Many of today’s investors are not just seeking positive financial returns. They are also seeking positive social impact. Not surprisingly, businesses and entrepreneurs have responded in kind with numerous investment offerings, corporate initiatives, and business ventures to promote social benefit. This shift in capital markets and corporate governance is perhaps most reflected in the incredible growth of environmental, social, and governance (ESG) investments and the increasing activism of America’s largest companies on some of the most pressing social issues of our time.
This shift away from pure profit-seeking towards profit-seeking plus social impact has been the subject of much debate. Less debatable is the sustained and significant nature of this sea change. One critical question that arises in the discussions surrounding this development is how best to compare and measure the efficacy of corporate actions for the betterment of society.
Two engaging, recent articles offer sensible approaches to addressing this critical question. The first article, Measuring Corporate Virtue—and Vice by Professors Paul Brest and Colleen Honigsberg presents a comprehensive general construct for benchmarking ESG performance. The second article, Equality Metrics by Professors Veronica Root Martinez and Gina-Gail S. Fletcher provides a more targeted proposal to address the specific problem of racial inequity in businesses. Each of these articles is distinct in their subject and scope of focus, but both fundamentally share the belief that business can play an important and more effective role in addressing certain social challenges.
In Measuring Corporate Virtue—and Vice, Professors Brest and Honigsberg propose a comprehensive framework for ESG reporting rooted in three factors: “(1) a limited set of metrics, primarily concerned with a company’s key environmental and social impacts; (2) a standard-setting body loosely modeled on the Financial Accounting Standards Board (FASB) to develop and particularize those metrics; and (3) reporting infrastructures that allow companies to collect, report, and verify the relevant metrics accurately.” (P.1.) Bringing to bear the authors’ respective expertise in accounting rules and social enterprise, this framework is designed to bring better standardization and comparability to ESG reporting and practices in a sensible fashion.
This proposal is appealing in large part because it is predicated on the prevailing financial reporting framework, making it readily familiar to businesses and investors. This familiarity is important because it could serve as a significant catalyst for wider adoption and usage. While FASB-based financial reporting has its critics and shortcomings, on net it has also served as the basis for incredibly robust and fruitful capital markets that have enriched business, investors, and society in numerous ways.
In contrast to Professors Brest and Honigsberg’s broad approach for ESG reporting in general, Professors Martinez and Fletcher’s article, Equality Metrics, takes a more targeted aim at the pernicious issue of racial inequity in business organizations. In particular, they advocate that “firms should (i) measure the state of (in)equality in their organizations and supply chains; (ii) identify a list of specific, assessable equality goals; (iii) implement policies and procedures aimed at achieving those goals that can be tested and measured; (iv) disclose their progress toward meeting these goals at regular intervals; and (v) use their own and others’ measured performances on these metrics to direct their future efforts at creating a more equitable organization.” (P. 875.) Reflective of the authors’ deep knowledge of corporate compliance and financial markets, the proposed approach is powerful in its realism and pragmatism.
A large part of the appeal of this approach is twofold. One, the proposal is predicated on institutional investors incentivizing companies to adopt their approach, which could lead companies to act more swiftly since they are highly sensitive to the demands of their largest shareholders. Two, the proposal allows firms ample pliability to craft and create goals and means that are best tailored to their particular shortcomings and circumstances while remaining mindful of the overarching objective of greater demographic equity in business.
The challenges that plague our communities are many, serious, complicated, and real. Every individual and institution can play a role in addressing these challenges, especially businesses. Measuring Corporate Virtue—and Vice and Equality Metrics provide two thoughtful, pragmatic approaches to help businesses become more accountable and effective in their socially beneficial efforts. Despite their contrasts, both articles are ultimately rooted in the idea that better data—properly gathered and disclosed—can improve corporate citizenship. Understandably, not everything that matters can be measured and counted. Data and metrics will invariably be subject to biases, defects, and errors. Nevertheless, better accounting on critical social matters like climate change and racial inequity can build an important, informed foundation for more thoughtful action. In the end, business efforts to do good can be done better. And to make such efforts count more, we can help them count better. For anyone interested in this endeavor, these two articles are excellent places to start.