The positive impact of ESG integration on the corporate balance sheet is becoming more apparent, even as its actual impact on the world we live in remains almost invisible.
We lack a framework for assessing how investors contribute to this impact. We also lack a transparent, robust and accountable global methodology for measuring corporate impact on ESG issues. This is where the World Benchmarking Alliance (WBA) comes in.
The WBA – launched in September by its three founding members: Aviva, the United Nations Foundation and Index Initiative – already has the support from a diverse group of more than 70 WBA Allies including ABP, Investec, ABN Amro and World Wide Fund for Nature and ShareAction. The UK, Dutch and Danish governments are providing financial backing.
The private sector has a crucial role to play in advancing the Sustainable Development Goals (SDGs), but to boost companies’ motivation, there needs to be real change in the way that their impact is measured. That’s why the WBA has set out to develop transformative benchmarks that will compare companies’ performance in alignment with the SDGs.
The benchmarks will be backed by the best available science, while leveraging existing international norms and standards. The WBA will act as an independent, transparent body with a broad group of Allies who will provide the WBA with the necessary support and credibility to be a successful driver of change. The aim is to empower all stakeholders, from consumers and investors to employees and business leaders, with key data and insights to encourage sustainable business practices across all sectors.
While the WBA’s series of benchmarks won’t be the first nor the most comprehensive ESG league tables or scorecards currently available, there are clear differences that may help propel it on to more investor portfolios:
• The WBA league tables will be free and publicly available, so anyone can access them.
• The league tables will be based on benchmarks that have been built collaboratively with a broad range of stakeholders.
• Companies can’t opt-in or opt-out – they will be ranked whether they like it or not. This will level the playing field and encourage transparency in what advocates hope to be ‘a race to the top’.
• Support from a broad range of some of the world’s largest institutions, companies, policymakers and non-profit organisations should help ensure that the underlying information is robust, the analysis consistent and the methodologies comparable.Existing scorecard rankings are generally more focussed on how ESG issues hit company cash flows, and they tend to focus on risk and materiality. These rankings follow methodologies that are regarded as proprietary intellectual property. These methodologies are not available for all stakeholders to see, including often even the companies that are being ranked.
Furthermore, results often disagree. One institution may rank a company one way, and another institution doing the same ranking on the same issue may rank the same company very differently. The gap may be down to the timing, the analyst or the analysis methodology itself. But without full transparency of the methodology, there is no easy way to reconcile the differences when making investment decisions.
The driving force behind the WBA is to create a universal set of benchmarks on which stakeholders can collectively agree. The focus of the WBA is on how each company is impacting specific SDGs rather than how ESG risks impact individual company cash flows.
Investors can use the same measures to gauge the success of their responsible investing strategies over time. For companies, it is also more transparent as to why they may have received their scores and can even challenge those decisions, helping to improve the quality of the information. Governments, non-profit organisations and other policymakers also can rely on these benchmarks to target regulations and measure their impact.
The first set of benchmarks will be published in 2020, addressing food and agriculture, climate and energy, digital inclusion, and gender equality and empowerment.
These benchmarks’ methodologies will be published throughout 2019. The WBA will work closely with its Allies in developing these benchmarks. By 2023, the WBA expects to have assessed the progress of 2000 companies across all major areas required for the private sector to advance the SDGs and, ultimately, achieve a better world for everyone.
It is too early to tell what impact the WBA ultimately will have. In practice, however, benchmarks that better reflect the true costs – not only to businesses but also to society and the environment – of financing the world in which we live can only help to promote genuinely sustainable corporate activities. Our experience with the impact of the Corporate Human Rights Benchmark has already been very positive and suggests that the WBA will be a major game changer for companies, investors and NGOs alike.
Steve Waygood is Chief Responsible Investment Officer at Aviva Investors.