The COVID-19 pandemic, the war in Ukraine, and the ongoing climate crisis have put a spotlight on the central role businesses can play in tackling global challenges. We need companies to step up and help solve social and environmental problems at scale — for the sake of the economy as well as people and the planet.
Yet one of the incentives companies have for being more socially and environmentally active — shareholder influence — is limited by existing approaches for assessing a company’s social and environmental performance. The predominant frameworks are too narrow and fail to fully address key stakeholder concerns on their own. Environmental, social, and governance (ESG) assessments focus on internal operational matters, such as labor relations and supply chain sustainability, but don’t fully consider the impact that a company’s products or services can have on outside stakeholders. Impact investing, in contrast, focuses on external issues, such as whether products and services address the needs of the poor, but it overlooks internal considerations, such as how companies treat their employees.
In reality, a company’s social and environmental impact is multifaceted. Consider Tesla, which builds electric vehicles that significantly reduce emissions across their life cycles but faces questions about its labor practices. From an impact-investing perspective, the company might achieve high marks, but it rates lower from an ESG standpoint, with neither framework capturing the whole picture. As a result, frustration with both approaches is mounting: Tesla’s recent removal from the S&P 500 ESG Index prompted CEO Elon Musk to describe ESG ratings as “an outrageous scam,” while criticism of impact investing has pushed some large asset managers to tone down the language of their impact funds and rebrand them.
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It’s time for an integrated framework for assessing impact — one that accounts for both the external and internal facets of a company’s social and environmental performance. Only then can managers and investors provide accurate evaluations and influence companies to tackle complex global challenges.
An Integrated Approach to Impact
Drawing on several decades of collective experience leading and researching socially and environmentally sustainable businesses, we offer a holistic approach to assessing and benchmarking companies’ impact performance, based on four different levers a company can pull to effect social and environmental changes. While each lever is distinct, the real value comes from considering all four together.