Universal ESG Metrics
It is based on the framework of UN Sustainable Development Goals. It assumes that each of the SDGs has causal parameters (Impact Parameters, IPs). It further standardises these causal parameters for their definitions, goals, pathways and weightage that would lead to each of the SDGs. These standardisations are done for large corporations by their sector. Then, it further assumes the large corporations would set their targets periodically in alignment with their sectoral pathways that are further extended, periodically, to their s/chain & v/chain entities who feed into their IP values. For example, individual GHG reductions measured in absolute metrics, say metric tonnes of CO2, Methane or any of the other four GHGs, their goals aligned with SDG13, their pathways and weightage into SDG13 standardised by sector for large corporations in the real economy, would become standardised sectoral IPs for SDG13. It is straightforward for all those IPs whose value remains the same across the globe. For other IPs, say for other SDGs whose value do not remain the same, we need to allow their standardisation to include Jurisdiction and any other aspect as needed. Then the question is, how do we compare these corporations in terms of their sustainability performance based on these IPs with varying dimensions? To this, we need to note that their standardised sectoral pathways define what these entities need to achieve, and if they achieve their targets, we can say that their IP achievement is 100%. The credibility of such declarations and achievements need to be ensured through a governance framework at the entity level. Thus, by measuring IP achievement in % terms, translating them into SDG % achievement and, further, their overall sustainability performance, we can do a lot. For this approach to work, we need to extend it to the SMEs too, apart from their s/chain and v/chain entities, as explained earlier. This is possible through further standardisation and governance at local levels. For the proposed deployment mechanism, refer to products and services for more details. All this requires policy support, say from G20.
In the case of leading FIs, these impact parameters are indirect as they are arrived at from their underlying companies and assets in proportion to the investments planned for or made into. Then they are called 'planned financed IPs' or 'actual financed IPs'. These leading FIs need to be classified into standardised categories with their standardised data elements that would include their financed-IPs for each of the SDGs, their weightage into it and their ideal value per unit of the leading FIs turnover - planned or actual. Then, these leading FIs' actual financed IP %achievement is calculated from their actual financed IP measured against their ideal financed IP instead of planned financed IP. This is to discourage portfolio greening. The ideal financed IP value is calculated from the leading FIs' planned turnover, and their 'ideal financed IP value per unit of their planned turnover' that is based on the category they belong to.
In this approach, the overall sustainability performance of the entity is based on the assumption that an entity's total direct or indirect impacts towards its one purpose are equal to the sum of its total direct or indirect impacts towards its 16 SDGs through its multi-stakeholder focus, leaving aside the 17th that is actually created to support the achievement of other 16. Then, the sum of the entity's weighted SDG %achievements would denote its overall sustainability performance. This would then require attaching a weightage to each of the SDGs. In other words, the entity needs to declare its targeted relative focus across the 16 SDGs. In the case of large corporations in the real economy, they would do so upon measuring their actual relative focus and having noted their ideal that is based on the sector they belong to. And, in the case of leading FIs, they would arrive at their targeted and actual relative focus across 16 SDGs from their planned financed IP, actual financed IP, planned turnover, actual turnover, their standardised data elements based on the category they belong to as explained earlier and additionally their ideal relative focus across 16 SDGs again that is based on the category they belong to.
The standardised NZ Transition Plans to deploy the standardised transformation methodology CTM (Change through Movement) with variations for the leading FIs and real economy large corporations enables these mechanisms, leading to the disclosure of the universal ESG metrics. From the non-financial outcomes from the constant pipeline of self-initiated, impactful and credible projects, the quantitative part of the universal ESG metrics is calculated. The other half of this metric is derived from the qualitative measurements embedded in the first half of CTM, the Movement, that are independent of these entities and their categories or sectors. Thus, these measurements are authentic, transparent, comparable and decision-worthy, capable of solving the problem of Greenwashing. Also, the qualitative measurements embedded in the first half of CTM, the Movement, can be treated as lead metrics, as they can predict the outcome of this transformation to some extent. Now, CTM will also ensure the entities periodically consolidate their baselines (directly/as-financed) and their targets in alignment with their sectoral pathways (directly/as-financed) following a governance framework at the entity level and update into the NZDPU periodically (through any mechanism/transmitter). This governance framework, adherence to it, and the calculations for the entities targeted and actual relative focus across the 16 SDGs will be open to external reviews and audits as per this methodology. The frequency or reporting period will align with those recommended by higher bodies or as mandated by regulations.
Now, the ISSB standards meant to enable corporates to disclose their sustainability-related data that are comparable for the purpose of investments into them have limitations. You might agree that risks must pertain to actions that would lead us to desired outcomes. Thus, the ISSB Governance framework, Strategy, Risks and opportunities must be focused on the corporates' actions that would lead them to their desired outcomes, which are to address climate change and the SDGs through their muti-stakeholder focus and at the pace they must. Thus, the corporates' sustainability performance measured from these metrics and targets has limitations as these metrics and targets are not produced while keeping these perspectives in mind. At the same time, for the overall comparability of the corporates, measuring their creditworthiness while incorporating their sustainability performance, at least, alongside their financials will also have limitations for the same reasons.
These universal ESG measurements will also enable the implementation of Taxonomies, wherein the Taxonomies will add value as guidelines instead of the need to mandate them entirely. This is possible because the sustainability performance of the entities is measured from their direct or indirect impacts towards their NetZero goals in alignment with their sectoral pathways directly or as-financed and achievement of their other SDGs likewise through their multi-stakeholder focus and in the perspective of their SDG relative focus across the 16 SDGs.
When extended across the financial and real economy as referred above, these universal ESG metrics for the corporates will enable measuring their creditworthiness while incorporating these measurements alongside their financials in an authentic, transparent, comparable and decision-worthy manner. At the same time, the universal ESG metrics for the FIs will enable them to comply with regulations. Thereby, it is possible to solve the problem of greenwashing.