Non-Financial Performance

 The other performance yardstick should be inclusive of non-financial ESG performance.

Such an integrated metric requires uniform measurement, accounting and reporting standards which are currently lacking, but which many organisations are currently working on establishing. Beyond measuring, accounting and reporting ESG performance, bridging the gap between financial and non-financial performance requires quantification of both performances on a common scale

One recent proposal from the literature is Impact Weighted Accounts , or IWA for short. IWA is an ongoing research initiative that aims to monetize corporate non-financial impacts (Serafeim et al., 2019–ongoing). It measures;

  • Absolute Non-financial value creation,
  • Expressed on the same “scale” as financial value creation

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Companies and executives recognise that their measures for financial performance don’t fully capture non-financial performance. Many of the leading companies have committed to the SDG agenda. They have (increasingly) started to resort to incorporating ESG metrics to get a grip on their non-financial value creation, sometimes going as far as making pay conditional on such performance.

While laudable, the current implementation of such CSR contracting falls short of its objectives in several respects.

  • Adoption. Not all companies have started to monitor and steer their non-financial performance. Analysis of ESG targets employed shows that out of a sample of 195 large European companies in 2017, only 74 employ any ESG targets ¹.
  • Scope. Most companies that employ ESG metrics, employ ad-hoc partial measures that only partially capture non-financial societal value. Many targets are often operational in nature, unreflective of a market failure and/or highly co-moving with financial performance (e.g. customer satisfaction) 2.
  • Consistency. Of the companies that employ CSR targets, few use the same target year-over-year. Of the companies that employ CSR targets, few (pairs of) companies employ the same target. Both lead to lack of comparability, both over time and across firms 3.
  • Measurement. There is no unified framework that defines the measurement of non-financial indicators, resulting in companies picking their own. Not only does this drive a further lack of comparability, it can also result in manipulation. Indicators are often qualitative, leaving significant room for discretion.
  • Disclosure. Disclosure on non-financial performance varies greatly, making it more difficult for investors and societal stakeholders to monitor the company’s non-financial performance.

To illustrate the problem these issues cause for investors and societal stakeholders, it is worth noting that even professional organisations specialised in measuring non-financial performance struggle to reconcile differences in reporting and performance between companies. The metrics employed by KLD, Sustainalytics, Vigeo-Eiris, Asset4, and RobecoSAM correlate comparatively poorly at 0.61 on average. For reference, credit ratings by Moody’s and Standard and Poor’s have an average correlation of 0.99 4.

There are many different initiatives that aim to support more uniformity, most focusing on either scope, measurement and/or disclosure (adoption and consistency being the responsibility of individual firms). Ironically, this wealth of (voluntary) disclosure initiatives does little to reduce information asymmetries 5. Companies currently employ standards selectively and implement measurement differently. This heterogeneity in measurement and reporting has resulted in increasing calls for standardisation and some private sector efforts in this direction are underway.

If non-financial performance is monetised, the question of whether to integrate or not becomes almost insignificant. True societal value creation then is the balance of financial and (monetised) non-financial value. This is also the approach taken in a recent proposal from the literature called Impact Weighted Accounts.


Non-financial performance metric candidate: IWA

A recent proposal from the literature suggests working towards a framework that monetises social and environmental impacts so that financial performance becomes impact weighted. The general idea is to net financial impact of non-financial impact (both positive and negative) to arrive at an overall assessment of value creation.

As a feasibility assessment, Serafeim et al. (2020a) applies a preliminary version of the framework to the automobile industry and quantifies social impact such as health and safety impacts associated with the automobile industry, as well as emissions and recyclability amongst others. This constitutes a proof of concept and suggests significant social and environmental impacts 6. In a different paper, Serafeim et al. (2020b) perform a similar analysis focused on environmental impact. Monetised impacts of e.g. water use and carbon emissions are 2% of revenues at the median, but in excess of 10% in 11 of 68 investigated industries. This suggests a significant effect of environmental impact on firm value if priced correctly. Importantly, while sector membership explains 60% of the variance in environmental impact, around 30% is due to firm specific factors 7. Executives could directly address firm specific factors that drive high environmental impacts.


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1 SEO Amsterdam Economics (2020) analysis. 2SEO Amsterdam Economics (2020) analysis. 3 SEO Amsterdam Economics (2020) analysis. 4 Berg et al. (2019). Aggregate Confusion: The Divergence of ESG Ratings. 5 Ho & Park (2019). ESG Disclosure in Comparative Perspective: Optimizing Private Ordering in Public Reporting. UPJIL 41/2. 6 See Serafeim (2020). A Preliminary Framework for Product Impact-Weighted Accounts. 7 Serafeim (2020). Corporate Environmental Impact: Measurement, Data and Information. HBS Working Paper 20-098.