KPI and Language: Why They Have to Change

In recent years, the expression ESG - Environmental, Social and Governance - is recurrent in managerial and investor language. However, from the management and finance community we very often hear criticism about these metrics, their poor reliability and lack of standardization. The comparison is made with the typical accounting and financial figures the same community has been accustomed to using for decades. What we forget when we tackle the issue of sustainability is its intrinsic complexity, which affects our ability to measure and evaluate risks, opportunities and ESG impacts.

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Breadth. Climate challenge, protection of biodiversity, efficient use of resources, human rights, gender equality, corruption, product safety, corporate welfare are just some of the aspects that fall within the ESG architecture. The most widely used international reporting and risk assessment standards include hundreds of metrics, organized into multiple impact categories. Despite the principle of materiality, which must lead to concerted attention on the relevant indicators for a business or industry, the measurement of sustainability requires an extensive and multidimensional analysis.

Depth. Each individual metric has specific characteristics. For example, on environmental issues, the logic of evaluation refers to hard sciences, where there is a deep tradition in measurement. Over the years, protocols and guidelines have been developed that help normalize information and make it comparable and consistent. On the other hand, the question of measuring social and governance variables is more difficult, where less "objective" parameters exist, and elements that can be measured quantitatively cannot always be found. In any case, multiple data and information are required for each indicator, which must be produced and verified, and which require specific knowledge.

Multiplicity. As much as sustainability has been talked about for decades, the ESG measurement industry is still in its infancy. As in the case of technological innovations, here too we have a plurality of standards, born spontaneously according to bottom-up logic, which populate the market. On the reporting, risk assessment and rating front, we have dozens of data providers - for example, GRI, SASB, Refinitev, Sustainalytics, MSCI, RobecoSAM, CDP - which offer solutions that are not always homogeneous, and are sometimes complementary.

Knowledge. However, the aspects briefly described above must not lead to superficial conclusions with respect to the ESG world. In fact, there is a strong asymmetry of knowledge between those who prepare and process the metrics and those who use them. The ESG application requires specific know-how linked to contexts that are also very different and removed from those of investors and managers. Today, this knowledge is almost completely absent in businesses and finance, where analysts attempt to trace back to their own types of analysis quantities that come from different contexts whose characteristics and implications they often do not fully undestand.

Language. One of the main challenges to making our capitalism more responsible is linked to the creation of a common language, which acts as a bridge between those who build ESG metrics and those who use them for decision-making processes. Education on these issues, starting from universities of economics, management and finance, is fundamental to establishing a path which in the coming years must lead to a paradigmatic change in the methods of managing and measuring the value created by a company or an investment fund.