#46: Quantifying Environmental and Social Impacts, Whose Job Is It, Business or Government?

The World Bank, United Nations, B Lab, SASB, and several other organizations are seeking to quantify and monetize corporate environmental and social impacts. This enables environmental and social costs to be included in financial reporting, and thereby provide a more accurate and comprehensive assessment of companies’ true economic impact.

But whose job is it to quantify environmental and social impacts, the private or public sector’s? Voluntary private sector efforts provide many benefits. However, they are unlikely to achieve sustainability and resolve climate change and other major challenges. This post discusses why, and how SCI can drive more effective solutions.

Voluntary Quantification

Rapidly growing environmental and social problems pressure companies to more effectively quantify and account for negative impacts. The Sustainable Accounting Standards Board and other groups seek to standardize impacts, with the goal of making sustainability and financial reporting more consistent and reliable.

This work is essential for resolving major challenges. Quantifying impacts is one of the first steps to eliminating them. Voluntarily quantifying impacts provides many benefits, potentially including reducing financial risk. But this approach should be seen as transitional.

Encouraging companies to account for environmental and social costs under systems that focus almost exclusively on financial performance will be difficult. The capital markets often will penalize companies for doing so, possibly leading to management changes.

This reflects the fundamental problem or flaw of current corporate responsibility systems – they are voluntary. It is impossible for this system to work. This is the main reason why climate change and other SDG problems have grown rapidly, despite responsible investing and corporate sustainability becoming mainstream.

Very generally speaking, companies can profitably mitigate about 20 percent of total negative environmental and social impacts under current systems. Further mitigation frequently increases costs and ultimately puts companies out of business. Beyond a certain point, voluntary corporate responsibility equals voluntary corporate suicide.

Current systems do not hold companies fully responsible for negative environmental and social impacts. This makes it impossible to stop harming the environment and society in competitive markets. Current systems effectively (and unintentionally) say to companies, harm the environment and society or cease to exist.

We do not expect individuals to voluntarily report the harm they cause (e.g. murder, assault, robbery) and then hold themselves responsible. This position is ludicrous. And yet, that is exactly what we do with current corporate responsibility. No wonder it doesn't work!

Mandatory Quantification

To resolve major challenges and protect society, we must hold businesses to the same standard as individuals – act responsibly or be held accountable for harm. It is not the job of companies or the private sector to quantify the harm they impose on the environment and society.

Citizens establish democratic governments to protect individual and collective well-being. Only government (i.e. the people’s agent) can hold individuals and companies fully responsible. Government could use panels of experts (including many of the experts who currently quantify environmental and social impacts) to estimate and monetize negative corporate impacts, and then hold companies responsible for them.

This approach would be far easier to implement under current systems. Companies would not have to try to get the financially-focused capital markets to integrate environmental and social costs. They could continue to focus exclusively on financial costs and profits. Environmental and social harm would be a monetary cost imposed by government on companies through taxes, fees and other means.

To protect profits, businesses might argue that these costs burden them. But this is deceptive. Companies only are being held responsible for the burdens and harm they impose on society. Arguing that holding companies responsible for harm (i.e. internalizing externalized costs) burdens them is like saying that individuals are burdened by murder laws.

In civilized society, there is no right or freedom to harm others. Therefore, laws that hold individuals and companies responsible for harm do not restrict rights or freedom.

System Change Investing

Sustainable systems will require responsible corporate behavior (i.e. cause no harm). Transitioning from voluntary to mandatory corporate responsibility is complex. It will require many actions. Sustainability pushback in the new US administration could make voluntary system change more difficult. (Next week’s SCI post will discuss achieving system change in supportive and restrictive political environments.)

The bottom line is that rapidly growing problems will provide the pressure needed to drive the transition to mandatory corporate responsibility. Current systems compel harm. It is inevitable that they will change through voluntary or involuntary means.

The most important action companies must take to reduce environmental and social harm is not to quantify impacts. This provides many benefits and should continue. However, the most important work is to collaboratively drive systemic changes that hold companies fully responsible (i.e. mandatory corporate responsibility), and thereby make not harming the environment and society the profit-maximizing strategy.

SCI potentially is the most powerful lever for driving voluntary system change. Companies do what investor/owners demand. SCI rates businesses on system change performance and shifts investments to system change leaders. This strongly incentivizes companies to implement system change strategies.

SCI provides extensive benefits for investors and financial organizations. These include reduced investment risk and enhanced returns, impact, reputation and assets under management.

For more information about SCI, visit our website SystemChangeInvesting.com or listen to this recent SCI podcast.