As part of the Wheeler Institute for Business and Development’s Climate Initiative, Lucrezia Reichlin, London Business School Professor of Economics and trustee of the International Financial Reporting Standards (IFRS) Foundation, recently hosted a webinar on “Building global consensus on how to measure and manage impact” on 21 March 2022. The guest speaker for this webinar was Ms. Clara Barby, Senior Partner, Just Climate. The webinar covered issues pertaining to standardizing climate impact performance measurement and management standards.
Shift in reporting focus from measurement to performance
Ms Barby talked about how in the past the focus was more on those companies that had not the best impact performance, but rather, the best way of measuring and managing performance through innovative, differentiated measurement methodologies. She remarked that if the energy transition is to take place in a timely manner, the focus must be shifted from methodology to performance. This is how the Impact Management Project was born. It was initially a group of progressive companies and asset managers, including multinationals such as Mars, frontline social enterprises, charities, governments, and mainstream asset managers & owners that laid the foundations of the Impact Management Project.
Another observation from her work experience was that previously several disclosures were being used by companies to measure their performance. The problem with this approach was that some of these disclosures genuinely overlapped, and perhaps competed with each other. But actually, in many cases, the reality was that these disclosures were tackling different pieces of the puzzle. For example, there were some disclosures that were focused on metrics, while there were others that concentrated on governance practices. Moreover, some organizations were working on underlying methodologies that ultimately a disclosure standard would need. Therefore, there was a need to harmonize these disclosures and once a common way of measuring and managing was established, companies could be evaluated based on their performance.
Urgent need to support high-impact solutions
Ms Barby emphasized the fact that within the universe of climate solutions, not all solutions are created equal, and thus there is a need for investing in climate solutions that are going to create the most impact – solutions such as green cement, green steel, waste biofuels, and so on. This is critical to achieving the targeting of halving emissions by 2030, which is much closer and ambitious to the net zero target of 2050. It is also important to keep in mind that if we don’t hit the 2030 deadline, then achieving the 2050 target would be almost impossible.
Disclosure standards for a sustainable world
Ms Barby reiterated that new disclosure standards would be needed to enable the energy transition as the IFRS are not sufficient to encompass impact management. For example, current disclosure standards cannot tell us what a good transition plan looks like, because disclosure standards are designed to create transparency, not to prescribe what is good or bad. Nonetheless, it’s important for investors and asset managers to be able to identify the differences, so that they can allocate capital to the most impactful companies and projects.
Role of public policy in impact management
Ms Barby acknowledged that there are strong linkages between market and policy. When it comes to transition plans, it has been observed that the market moves first in some instances, and then policy catches up, while it’s the opposite on other occasions. For example, the policy target of limiting warming to 1.5 degrees by 2050 has given impetus to net zero targets and associated market activities. Therefore, public policy undeniably has a huge role to play in determining what good looks like in many aspects of impact management.
Essential elements of climate impact management
Ms Barby highlighted three concepts related to standards that are critical to the energy transition and must be clearly defined in future impact management disclosure standards, namely:
- Thresholds: It is important to define the thresholds with respect to which a company’s impacts can be defined as positive or negative. Thresholds define the limits for what constitutes good enough and can be either societal or ecological in nature. For example, the target of limiting warming to 1.5 degrees serves as an ecological threshold as it helps to assess whether allocation methodologies and organization-specific targets based on science are good enough to deliver on this target or not.
- Measuring and assessing impact: Understanding a company’s impacts means measuring the changes in well-being of people or the conditions of natural resources that the company’s activities are causing. However, impact has different interpretations for different stakeholders – it could be different for different groups of society. There is also the challenge of the extent to which one can measure the outcome as experienced by these groups. So even within a given group, it’s a question of how well change in well-being is being measured. Typically, there is a proxy measure for that and there’s some evidence of a causal link between the two. Ms Barby mentioned that the best way to get this information is to communicate directly with the different cohorts of people experiencing the impacts, thereby effectively obtaining the primary data. There are also learnings that companies can draw from organizations working in the field of development as they have extensive experience in monitoring & evaluation techniques.
- Enough precision for the decision: Given the large-scale nature of corporations and capital markets, direct interaction with cohorts of individuals is unrealistic. Therefore, a combination of tools must be used. It’s quite likely that evidence from a study about the experience of a particular cohort with a company’s activities may be used to draw assumptions about the entire population. In such situations, it is important to strike a balance between how accurate the data needs to be to make the best decision going forward. It’s also important to collect data with as much rigor as possible, embedding it in internal control systems so that it makes its way up to the board-level and is integrated in decision-making and reporting. In many ways, it is similar to collection of financial accounting data by a company’s finance control department. Such infrastructure and processes can be leveraged for collecting data on companies’ climate performance.
Key challenges & solutions for disclosure standards
Ms Barby talked about some of the most important challenges that need to be addressed to ensure that disclosure standards are effective in facilitating the energy transition. These include:
- Perception issues: The framing of a company’s impacts on the society and environment as ‘inside-out’ versus ‘outside-in’ can conceptually cause people to misinterpret the idea of circularity – the idea that there’s a causal loop between the impacts that a business has on its stakeholders and vice-versa. Therefore, this circularity loop is incredibly important to understand because impact management, from the internal perspective of a business, is about assessing these impacts and determining how the company depends on the stakeholders that it’s affecting, and then using this data to mitigate the company’s negative impacts.
- Lack of communication between different standards: There are various kinds of disclosure standards – standards that are relevant for investors, standards that speak to a range of other stakeholders depending on the impact being measured such as carbon emissions relative to science-based targets, water relative to local water basin availability, wages relative to real living wage, and so on. In a nutshell, all these standards measure performance relative to a threshold, and the same data is relevant to a variety of different stakeholders. Therefore, Ms Barby highlighted the importance of ensuring that disclosure standards are integrated as eventually, it’s important to look at a company’s board, its governance, its strategy, its risk management protocols in an integrated, holistic manner for impact management.
Large corporations or SMEs: who is better positioned for climate action?
A topic of great debate these days is whether big multinational companies with all of the resources are the ones that are going to be able to drive the climate agenda or will it be driven by SMEs that are deeply embedded in their communities and know their suppliers and customers well as opposed to large corporations. One interesting thing that’s been happening is that corporates are putting their resources into modelling the impacts of deploying interventions at different types of suppliers in different locations. This information helps suppliers invest in things that are most relevant and result in maximum climate impact.
About Just Climate
Just Climate is an investment business dedicated to climate-led investing to address the net zero challenge at scale. Just Climate was established by Generation Investment Management, which has about a 20-year track record in sustainable investing. Just Climate aims to have a transformational climate impact and to be the catalyst for further action and investment, as well as serving as a model and collaborative partner to others. Just Climate seeks to harness the power of institutional capital to catalyse timely climate impact at scale to help achieve net zero GHG emissions and limit global warming to 1.5 degrees Celsius (1.5°C) above pre-industrial levels via a Just Transition by: (i) catalysing and scaling capital towards the most impactful climate solutions; and (ii) broadening what capital markets value by establishing climate-led investing as a capital allocation imperative.
About Clara Barby
Prior to joining Al Gore’s Climate Solutions Fund Just Climate, she led the Impact Management Project (IMP), a five-year initiative aimed at facilitating a consensus around impact measurement, assessment and reporting. In 2021, Barby led the International Financial Reporting Standards Foundation’s (IFRS) work to establish the International Sustainability Standards Board (ISSB), officially launched at COP26. She also served since 2010 as a Partner at Bridges Fund Management, leading the firm’s sustainable and impact strategies.
The Wheeler Institute Climate Initiative seeks to understand, illuminate, and support the business community – individuals and systems – in understanding, responding and adapting to the challenges and opportunities that climate change presents. We have a particular interest on implications and actions for those in developing countries.
Professor Reichlin’s conversation with Clara Barby is the third event in a five-part webinar series with high-profile corporate leaders that aims to explore how public and private institutional investors can restructure capital offerings and risk management processes to reflect climate forces.
Sagun Tripathi (MBA 2023) worked for more than eight years in the energy sector, across different geographies – the US, Germany, and India – and functions – R&D, consulting, strategy, and operations – before coming to LBS. He is passionate about climate action and how sustainable energy holds the power to transform lives in the developing world.