ESG forever complicates decision making and requires a new level of project governance

Environmental, Social, Governance (ESG) is a framework to express the effects of our economic activity not only on profit (governance) but also the planet (environmental) and people (social). This is why it is also called the triple bottom line (TBL, 3BL).

CSRD reporting elevates these three bottom-lines to an equal level. It requires assured quantification of not only financials but also CO2 footprint and broad social impact along the supply chain.

As part of the first wave of CSRD reports, accountants and auditors are working hard to devise and install accounting systems for CO2 and social impact. Eventually, they might become as pronounced and powerful as finance.

With those three accounting systems in place, an organization will be able to measure every economic activity against all three bottom lines. In the future, an invoice might have three numbers against each line: €, CO2eq, microlife

The last two could be positive or negative. The third is the social measure which is not established yet. Microlife is just a suggestion.

Internally, on the side of investments and projects, the three bottom lines make decision making harder than ever.

As business are expected to balance all three bottom lines in their investment decisions, the days of profitability (NPV, IRR etc.) as the sole determining factor are over.

Business cases will have to incorporate all three and business leaders will have to make individual decisions weighing them. Auto-approvals in the form or "everything above an IRR of 12% is a go" are over. It will take more complex decision-making rules.

For each bottom-line, boundaries may be set above and/or below which an investment is or is not considered. There might be absolute and relative boundaries. Ie. one can be off by X if compensated by at least Y. Or the case requires approval by a new governance board or the CEO. Each organization will have to establish those rules.

Adding to the complexity is the volatility of the environment. As CSRD evolves and banks and auditors become more knowledgeable and demanding, the internal decision-making will have to continuously adapt. This may invalidate already approved business cases.

Keeping on top of this requires a solid project portfolio management e.g. in form of a strategic PMO that supports the tracking of the complex business cases against an changing external environment incorporating best practices from the areas of foresight, risk management and project management.

#sustainability #esg #pmo