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 behaviour. 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?

How can corporations, from now on at least, better metricise 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 globalisation, 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.

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 behaviour, but it has the merit of crystallising 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??

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 behaviour.

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 globalised, inter-dependent world.??

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

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 labour standards, living wage, child labour, 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 metricised 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, organised 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 dependence 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.

The time for defining and intelligently metricising 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?- Chief Impact Officer at?GOODFOLIO

As with all investing, your capital is at risk.

GOODFOLIO Ltd is an appointed representative of?RiskSave Technologies Ltd?which is authorised and regulated by the Financial Conduct Authority (FRN: 775330).