Purposeful measurement requires radical prioritization

Business leaders today are faced with an increasingly complex and fast-changing environment through which to steer their organizations. Systemic climate and biodiversity crises, resource scarcities, growing social inequalities, pandemics, political polarization and geopolitical conflicts, technological disruption, and the changing nature of work – to just name the most obvious – all require meaningful responses from businesses if they are to continue operating successfully into the second half of the 21^st century. In other words, long-term sustainable business performance depends on a fundamental understanding of both social and environmental dependencies and impacts of a business venture.

In this context, and to develop this understanding, the importance of new measurement systems that go beyond traditional financial performance has been elevated. Yet, neither offers from for-profit ESG data-providers nor frameworks from non-governmental and international organizations have been able to deliver on a practical system that business leaders could use to steer meaningful change within their organizations. If anything, the plethora of measurements and methodologies created has added to the complexity that managers are facing in this space. And while the last years have seen promising advances in standardization and regulation of sustainability-related measurement that will increase clarity and comparability of corporate disclosures, we are still left wondering whether and how these measures will help companies manage – that is steer towards meaningful increases or decreases of – their dependencies and impacts in a sustainable way.  

What we want to avoid is that measurement of sustainability becomes a mere compliance task. This would move insights from data collection directly into boilerplate reports without receiving proper consideration from managements and boards. Such measurement for the sake of measurement would not only be a waste of resources but, above all, would mean a missed opportunity for businesses to future-fit their organization.

So how can we ensure the meaningfulness of measurement? In my ongoing research, using both conceptual and empirical approaches, I explore various business and investor settings to understand when and why sustainability information seems to enable business leaders most to make impactful decisions. By impactful decisions I mean those decisions that really move the needle. The non-incremental. The transformational. The starting point here is usually the recognition that numbers are not an end in themselves, but that they are a tool with a function. Conceptually, this means tying measurement to specific pre-existing or novel logics of action. Empirically, this means assessing how businesses link sustainability measurement to their own conceptualization of corporate performance. Based on this work, two interdependent logics have emerged as being particularly powerful in enhancing the use and usefulness of sustainability-related measurement: 1. Tying measurement to purpose, and 2. “Radical prioritization”.

In a first instance – and at the risk of sounding tautologist – tying measurement to corporate purpose can help making measurement purposeful again. Or, to make it sound less redundant, for sustainability-related measurement to be meaningful to management, it needs to be closely linked to the core value proposition (economic, social, and environmental) that a company pursues with its business model. For this to work, of course, businesses need to first know what their corporate purpose is and what value they want to create through it. Colin Mayer’s definition of finding “profitable solutions to the problems of people and planet, without producing harm” describes a tangible way of how companies can think about this. Tying a business model to such a meaningful challenge, and measuring its achievement as a strategic goal, can be extremely beneficial for the strategic market development of companies, as evidenced by examples such as Novo Nordisk (“Defeating Diabetes and other Diseases”) or Mars Petcare (“Bettering the Health of every Cat and Dog”). It can also be powerful in shifting the logic of performance within a business altogether.

Measuring the social and environmental dependencies and impacts of a business model, of course, remains to be a complex task. This is exactly why the focus on core value propositions and purpose is so important: It enables what I call “radical prioritization”, meaning that the core of sustainable performance measurement and management should focus on a few, select issues which are the most central to the social, environmental, and economic value that the business seeks to create. It is radical, as it goes beyond the mere concept of single and double materiality, asserting a strategic lens of value creation in selecting only the most important topics and, thus, also making conscious choices about which are considered less important. It is about prioritization, as it requires a company to then manage these topics actively and with the same commitment and attention as it manages, for example, earnings and margins.

Yet, radical prioritization is not just a tool of complexity reduction. It fundamentally is meant to aid complexity appreciation. By concentrating on a select range of topics, the trap of superficial analysis can be avoided. Within the selected areas, assessments should thus focus on the entire impact chain (capturing inputs, outputs, outcomes, and impacts), include key stakeholder perspectives, and rely not on one, but various methodologies. Core KPIs should relate to short-, medium- and long-term targets, capital allocation should be aligned to the achievement of these targets, and measures and methods that provide evidence on progress should be externally audited wherever possible. In other words, within the few select issues which enjoy radical prioritization, specificity, credibility, and legitimacy must be managed to the maximum.

Finally, it is important to highlight that the concept of radical prioritization, perhaps against expectation, does not advocate for a disregard of the advances made in standardization and regulation – particularly where these focus on negative firm impacts. Indeed, it needs to be complemented by comparable measures in relation to negative externalities to allow for external accountability in their regard. In other words, radical prioritization must be based on a “do-no-harm” principle of value creation, which avoids its misuse for fig-leafing disregards of fundamental rights, such as human rights or grave environmental pollution.

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By Prof. Judith C. Stroehle, Assistant Professor of Sustainability Governance, University of St. Gallen

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