and the inherent complexity of social impact programs, making it challenging to develop universally accepted frameworks.

 

Understanding Social Impact Measurement

Social impact refers to the broad and lasting effects—both social and cultural—that public or private actions have on human populations. These impacts shape how individuals live, work, interact, and adapt within the fabric of society. Whether driven by policy decisions, corporate initiatives, or community-based efforts, social impact encompasses the transformative changes that influence daily life and societal structures.

Social impact measurement is the structured and systematic process of evaluating how an organization’s activities affect society and the environment. Unlike traditional financial or business metrics, this process captures the tangible and intangible outcomes generated by development programs, social enterprises, and philanthropic initiatives.

When done effectively, social impact measurement serves as a powerful tool for informed decision-making and strategic resource allocation. It also fosters greater accountability, promotes transparency, and strengthens engagement with stakeholders by clearly demonstrating the value and relevance of an organization’s efforts in creating meaningful change.

 

Understanding and Applying Social Impact Measurement

Organizations adopt a variety of approaches to manage and measure social impact, each tailored to align with specific goals and priorities. These approaches often serve different purposes—ranging from crafting compelling narratives that communicate the impact of programs and initiatives, to building strong cases that justify the return on investment (ROI) for social and financial contributions. Whether focused on storytelling or case-building, effective measurement helps demonstrate value, drive strategic decisions, and strengthen stakeholder confidence.

 

  Key Approaches Commonly Used

Outcome Mapping is an approach that centers on identifying the desired outcomes of an intervention and understanding the roles of key stakeholders in achieving them. Rather than solely focusing on end results, it emphasizes the pathways of change—tracking shifts in behavior, attitudes, and relationships over time.

This method relies on both qualitative and quantitative data collection techniques, such as interviews, surveys, and focus group discussions (FGDs), to monitor progress and assess impact. Outcome Mapping is particularly useful for complex or adaptive programs where change is not always linear.

Inputs: What resources (e.g., time, funding, personnel) have been allocated to achieve the desired impact goals?

Activities: What specific actions or initiatives have been implemented to drive progress toward these goals?

Outputs: What are the immediate, tangible results or products produced from the activities?

Outcomes: What are the short-term, observable effects or changes resulting from the interventions?

 

Theory of Change (ToC) is a strategic framework that visually maps out how specific activities are expected to lead to desired outcomes and long-term impact. It helps stakeholders clearly understand the underlying assumptions, pathways of change, and causal linkages that drive progress. By making these connections explicit, ToC serves as a valuable tool for planning, implementation, and evaluation.

ToC also supports the identification of relevant indicators and measurement strategies that align with a project’s objectives, ensuring that progress can be effectively tracked and assessed over time.

Key questions addressed by a Theory of Change include:

• What impact does the program or project aim to achieve?
• What mechanisms or interventions will lead to that impact?
• How will we know when the desired impact has been achieved?

 

Social Return on Investment (SROI) is a framework for measuring and communicating the broader social, environmental, and economic value created by an intervention relative to the resources invested. It goes beyond traditional financial metrics by assigning monetary values—where possible—to inputs, outputs, outcomes, and long-term impacts. Through this process, SROI enables organizations to calculate a ratio that reflects the social value generated for every unit of investment (e.g., $1 invested yields $3 in social value). This comprehensive approach offers deeper insight into the true value of programs, helping to justify funding, improve decision-making, and strengthen stakeholder engagement by demonstrating the meaningful returns delivered beyond financial profit.

Randomized Controlled Trials (RCTs) are rigorous experimental designs used to assess the effectiveness of an intervention by randomly assigning participants into two groups: a treatment group that receives the intervention, and a control group that does not. This process of randomization minimizes selection bias and ensures that both groups are statistically comparable at the outset.

By measuring and comparing outcomes across these groups, RCTs enable precise causal inference, allowing researchers to attribute observed changes directly to the intervention. Often regarded as the gold standard for impact evaluation, RCTs provide robust, high-quality evidence that can inform policy, guide program design, and improve resource allocation. Their ability to isolate the true effects of an intervention from external factors makes them especially valuable in complex social and development contexts.

 

Common Challenges in Social Impact Measurement

Measuring social impact is a critical but complex process. While numerous frameworks and methodologies are available, each comes with its own limitations and must be adapted to the specific context of the organization and the social issue being addressed. Organizations often encounter a range of challenges in their efforts to assess social impact effectively. These challenges include:

1. Complexity of Social Issues
Social issues are inherently multifaceted and interdependent, making it difficult to isolate and measure the effects of a single intervention. The intersection of social, economic, cultural, and environmental factors often blurs the direct impact of programs, complicating efforts to draw clear causal connections.

2. Lack of Standardized Metrics
The absence of universally accepted metrics and indicators for social impact hampers consistency in measurement. Without standardization, it becomes difficult to compare results across organizations, sectors, or regions, and can lead to inconsistent reporting and limited benchmarking opportunities.

3. Long-Term Impact Considerations
Many social outcomes evolve over extended periods and may take years—or even decades—to fully materialize. This presents a challenge for organizations needing to demonstrate short-term progress, especially within funding or strategic planning cycles. Longitudinal evaluations, while valuable, can be resource-intensive and time-consuming.

4. Limited Comparability
Differences in organizational goals, methodologies, and target populations make it difficult to compare impact data across initiatives. These variations limit the ability to extract broader insights or identify best practices, and may hinder collaborative learning across the sector.

5. Attribution vs. Contribution
A persistent challenge lies in distinguishing whether observed outcomes can be directly attributed to a specific intervention, or whether they are influenced by external factors. Demonstrating attribution requires rigorous evaluation design, including the use of control groups or counterfactuals—approaches that may not always be feasible or ethical. Often, organizations must settle for demonstrating contribution rather than causality.

6. Data Quality and Availability
Reliable, high-quality data is the foundation of effective impact measurement. However, organizations may face challenges related to data availability, accessibility, and accuracy. Inadequate data collection tools, inconsistent methodologies, and biases in data reporting can undermine the credibility and utility of impact assessments.

7. Time and Resource Constraints
Comprehensive social impact evaluations demand significant investment in time, expertise, and financial resources. For many organizations—particularly smaller ones—limited budgets and capacity may necessitate compromises, such as narrowing the scope of evaluation or reducing the frequency of data collection.

8. Contextual Sensitivity
Social impact measurement must be attuned to the local context in which interventions are implemented. Failing to account for cultural, socio-economic, and political dynamics can result in misinterpretation of findings and ineffective decision-making. Tailoring impact measurement approaches to specific communities is essential to ensure relevance, accuracy, and cultural responsiveness.

 

To advance meaningful social impact measurement, organizations must recognize these challenges and address them through thoughtful strategy, capacity building, and collaboration. By doing so, they can improve the quality and credibility of their evaluations, make more informed decisions, and ultimately maximize their contributions to positive societal change.

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Best Practices for Social Impact Measurement

To effectively measure and amplify social impact, organizations must adopt a comprehensive, strategic, and adaptive approach. This extends beyond tracking key performance indicators—it requires meaningful stakeholder engagement, smart use of technology, rigorous data practices, and a firm commitment to ethical standards. Below are best practices that serve as a roadmap for organizations aiming to achieve measurable, sustainable, and impactful change.

 

1. Define Clear Objectives and Indicators

Start with a strong foundation by establishing well-defined, measurable objectives that align with your organization’s mission and values. Develop a suite of indicators that capture both quantitative and qualitative dimensions of impact—ranging from immediate outputs to intermediate outcomes and long-term effects. Regularly review and refine these indicators to ensure they remain aligned with evolving strategic goals and are responsive to changes in the operating context. Effective indicators should not only measure change but also inform decision-making.

 

2. Engage Stakeholders Throughout the Process

Stakeholder involvement is essential for ensuring that measurement efforts are inclusive, relevant, and credible. Engage key stakeholders—such as beneficiaries, community members, donors, partners, and staff—at every stage of the process. This includes co-creating measurement frameworks, participating in data collection, and contributing to the interpretation of results. Use participatory methods, such as workshops and feedback sessions, to ensure diverse perspectives are represented. This collaboration fosters trust, increases the legitimacy of findings, and ensures the impact assessment reflects what truly matters to those affected.

 

3. Develop a Deep Understanding of Your Data

A robust understanding of data sources, quality, and limitations is crucial. Develop a comprehensive data strategy that outlines how data will be collected, managed, analyzed, and interpreted. Clearly define roles, responsibilities, and protocols to ensure consistency and accuracy. Build internal capacity by training staff in data literacy and analysis. Employ data visualization tools to make complex findings accessible and actionable for diverse stakeholders. High-quality data is the backbone of credible and effective impact measurement.

 

4. Use a Mixed-Methods Approach

A blend of quantitative and qualitative methods provides a well-rounded view of impact. Quantitative data offers measurable insights into reach, scale, and effectiveness, while qualitative methods—such as interviews, focus groups, and case studies—uncover rich, contextualized narratives about how and why change occurs. Triangulate data from multiple sources to enhance validity and reduce bias. This integrated approach offers a deeper, more nuanced understanding of both outcomes and lived experiences.

 

5. Foster a Culture of Learning and Adaptation

Social impact measurement should be more than an accountability exercise—it should drive learning and improvement. Create feedback loops that allow your organization to reflect on findings, identify what’s working (and what isn’t), and adapt strategies accordingly. Encourage an internal culture that values learning from both success and failure. By continuously applying insights from data, organizations become more agile, resilient, and responsive to the communities they serve.

 

6. Leverage Technology for Greater Efficiency

Embrace digital tools to streamline data collection, storage, analysis, and reporting. Mobile survey platforms, cloud-based databases, and real-time dashboards can dramatically improve accuracy, timeliness, and scalability. Advanced analytics and data visualization tools can turn raw data into actionable insights. By integrating technology thoughtfully, organizations can enhance both the efficiency and effectiveness of their impact measurement systems.

 

7. Prioritize Ethical Integrity

Ethical considerations must underpin all aspects of impact measurement. Ensure that data collection processes prioritize informed consent, confidentiality, and the dignity of participants. Adopt robust data protection and privacy protocols to safeguard sensitive information. Be transparent with communities about how data will be used and respect their right to participate—or not—on their own terms. Ethical engagement builds trust and minimizes the risk of harm.

 

8. Commit to Transparent Reporting

Transparency builds credibility. Share findings openly with stakeholders in a format that is accessible and easy to understand. Use clear language, visuals, and storytelling to communicate both successes and challenges. Disclose methodologies, limitations, and areas for improvement. Transparent reporting not only reinforces accountability but also contributes to sector-wide learning and innovation.

 

9. Collaborate to Strengthen the Field

No organization operates in isolation. Partnering with academic institutions, research organizations, and peer networks can unlock new expertise, resources, and approaches. Collaborations can also facilitate the development of shared standards, metrics, and benchmarks, enhancing the overall consistency and quality of impact measurement across sectors. Working together accelerates collective learning and drives systemic change.

 

By following these best practices, organizations can build more effective, inclusive, and credible systems for social impact measurement—ensuring their efforts lead to real, lasting, and transformative change.

  

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation 

 

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What is the Role of Internal Audit in ESG?

 

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Introduction

Environmental, Social and Governance (ESG) has now become integral in business strategies and operations. It is no longer a nice-to-have agenda for companies. ESG contributes towards value creation, in both financial and non-financial aspects.

Acknowledging this, is important, but we need to also take account that ESG also recognizes a new risk type i.e. Sustainability Risks. Companies are still strengthening internal processes towards managing Sustainability Risks and this includes enhancing its governance structure, strategies, business goals, initiatives and also on disclosures.

Sustainability Risks (and opportunities) are relevant for both businesses and operations, and sit across companies’ functions. That is why, having a robust structure with clear roles and responsibilities across the three lines of defense is imperative, to ensure ESG is managed holistically and aligned with overall business model.

One of the questions that has been discussed lately is – what is the role of Internal Audit in ESG?

But before that, there is a need to reiterate the importance of ESG for stakeholders.

 

Stakeholder pressure – regulators and investors as main drivers

 A robust and holistic ESG strategy and roadmap has now become essential to address regulatory requirements and stakeholders expectations. ESG strategy and roadmap also serves as competitive advantage, and catalyst for overall value creation. Companies are constantly under the scrutiny of regulators on the ESG resilience in addressing the evolving changes and requirements over short, medium and long term. On top of that, stakeholders are expecting clearer and more meaningful alignment of ESG strategy and roadmap with companies long term corporate strategy. Internally, stakeholders namely employees, are setting higher standards on the Sustainability agenda at organisations they are working with, that would impact talent recruitment and employee satisfaction.  One thing to note here is that, the primary source for stakeholders to understand on a company’s ESG strategy and roadmap, is through reports and disclosures.

  

Internal Audit’s Role in ESG

Internal audit is now becoming more and more critical in ensuring quality of ESG disclosures as a whole, as they can provide objective assurance and advisory pertaining to the credibility of ESG data and information. As with financial reporting, the independent and objective assurance that internal audit can provide should be an integral part of a company’s ESG disclosures.

 

Sustainability Assurance

·         Sound and robust ESG disclosures require maturity in ESG systems and controls and internal audit should be one of the very first parties to have oversight prior it goes to external third party auditor

·         Internal audit should always aim for ESG disclosures to be based on metrics that are relevant, accurate and consistent that would benefit the stakeholders and organization

·         Internal audit should embed ESG into regular periodical audit plans and should be business-as-usual

 

Sustainability Advisory

·         Assess scope and areas that are less well-defined and build an ESG control environment towards meeting regulatory expectations and industry best practices

·         Propose ESG reporting metrics (internal and external reporting) and data management processes, to ensure the coverage of meaningful and accurate ESG data for the organization and its stakeholders

·         Advise for better ESG governance to ensure organization has relevant synergy across departments and functions

 

Conclusion

Internal audit should by now looks beyond identifying risks and controls in place. There is a need towards integrating ESG within the scope and methodology, and there must be linkages towards organization strategy, risk management and governance structure to facilitate internal initiatives, programmes, KPIs, controls as well as infrastructure are effective towards supporting organisations’ ESG agenda.

 

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation 

 

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Green Talent – key towards net zero

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In the previous article, we talked about why a company culture is important in the overall ESG agenda. Now, let’s talk a little bit more specific. What is the role of the workforce on the current ESG buzzword i.e. climate and net zero.

Companies need to understand that Human Resources (HR) play a key function to ensure a successful business transition towards net zero.

The race towards net zero and the greening of the economy has started and will continue to have significant impact on the on employment and the required skillsets. Just like other capitals, investments in human capital in building a talent pool of green skills is important towards enabling a company to transition towards low-carbon, resource efficient and green operations.

Green skills do not sit within a specific sector. It covers a broader spectrum where it applies to a wider set of current functions and management levels. Currently, the industry is witnessing a ‘green enrichment’ job descriptions where skillsets and knowledge related to ‘green’, net zero, low-carbon, green products, renewables and many more, are becoming a common requirement.

On top of that, the industry is also seeing new emerging jobs catered for green skillsets especially in the area of renewable energy and energy efficiency and green technology.  

Green skills should also be supplemented with generic skillsets such as stakeholder engagement, adaptability, risk management and problem solving as these skillsets required by a green talent.

The demand for green talent is on the rise and the competition is stiff. According to multiple studies, the scarcity of green talent is across all industries and sectors. For instance, a recent survey from Funds Europe highlighted that more 70% of financial services firms viewed that they are facing ESG skills shortage, and only a small minority of firms (13.5%) are providing training on the risks resulting from climate change, which exacerbates the challenge.

Without a doubt, HR must up their game towards building the required skillsets and capabilities of green talents as this will ensure sustainable succession planning to meet companies’ green transition.

Some of the practical steps to be taken as guidance are as follows:

 

Green Talent Competency Assessment

HR needs to have a clear definition of the requirement criteria for green skills and knowledge in order to conduct a strategic and purposeful green skills competency assessment. There are a few frameworks out there such as the one developed by Bursa, that could guide HR to develop the sets of criteria specifically for green (and overall Sustainability) talents, but HR needs to further refine based on the company’s business model and its green ambitions and goals.

 

Green Talent Roadmap

HR should craft a structured resourcing plan including talent up-skilling pathways for identified employees critical for moving the green agenda of the company. This resourcing plan should be approached from within the company (internal) and from outside of the company (external) e.g. identify key employee groups, retain and attract green talent with green skillsets.

 

Green Talent Capability Building

Employee development should be an on-going process by leveraging on vocational education, training modules, learning programmes, green certifications, as well as on-the-job training to develop and strong talent pool with green talents and succession planning. This should be across different levels i.e. awareness, fundamentals, intermediate and advanced.

 

Monitor and Respond

The initiatives to up-skill the green talents need to be monitored in terms of its effectiveness. Are they meeting the requirements for a specific function? How is the participants’ feedback? Is it enough? Is it too basic? Are there any other new programmes that need to be rolled out? Does the overall plan need to be revamped? These are some of the questions HR needs to monitor and to eventually respond in order to address any gaps and improvement plans to ensure successful execution of develop green skillsets.

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation 

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Role of Treasury in ESG

 

Role of Treasury in ESG

 

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Introduction

Sustainable Finance is widely known as the consideration of environmental, social and governance (ESG) factors into financing (including investing) and decision making processes. For the financial sector, ESG factors, which are broad in scope, have not been traditionally part of standard financial analysis. However, now, more than ever, ESG integration into financial analysis has not only become relevant, but critical.

 

The difficult first step

Regardless of sector or region of operations, ESG integration into business model has always been a challenge. Unfortunately, for treasure, this is even harder. This is because treasury is partly tied to the organisation’s policies which means ESG integration into the treasury functions are not 100% control by treasury directly.

However, there are a few key initial steps that worth to be taken; and it can start with an acknowledged framework that maps the potential contributions of treasury to ESG factors and guides its integration, and this can be based on a few established frameworks that can meet the above objective.

But, there hurdle here is; what framework to adopt as the regulations and standards are still unaligned globally. One of the ways to approach this is to adopt the common and most widely accepted framework such as the United Nations Sustainable Development Goals (SDGs). This shall enable clear linkages to the goals that contribute to each and/or combined elements of ESG. Another option is the green, social, and sustainable bond principle frameworks of the Climate Bond Initiative (CBI).

By adopting these frameworks, it provides guidance and directions to evaluate ESG eligible project financing.

Contributions of treasury to ESG

Green financing is not the only way corporate treasury can contribute towards supporting sustainability. In terms of its operations, sustainability can be achieved through digitalisation in its processes, record management and bank statement management. Innovative technologies like robotic process automation, blockchain, and artificial intelligence should also be implemented to increase efficiency in an ESG friendly ways. These initiatives will cover the environment impact of sustainability. In terms of social, corporate treasury should encourage diversity, equity and inclusion by providing equal opportunities for everyone and creating an inclusive working environment.

On top of that, the role of treasury can be further more extensive. Firstly, treasury can set ESG-related requirements to be met by new business partners. Secondly, for existing business partners, treasury can create advocacy and awareness for them towards complying with these requirements. Treasury can also build credible relationship with credit rating agencies focusing on the areas of ESG.

A structured model should be established and implemented to ensure an effective integration of ESG in treasury. This model should include a clear overview of potential treasury contributions to ESG factors, once they have been selected, and the building blocks needed to achieve those contributions.

 

Monitor and Measure

It is important that the progress of ESG integration in treasury is monitored and tracked in a structured manner and also using credible metrics and benchmarks. However, we need to acknowledge that development of metrics and benchmarks for ESG integration tracking is still in the nascent stage and it comes with some complexities, in terms of identification of types of indicators, as well as standardization. Nonetheless, it still can be done effectively with consideration of a few key approaches.

First and foremost, it must be made clear on the mapping of each treasury contribution, and this should be done separately. From here, metrics and benchmarks need to be developed separately for each contribution based on materiality to the company and stakeholders. Apart from that, the metrics and benchmarks should always be updated as the ESG integration matures so there will be efforts towards improvements.

Examples of product offerings and operational metrics and corresponding benchmarks are:

·         Assessing external review of Sustainable Financing framework to measure the perceived the ESG elements of financing

·         Tracking digital workflows, through a digitalised form processing and records ratio

·         Measuring  the increase in output of a processes in place to monitor the effectiveness of technological innovation

 

Conclusion

ESG as a whole is constantly evolving, and so is the role of treasury in ESG. It is important for the treasury team to keep up to date with the latest development of ESG, particularly on Sustainable Finance as well as how operations c

 

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation 

 

 

 

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The Main Challenges in Climate Reporting and How to Tackle Them

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Companies have been disclosing on how their operations impact the climate and this information is easily accessible in companies’ websites and public reports. But, what about the information regarding the impact of climate risks to companies? Recently, this topic is being discussed at a greater length and the demand for companies to disclose it has risen. This is due to the fact that the direct physical impacts of climate change risks are exposing companies’ operations to complex operational risks. On top of that, this demand is also driven by the indirect and transition climate change impacts, including introduction of new policies and regulatory requirements to shift towards a low carbon economy, as well as changes in customers demand on product and services that are more ‘climate friendly.

Reporting on the impact of climate risks to operations represents how the company is both managing the risks as well as creating business opportunities for the sustainability of the business.

In response, stakeholders are demanding for greater transparency on the climate impacts on companies’ financial performance, including future performance.

Adoption of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) recommendations is also increasing, and we are seeing this across the world. The recommendations of TCFD have been driving companies to enhance the holisticness of climate disclosures. The TCFD sets out a framework that enables companies to disclose their climate risk profile and integrate it into mainstream filings. This information provides regulators and investors with a meaningful climate-related risk information to better assess how companies manage climate change impact and how they respond over short, medium and long term.

 

TCFD – Current Progress

The TCFD recommendations are widely accepted by organisations from various sectors, including investors, associations, as well as policymakers. All have expressed full support towards the adoption of the TCFD recommendations.

However, the implantation of the TCFD is deemed as the main challenge, from getting started to improvements the adoption. CDP and Marsh & McLennan Companies’ Global Risk Center in its research has reported that the implementation challenges faced by organisations include the following three key areas:

·         Securing leadership buy in for a wider approach to climate risks

·         Overcoming siloed risk-management processes

·         Limited experience with climate change scenario analyses.

 

Securing leadership buy in

The Board and Management need to properly define and evaluate the impact of climate risks to the balance sheet of the company. In order to do so, Board and Management should expand their horizons of their considerations towards climate related issues and trends. It is reported that more than 80% of companies’ Board provide oversight on climate issues. However, it also reported that only 10% of companies actually incentivise Boards to prioritise climate risks, and even lower percentage of Boards consider climate risks as a top 5 risks affecting the company within the next 5 years. This clearly contradicts with the -Global Risk Report by the World Economic Forum which ranks climate- and environment-related threats as the most likely and most damaging over the next decade. 

 

Risk management are working in silos

Conventional risks can be easily isolated and addressed with standard risk-management process, and this will not pose much issues to a lot of businesses. However, it is a totally different ball game when it comes to more complex risks embedded in interconnected systems, such as nature-related risks and climate risks including on risks pertaining the transition to a low-carbon economy.

Climate risks for example, are now considered one of the biggest risk topics being discussed. According to CDP, only 34% and 28% out of more than 1,500 companies, respectively, are linking physical risks and regulatory and transition risks associated with climate change beyond six years.

For investors, organisations and other stakeholders that are assessing the mid- or long-term view, limited and short-term climate change impact analyses will not be adequate in providing them with robust information on potential direct physical and transitional risks from climate change.

This is certainly a complex issue. On top of that, another research has found that the complexity also rises from the lack of stadardisation and clarity on risk definitions, as well as which function within the organisation that is accountable to manage them. Climate risk management should not fall under under the sole responsibility of one individual or a function which in many cases – the sustainability team. Responding to climate risks will require broad ownership, understanding and collaboration across the organisation on climate risks and opportunities and how they relate to financial impacts in the long run.

 

There’s not much experience and cases on climate change scenario analysis

Based on TCFD’s recommendation, companies should describe the potential impact of different climate scenarios, including a 2-degree Celsius scenario, on businesses, strategy and financial planning.

The fact is, companies encounter a lot of challenges and potential barriers in translating climate scenarios to integrated financial analysis. Various types of climate scenarios and widely varied outcomes result uncertainty to determine which climate scenarios are appropriate to use and to translate into meaningful financial impact analysis. Currently, the developed climate scenario models were established mainly for academic and economic use cases, but not financials. Existing scenarios require input and judgment from experts across the organisation but the other challenge is that for many cases, the process involves a lot of very educated guesswork and not everyone guesses in the same wavelength as others.

Companies are required to find ways to integrate the analysis into current strategy and scenario planning and risk assessment. Subsequently, companies are required to provide linkages of the scenario impacts to future business strategy and performance. Data is one of the main obstacles as there is lack in historical and factual data to link climate impacts to financial performance.

TCFD’s recommendations will likely to be via phased approach and require time especially for companies that are new in their overall Environmental, Social and governance (ESG) journey. There is also indeed, the need for a clear and practical reporting framework.

The long-term horizons of climate risks and opportunities typically extend beyond the scope of business planning and one thing that needs to be highlighted is that normally, business works on a short-term cycle, hence, quarterly financial reporting is the common practice. For financial stability, the horizon is extended, but typically only to the outer boundaries of the credit cycle — about a decade. This brings to another concern – by the time climate change becomes the defining issue for financial stability, probably it will be too late for a response, unless, drastic actions are taken right now to evaluate and disclose climate-related factors.

 

Conclusion

Without a doubt, assessing and reporting on climate impacts – risks, resilience, opportunities is challenging. However, by undertaking it, it provides the edge for companies to get the upper hand to face the adversity arising from climate change. This, is key for a truly, sustainable future.

 

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation 

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ESG Quick Reminder – Embrace, You Win. Avoid, You Lose

 

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Responsibility towards Environmental, Social and Governance (ESG) issues have surged in recent years. The central driver of this movement is Climate Change. Till this very date, there has been broad understanding amongst countries across the world that Climate Change is a real threat and the continuous rise in global carbon dioxide emissions must be addressed.

According to KPMG Survey of Sustainability Reporting, in 2020, that analysed the annual financial reports, corporate responsibility reports, and websites of 5,200 companies in 52 countries that provides a detailed look at global trends in sustainability reporting and offers insights for business leaders, company boards and sustainability professionals. It was found the 80% of global companies report on its ESG performance and a majority of companies worldwide have carbon targets in place.

The question is, what’s in it for companies to report on its ESG performance and targets?

 

ESG – It’s the standard of and for the future

As mentioned earlier, ESG accountability has exploded in recent years. Companies are now looking beyond financial metrics. ESG policies are meant to push companies to break away from overdependence on financial metrics, not only in ESG risk mitigation but also in strategy and business decision-making.

This could be a challenge for companies that are a few years in its ESG journey and may be a costly investment as well. At the same time, as ESG covers a wide range of areas, the key focused ESG KPIs that are unique for the company have always been one of the most highly debated topics amongst Board members and Senior Management of companies that are initiating their ESG management. However, for ESG-matured companies, especially large-cap companies, its ESG strategies are well-defined and measurable. For example, to tackle Climate Change issues arising from its operations, some companies established the ‘path to zero’ initiatives which showcase the commitment and journey towards net zero carbon emissions.

These days, it is not something new that we read on the growing trend of companies’ ESG policies and strategies as risk management as well as value creation and generation. In the United States alone, as of 2019, it was found that one out of every three dollars under professional management or approximately $17 trillion was managed in accordance with ESG metrics.

ESG metrics are not merely for compliance purposes. More and more evidences have been disclosed that showcase that ESG is not just ‘a good to have’ but instead, ESG is a crucial and strategic imperative. ESG risks can cause companies that do not factor in ESG metrics to face substantial financial impact. For example, based on an extensive four-year analysis on ESG metrics by MSCI, found that companies that are ranked with lower ESG scores experienced higher costs of capital, higher equity costs, and higher debt costs compared to companies that performed and ranked better in ESG scores.

In fact, McKinsey’s statement would best support this abovementioned finding as they have cited over two thousands studies that indicated that companies with higher ESG scores benefited a 10% lower cost of capital compared to companies with poor ESG scores. On top of that, companies with better ESG scores are said to experience lower environmental, litigation and even regulatory risks.  

 

Conclusion

Like it or not, sooner or later, all businesses are faced to confront ESG as an integral component of operating its business. Many companies that lead in its ESG journey have started reaping the financial and non-financial value from its ESG investments, and at the same time, manage to mitigate ESG risks and benefit lower operational and capital costs.

Companies are not able to avoid ESG issues anymore as ESG has proven numerous times to be a financial issue. ESG is and will continue to challenge businesses in all sectors. Thus, making ESG a factor that companies need to embrace from now onwards.

 

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation 

 

 

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Firming Up on ESG Management. Here’s Why Companies Should Not Delay it Any Longer?

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Introduction

Not many years ago, Environmental, Social and Governance (ESG) agenda has always been sidetracked by companies. The importance of ESG back then was not clearly understood and only observed as an addition to regulatory obligations. The lack of awareness by the Board and management of companies also didn’t help to overturn this mentality. However, companies across various sectors nowadays have started to give more attention to its ESG management and performance. More and more companies have shown unique approaches in ensuring ESG plays an integral part of companies’ corporate strategic agenda. With the impact of COVID-19 pandemic, companies are pressured to step up their ESG management and reporting. This article will briefly highlight the approach that companies need to consider in order to meet the increasing ESG expectations.

 

Multi-Stakeholder Management

Stakeholders are affected and also affecting all of the ESG criteria – Environmental impacts, Social impacts and Governance impacts. But as a ‘Stakeholder’, social issues have always been the central focus, ranging from community engagement to subjects related to human rights. Though till now it is difficult to quantify the financial values generated from social issues, but the impacts posed by the mismanagement of these issues are severe as companies would lose the confidence and trust from its stakeholders and eventually have reputational and financial implications to companies. 

Talking about reputation, there is never the best time compared to now for companies to adhere to its corporate principles and progressively revamping its risk management processes and advances reputation. Just by meeting the current demands of internal and external stakeholders is no longer acceptable particularly to key stakeholder groups that are looking at long-term values and gain from companies. So, the demands on future ambition and performance are also vital. For example, COVID-19 has heavily impacted (and still impacting) companies’ workforce across sectors pertaining areas of health and safety, income stability, and overall workforce morale and motivation. Stakeholders are observing how companies deal with these challenges and assuring the best solution are being provided to benefit them during and after the pandemic crisis.

Specific stakeholder groups such as regulators and investors as well as other market participants that include rating agencies, will continue to press companies to place paramount attention to social issues and how companies shows resilience in the competitive and challenging business landscape.

What can be learned from the recent COVID-19 crisis is that the immediate focus on social issues creates an opportunity like never before for companies to relook and improve on its overall stakeholder management and engagement to all of its key stakeholder groups such as its workforce, community, regulators, investors, and also those across its value chain such as the suppliers.

That being said, in allocating the efforts and resources towards managing the critical social issues, companies should not lose control of the continuous enhancement of environmental and governance issues. At the end of the day, ESG issues are interconnected. Apart from that, environmental issues such as climate change imposes great threats and impacts for companies. The impact of COVID-19 pandemic should provide companies the lessons that their business should be prepared at all times of all ESG risks that may affect them in the long-term. 

 

Effective ESG Strategy

ESG is no longer something that is ‘nice to have’, but are now considered as an imperative component of companies’ financial performance and evaluation. For instance, there was an estimated increase of USD$70 billion investment pumped in the 2019 ESG funds. This supports the prediction that ESG investing to top USD$50 trillion in the coming two decades. This trend points out that ESG investing will one day become mainstream and there is a clear opportunity for companies to reap the benefit if they prepare for it from now.

An effective ESG strategy is not only important to help companies to achieve the desired sustainability ambitions, but also provides a clear direction on how they can consistently improve their performance, manage and mitigate its risks and enhance market position.

The progress and outcomes of companies’ ESG strategy should also be communicated to all stakeholders to enable companies to gain the trust and confidence especially from the investors for long-term value creation.

In reaching towards the development of an effective ESG strategy, companies should oversee in a diligent manner on five key components; the companies’ material issues, roles and responsibility of the governance structure, comprehensive policies and innovative programmes, metrics and targets, and ESG communication.

To come up with strategic focus areas, companies should analyse issues that have the most interest, as well as impactful on and towards the business and the key internal and external stakeholder groups. Focusing on financial matters are now redundant as more and more ESG related issues are gaining the interest from stakeholder groups. It is definitely difficult to meet the demands from all stakeholders, as it is also not viable for companies to neglect the business needs. So, companies should have a structured and robust process in place to derive the key issues that have balance significance on the business and also the key stakeholder groups. These are considered as the material issues that should be in reference to companies’ ESG strategy development.

A sound governance structure should also demonstrate accountability and awareness on ESG management from all levels especially the Board and management. The Board and management should be aware of all ESG risks and opportunities relevant to the company and the industry the company is in. There is no template approach in ESG management as companies varies from one another. So, it is absolutely important that the governance structure to carefully formalise the roles and responsibilities that maximises the implementation and monitoring the robustness, effectiveness and the performance of companies’ ESG strategy. It is also important to note, that even though there might be specific functions or personnel that are responsible to oversee ESG management of a company, the ideal approach is for the collaboration of different functions to come together and work on ESG management as one whole unit and to ensure regular and beneficial exchanges of information are feasible. This would allow better risk and opportunities management particularly once companies have define the material matters to companies.

The development of ESG policies and programmes should be well-coordinated and strategically planned out. In order to do so, companies should not envision the short and medium-term outcomes but to also evaluate the long-term outcomes for the companies and stakeholders. In undertaking this evaluation, companies must see the areas that are feasible for them to optimise and capitalise in the specialties and strengths that are unique and aligned to the companies’ values. Most importantly, companies must anticipate the potential changes in the business landscape including the political, regional, regulatory, social and environmental trends that would likely to occur within the proximity of companies’ operations and influence. This would allow the companies to reap the long-term financial returns and remain competitive at all times. Having these understandings, companies should be in a good position to allocate the investments, resources, timeframe to implement the relevant plans for its ESG strategy.

The success of any strategy, including ESG strategy depends on various factors that are controllable and uncontrollable. Companies should always monitor the performance of the developed strategy to analyse the value it brings to be desirable or would actually cost additional effort and unnecessary investments to the companies in the long run. Companies must adapt and be flexible to changes and also must know when. The results from the materiality assessment (to identify the material matters of a company), should be referred to in developing the relevant metrics, KPIs and targets that are achievable and realistic to place companies in a higher ESG management position. Setting metrics, KPIs and targets that are too ambitious immediately may result in early failures that would lead to demotivation to oversee ESG management as a whole. The overall objective is essentially to measure companies’ ESG performance, so companies should be mindful to develop metrices, KPIs and targets based on its ability to improve and that are manageable to monitor over a sustainable period of time.

The progress of companies’ ESG performance provides important data and information for companies to readjust and restructure on improvement approaches. It provides important data and information for stakeholders as well. It is already well known that the access to transparent information on companies financial and ESG performance is key to gain stakeholders’ confidence, trust and loyalty. Communicating ESG performance may come in various ways via companies’ Annual Reports, Sustainability Reports, websites, AGMs and companies may even create specific events to solely discuss and share on their ESG performance and obtain instant feedback from the stakeholders. This would not only provide insights on the rationale and ambition of companies ESG strategy to stakeholders but also provides solid and concrete responses on how certain stakeholders value the ESG strategy that are affecting them. These exchanges of information will further assist companies to develop or redevelop better ESG strategies.

 

Conclusion

Companies’ ESG strategies or framework for continuous value creation should by now be driven by the Board and management that oversee ESG management and reporting as not merely a voluntary approach to one that in some jurisdictions is increasingly subject to mandatory reporting. Companies that have not embarked on ESG integration into their business operations, or companies that have started to, or even companies that have somewhat fully integrated ESG must all understand that the current landscape demands them to always be ready to improve and adapt. There is no room to be comfortable with the current establishment and practices in place would eventually be obsolete without them even realising it.

 

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation 

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