Switch to hybrid indicators!
A company’s performance is measured by financial metrics alongside Environmental, Social and Governance (ESG) indicators. They’re two distinct reporting systems, however, which makes it seem like a choice has to be made between economic results and social responsibility. What’s more, two incompatible reporting systems are unhelpful when it comes to overall performance assessment– hence the idea of designing hybrid indicators.
Investors continue to favor financial metrics and short-term results, missing out on more sustainable performance where the advantages are only visible in the longer term. But this preference is bound to change. A growing body of research shows strong correlation between ESG criteria and financial results. Hybrid – financial and ESG – indicators can be used to evaluate a company’s performance more effectively.
What would a hybrid metric look like? Consider the case of a beverage maker tracking the relationship between profitability and the nutritional value of its sodas. Another example is a textile company assessing the relationship between the selling price of its clothes and the working conditions of people on the shopfloor.
These hybrid metrics are suitable when there is a causal link between changes in social or environmental performance and financial results.
“ Where ESG Ratings Fail : The Case for New Metrics ”
by Mark Kramer, Nina Jais, Erin Sullivan, Carina Wendel, Kerry Rodriguez, Carlo Papa, Carlo Napoli and Filippo Forti (Institutional Investor, September 2020).
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