Beyond ESG: Measuring Corporate Purpose - EPI/British Academy

Thank you very much, Colin, and yes, my perspective is very much that of a practitioner over the last decade or so on various boards and chairing committees which have this whole subject at the centre of their responsibility. And the first point I think I'd like to just make, which might be obvious to people, but I think it's worth making because there's confusion around this, is that there is a difference between measuring purpose and measuring ESG. So the latter does benefit from the kinds of measures that you've set out, Colin, with colleagues in the paper. And particularly for, you know, the proposition for measuring non-financial assets and liabilities. But the former purpose is, in my experience, that's something that first needs to first be translated into the business strategy and executed in the core of the business and is so measured by long-term value creation. So in my experience, boards are not talking so much today about measuring purpose, but the most enlightened are using purpose to shape their strategy. What they are talking about is measuring ESG, and actually there's been initiatives on that front for some time, albeit not committing yet to what's proposed here with cost accounting for non-financial assets and liabilities. But just to give a few examples, I mean, many FTSE companies have for some time been using risk management models that assign monetary values to scale risks, particularly reputational risks arising from the E and S risks of ESG, albeit that doesn't flow through to the P&L. Most companies now of scale have some sort of balanced scorecard with non-financial measures And that is increasingly reflected in remuneration for the senior executives in the company. I'd say the area that has seen the most movement in terms of turning these things into sort of financial measures is the carbon premium, as it's now been popularized by Bill Gates, and some companies are charging their business units for their carbon footprint, and I think common measures on carbon will now happen across the business sector. I think that lagging behind that, but I think also coming down the road, is some common measures on the S side of things, on the people agenda, for example around living wage, diversity, and so forth. And really what investors are asking boards for is, what they're after is comparative data. So, you know, they are interested in being able to compare one company with another, and models such as that being talked about today, I think, can help that agenda move towards more comparative data. I'll leave it there.

That's great, uh, Jasmine. Thank you very much for getting us off to such a great start. Um, so I'll now turn to Bruno, please, to give your views on measurement from the perspective of economics and mutuality and the Mars Corporation.

Good morning, everyone, and thank you, Colleen, and the British Academy for hosting this this event. When you talk about purpose and measuring purpose, it's all about actually also understanding the role of profit and the right level of profit that eventually will drive the performance of the corporation. And this notion of profits and purpose, and purpose and profits are now widely discussed in the literature, but it is a fairly new phenomenon. And just to give you a little bit of background, we started back in 2007, so about 18 months before the crisis, with the question coming from, from the board and management of Mars Incorporated about what should be the right level of profit. A corporation, and the question was not asked in the context of making more profit or making less profits, but in the context of, is there something called the right level of profit that is indeed connected to the level of performance? And there is of course an obvious correlation between profit and growth, and between growth and profits, but we don't know exactly which one drives what, and to our surprise, when we started this journey in 2006-2007, this question of the right level of profits was a blind spot in the literature, and actually it still is. It's a topic which is discussed in sociology, in philosophy, in theology even, but not very much in economics management science. So why am I sharing this with you? It's because Purpose and profit are connected, and they are actually inextricably connected. And I'd like to build on what Jasmine just said, that purpose in the definition of the economics of mutuality is not an asset for communication or for engagement, it is actually the asset that drives strategy. And therefore, when purpose becomes a strategic asset that eventually drives the operation of the business, The next question is about to say, hey, what are the stakeholders that are actually material to the purpose that can help the company deliver not only performance, purpose, but also impact? And then comes the notion of measurement, and then you have different types of measurement. You have the measurements, the metrics that drive performance, and the metrics that actually help companies report impact, and therefore all of this actually points to the notion of accounting. Today we have a definition of profit which is essentially very limited, it is about measuring the financial capital performance of a company and by taking into account a very limited number of stakeholders, primarily the shareholders and the employees, but the notion of business goes now far beyond just financial capital and goes also far beyond just a couple of important stakeholders. So the notion of profit today, or definition of profit, is actually ill-structured, that is, it's an ill-definition. So together with Colin and Oxford and also other researchers, we've been thinking about the concept of adjusted profit, or what we call in our definition the mutual profit, which is essentially a concept that is using the language and the practice of accounting, but also in the context of internalizing the right externalities that are related to the purpose, but also internalizing the role of other forms of capital, social capital, human capital, natural capital, which are as important as the financial capital to drive the performance of business. So this notion of accounting for cost, which is one of the critical components of the paper we wrote together, is about to provide the business solutions to measure more precisely the right level of profit, so the right level of value that the company has been created and/or destroyed over a period of time. That's an important tool to help business manage their operations and manage their decisions, but alone it is not enough, and this is also the second objective of the paper, because accounting for cost only covers one aspect of accounting. Accounting is also about accounting for valuation, and this is primarily for investors and policymakers, and this is actually the work that's for instance, the Harvard Business School and George Serafeim are engaging, but also the notion of accounting for reporting, and this is the whole debate around the ESG. So the understanding actually of the 3 roles of accounting— accounting for cost, accounting for valuation, and accounting for reporting— is as important as the understanding of how to drive performance, how to drive value creation, and how to report impact. The issue we have today, and we'll finish there, is that there is a lot of activities on the last pillar, which is about reporting, and there actually— there is beginning of work in accounting for cost and accounting for valuation. And I hope actually that the paper that we've been working together with Colin and Robert, who are actually 2 of the panelists today, is a step in the right direction to help business management, to help investors. and to help policymakers understand how responsible business could not only help increase positive impact on society and the environment, but also could help business being restored in their role to promote this responsible agenda. And I will stop here.

Thank you very much indeed, Bruno. I'll turn now to Saori, and I'd be grateful if you could please describe how major corporation like BASF is using measurement to embed purpose in its business?

Yeah, let me frame what we do and why we do what we do, because what we do see now is we are in the middle of a bigger paradigm shift. What is this paradigm shift all about? We have come from the age of globalization where companies were very much driven of entering new markets by volume growth, market share gains. But what is happening right now due to the Paris Climate Protocol, the increasing cost to the environment, that we enter a new S-curve of growth where at the center stage it is all about smart resource usage. So this means we are entering a decade where it's all about values and value. And this is why purpose gets much more importance than even in the past, because people want to know why they buy from companies and why they should invest. And what do we stand for? Now, this is where we looked at what do we stand for. Our purpose is we create chemistry for sustainable solutions. How do you bring this from a purpose level down to a business role? Now, let me show you with the example of the Green Deal how we do this and what this means for measurement. Today, we see that with the Green Deal alone, and this is just the beginning, because China with the 2060 target for CO2 and now Also the United States with the government of Dubai that will follow to go more stringently about value creation for a next decade of a resource intelligent age. In the Green Deal, when we looked at the markets, there are more than 50 to 100 innovation markets that will be triggered by a new kind of frameworks of the regulatory framework. Now we have started this analysis already years ago. We went through 59,000 product applications and we wondered when we had our purpose, which of those product applications truly contribute to a more consistent value contribution, really creating impact. Today we have €17 billion of net sales with these kind of categories of products, and our aim, and that's the target setting, is clearly to come to €22 billion over the next 5 years. These 50 to 100 innovation markets, what are they? These are markets like carbon farming in the agricultural sector. These are things like recycling markets that will now design and build new parts of growth. There's a lot of biodegradability-related markets, be it in polymers, be it in all kinds of substances, and biological solutions are on the move. So companies are wise to invest in innovation towards society. Now the interesting part is these markets have a higher growth rate between 2 to 35%. So this new age will challenge business models and the way we do business on all levels, and we are up to that. Now what about measurement? When you look at the measurement that we have been using until now, it's built on tier counts, and we as BASF were wondering, you know, while we really appreciate that Luca Pacioli invented the T-Accounts in 1500. Still, at that age, there was no climate change, nor we had digitalization. So the question we asked 8 years ago, is it good enough to just measure profit? Do capital markets know the true value contribution that companies really bring? And how would a new steering of companies look like in this new wave of a resource-intelligent age? And this is why we try to incorporate value for humans, because they were so far just a cost factor. Just an example today, COVID. We have seen financially monetized the impact along our value chain that we create by simply, say, paying salaries along the value chain with all suppliers or customers. BASF, for example, is generating €70 billion of purchasing power to the economies of the world. And COVID has shown if there is salary insecurity, it also leads to purchasing power insecurity for the entire economy, which means governments have to pay money. So companies have a much bigger contribution and impact than what people think. On the environmental part, we saw that we have in total across the value chain minus $30 billion cost. So how can we reduce this? This is our task, and this is why the Value Balancing Alliance was founded already a couple of years ago, because we see there is a necessity for joint language. I'm really, you know, for competition, but I think on methodology it's sunk costs for everyone. That's why we want to collaborate. And my last point here is I think it's absolutely needed to work jointly on a joint standard methodology because, you know, as Oren Haran said, if we would have continued to work on the candle, the electric light would never have been invented.

Thank you very much indeed, Saori. Our 4th speaker is Rupert. Rupert, perhaps you could tell us about the Enacting Purpose Initiative's view on measuring purpose and the views of investors. Over to you, Luke.

Thank you, Colin. Yes, so we have over the last year and a half at the Enacting Purpose Initiative, we've engaged with boards and board members in Europe and in North America, but what I'm going to focus today is also a third group that we've engaged with, which is the group of asset owners and asset managers. We've engaged with 31 of those, and they include some of the biggest asset owners such as CalSTRS, CalPERS, and others, and some of the largest asset managers including people like BlackRock. It's been very interesting hearing what investors want in addition to what companies hope to provide, and 5 things really emerge so far, from the discussions that have taken place. The first is clarity on materiality. Investors are very keen to understand why purpose matters to boards. It's very clear that if purpose is articulated by boards as being a driver of strategy, as opposed to some form of lesser interesting and lesser impactful strategy of being to do with marketing, then investors are very keen to hear about that, and in particular why the pursuit of purpose is material to the success of the organisation. So the first is some sense of materiality. The second relates to metrics, and metrics, as Colin has outlined and our paper hopefully makes clear, are very different to the question of the value of things. I'm reminded by one of Oliver Wilde's most famous plays, Lady Windermere's Fan, which provides us with 2, I think, elegant quotes that frame this question. The first, of course, is the most well-known quote from the philanderer Lord Darlington, who is quoted as defining a cynic as a man who knows the price of everything and the value of nothing. But there's a follow-on reply from another character in that play, Cecil Graham, who is a young troublemaker in the play, and he then replies, he says, and a sentimentalist is a man who sees an absurd value in everything and yet does not know the market price of a single thing. So these 2 ideas around the difference between the value of something and the price of something really comes into this second point that investors are keen to try and understand better, and in this respect they really welcome the idea of the missing middle that we put into our paper, this idea of a focus initially on putting forward metrics before you think about how it translates into the idea of monetary value in any form of accounting sense. So this idea of metrics is welcomed, and in particular, which is why we focused on these 4 elements to metrics, they are keen to support the idea that boards put forward: number one, what the inputs are, in other words, what's their investment capital in their purpose; secondly, what have they produced in terms of outputs; third, what are the outcomes, so what's changed as a result; And fourth, the benefits to society as seen through this question of impacts. The third area that investors are very keen to understand more about is alignment, and it's alignment in particular of incentives for senior managers. The point is really very simply put, which is that unless there is clarity and explicit alignment that pursuit of purposeful activity will be rewarded in senior management incentives, then they regard it as being a less purposeful or less purpose-driven company. The fourth area, which sort of flows from this point about incentives, is the increasingly active area of capital allocation and decision-making. If purpose is to be a driver of corporate strategy, what investors are very keen to see is the capital and investment allocations being aligned accordingly. So for example, there's a big focus within the investment world at the moment on the way in which financial institutions are pursuing their purpose through allocating capital towards purpose-led activity. So there's been a huge amount of interest, for example, in green bonds, And that's been fantastic to see the oversubscription and the interest from investors in new financial instruments around those sort of activities. And the final area is the question of reporting, where investors quite reasonably think that if something is material and it's meaningful and drives strategy, then it needs to be more clearly reported. Now in the UK, of course, we've got a regime which is advancing a much more active reporting structure for purpose, led by the Financial Conduct Authority here in the UK and the reporting bodies. Less so elsewhere, less so in the US, and less so in different parts of Europe, but increasingly there is a momentum to try and have some form of regulatory architecture around reporting for purpose. In specific terms, investors would like to see annual reports starting with a statement of purpose: why is it that the organisation exists and how does it drive and inform strategy? Interestingly, in the US they're increasingly thinking about whether filings, regulatory filings, should be made on anything which is related to purposeful activity. And the final thing on reporting is this idea, which has been championed by a number of organizations, most notably Unilever, to add to the existing corporate infrastructure of reporting, which currently for shareholders really only focuses on the annual general meeting, is to add an additional stakeholder general meeting, this idea of a stakeholder general meeting, and Unilever in particular, I think, gets a shout out for this, for doing that consistently and innovating in this respect. They have in fact a sustainability reporting seminar next week. So those 5 things: materiality, metrics, alignment, capital allocation, and reporting, as a quick summary of the investments— of the investors' views. Thank you.

Great, thank you very much indeed, Rupert. Eleanor, Can we turn to you and ask you please to tell us how measurement relates to reporting, sustainability, and regulatory initiatives that are currently in progress?

Okay, thank you very much for your kind invitation, and yes, I will probably start on reporting and I will make a a couple of points on that. Also taking the input from Jasmine at the beginning remarks for making a difference between purpose reporting and ESG reporting, I think in Inter-Sampaio we are still doing ESG and sustainability reporting. And let me also tell you that we are also struggling with that. Why? Because right now there are— There is actually a plurality of reporting standards. We could see them in the slides that you used in your presentation, Colin, where we could see all the many different standards that still are out there in sustainability reporting. So, actually, what we end up doing is that we try to cover as many as possible. Of course, we have to be in line with the regulation, which for us, for Inter-São Paulo, means with the European regulation. We have to make reference to a reporting standard. In our case, it's GRI, but in Italy, 100% of companies that disclose sustainability reporting use the GRI. We have American investors that are asking for the SASB, so actually our document is also in line with the SASB requirements. Of course, there is a lot of focus on climate reporting, and there goes the TCFD. We adhere to the Sustainable Development Goals and the Principles for Responsible Banking, and we also include the reporting of our commitments with the metrics that are linked to these commitments into our ESG reporting. So this means that we end up having a document which is over 200 pages with over 50 pages of indicators. So of course, we are waiting, let's say, say, for standardization of reporting standards, and also of the requests that we receive from investors and analysts. Because investors in the ESG space, they all have their own methodology, their own assessment standards, which differ quite one from the other, which means that one is more focused on climate-related information, the other more on cybersecurity, they are all looking for public information, information that may be audited as well. And so this is the reason why we include in our reporting so many, so many information. So this is, of course, not an optimal— way of working. We are actually waiting for the new release of the Non-Financial Reporting Directive in Europe. Europe in this field has for sure a leading role internationally. We hope that these new regulatory initiatives will also bring some simplification, and also we'd be recognized internationally, because otherwise we would anyway end up having different reporting from different stakeholders for different investors, or also geographically. So one, the one point I wanted to make is really the plurality of standards and some efforts around the globe, such as the World Economic Forum, but still, let's say, a simplification and a standardization of these reporting is not out there. Another point I wanted to make is on input, output, outcome, and impact that you were mentioning also before. We are measuring input, outputs quite easily, outcome yes, and very difficult to measure the impact. So there's— we can see some methodology especially in the environmental field, much more difficult in the social, on the social side, to measure the impact of your initiative, and probably even more for a financial institution where the impact really lies not so much in your direct activity, but indirectly giving credit, giving financing or investments in certain areas of the economy, so driving it, reorienting financial flows towards a more sustainable economy. So I think we still have to work on these issues as well. I would stop here as I see that the time is running out.

Brilliant. Okay, thanks very much indeed, Elena. So let me just start off with picking up some themes that have emerged, then I'll bring in the the large number of questions that we've already received. So one point that a lot of you have referred to is the need for standardization. Who should do it and how should they do it? Could I perhaps ask Jasmine for your thoughts on that?

Just to really echo, you're picking up quite rightly on Eleanor's point around standardization. I mean, that, that is the most burning issue. I would agree with you 100%. And I think at one of my boards, the team reported back, we asked for a bit of an audit of how many measures across the different initiatives that we were— that the team were having to collect, there were 2,000 points of data that we were reporting against. And clearly, you know, that actually doesn't help anybody. Not only is it, you know, a huge resource drain, but it doesn't actually provide any information— data rather than information, classically. Your question, you know, is the right question, Colin. Who's going to drive it? I think we all— companies have to, and investors— everybody has to kind of keep the pressure on. The good thing is there is momentum now towards some consolidation. And I think, you know, we're the— you know, we're all part of the system that has caused the proliferation. And I think we all have to drive towards and be a little bit brave in terms of you know, choosing which are the most helpful and providing the feedback and using our— I mean, each player on their own isn't going to be able to do it, but by working together, I think, and supporting the initiatives that are underway to consolidate, I think that we should see progress.

Thank you. Eleanor, perhaps I can just come back to you and ask you for your views. Who do you think should be really pushing forward and achieving the standardization objective?

Well, I absolutely agree with what Jasmin was saying. Having to, let's say, come out with a name, I think that IFRS is going to play a bigger role going forward. So, I would probably look at that. European Commission is working very much on that. I was part also of a group of EFRAG, European Financial Reporting Advisory Group, on this. So, I would say European Commission, but more generally IFRS, I think, is being, let's say, not so much involved so far, but I think their role is is growing in that respect. And you see, it's like the journey that has been done on the financial statements as well. So, we all had different standards, US GAAP, and then at some point we came to a standardization. So, it's probably that on the ESG and sustainability field, we are still a bit behind in that journey, but I think there is a growing request because we have many investors that are geographically not within the EU, so they are asking us information according to American GAAPs or mainframe standards or different methodologies and so forth. So really it's something that is is growing. And I also think that all the ESG assessments that are made right now, ESG ratings that are quite heterogeneous on the same company. The correlation with credit ratings is around 0.99, and while for ESG ratings about 0.60. So much, much lower. Why? Because they all have different methodologies, different assessments, use different KPIs. So if you don't want to run the risk of going out one of these assessments of these indices, you have to cover them all, which is the reason why we end up having thousands of indicators. Are they all material? Are they all really KPIs? Of course not, because only some of them are really crucial and are linked to the materiality themes that are linked to the purpose of the company as well.

Okay, thank you very much. We've got quite a few questions that are coming in around the issue of measurement of profit. Someone has asked Bruno if you can give examples of companies that are actually doing what you've been talking about in terms of the economics of mutuality and the measuring of profit that's proposed there. And a number of people are saying that the measurement of profit is a block impediment to the advancement of purpose, as Peter Newborn has said, and that shifting the purpose paradigm will require a critical redefining of profit. So Bruno, can you just respond to those questions about profit?

Yeah. Well, thank you, Colleen, and thank you for whoever asked these questions. Here we are talking about management accounts, not reporting, just to be very clear. There is a difference. Management account is about— is a tool, is a management tool which is based on the practice and the language of accounting to drive performance, to make trade-offs, to drive investment. And this actually is something that nearly all companies are doing. There is always a difference between management accounts on one side and what the company reports for tax purposes. And personally, my background is in finance. I was working in a finance department, so I know exactly how it works. So essentially here, what we are proposing is to align the modes of profit construction with the purpose, and in a sense we are using the purpose to define the boundaries of the firm. The boundaries of the firm go beyond the traditional stakeholders and they embrace a number of stakeholders which are both material to the purpose that the company may choose, but also that are resources of financial and non-financial capital required to deliver the performance of the business. So that's number one. So it's a management account tool to help companies align their practice with purpose, but also through the incentive mechanism that, Rupert, you talked about, it's also a way to align behaviors and purpose. So that's number one. So it is a fairly well-known practice in accounting that we apply to purpose. So as part of the work we are doing with the economics of mutuality, we are engaged with a number of companies and business units that actually are developing and implementing this concept, and it's not rocket science, and it's based on a few principles. The first one is that We, we are talking here of a single bottom line, not a triple bottom line, single bottom line. And single bottom line is about measuring the value that the company has created and/or destroyed across a number of stakeholders that actually is based on the strategic choice of the company. And the second principle is that we are not bringing a monetary value to a non-monetary capital. The same way you remunerate financial capital with financial capital, you want to remunerate human capital with human capital, and social capital with social capital, and natural capital with natural capital. Suppose your company actually is polluting water, we propose here to replace the water that you pollute with a technology that would actually depollute the water, and the depollution of the water would have eventually a cost, but you don't give a dollar value or euro value to a non-financial capital. I think some of the confusion is coming from the fact that we want to bring monetary value to everything. To go back to your definition, Robert, that cynic is someone who knows the value of— the price of everything but the value of nothing. It's extremely philosophically and technically difficult to put a dollar value human capital or on the quality of relationship. However, it's possible to assess the costs of creating social capital, human capital, or the cost of replacing capital. So this idea of actually coming up with a cost for creating non-financial capital or the cost of replacing non-financial capital across a limited number of stakeholders that are material to the purpose as a way to align behavior, practice, and purpose, and behavior and purpose is at the core of what we're doing. The second step is, of course, you want to report that. It's not only just a management tool, you want to report this, and— but there is, in my view, it's much more philosophically and technically efficient to start with what you can control or what you can eventually put your hands on, and eventually reporting follows. Companies should start with understanding that purpose drives strategy and strategy drives that performance, and in a sense equip themselves with the metrics that eventually are material and relevant for this value creation process, and then eventually be busy about how this metric would eventually translate into whatever standard will eventually emerge. We don't want to wait for a standardized tool to actually start to do the right thing. So in a sense, it's— I know it's a long answer to your questions, Colin, but I can tell you that this practice of adjusting the profit level is a fairly well-known practice in accounting. The innovation here is that we apply it to the notion of purpose under the assumption that yes, it is single bottom line to achieve alignment, and B, it's not about monetization of non-monetary capital, but we're using the concept of accounting for costs to provide a connection with the financial accounts, and eventually this find its way to report in the ESG space, which eventually is still extremely confused and extremely prolific in a sense, but we don't want to— we don't have to wait for the clarification of the reporting space to start essentially aligning performance and purpose with a new mode of property construction.

Okay, thank you very much indeed, Bruno. Rupert, we've got a question about— from Victoria Hirth— as to what the Enacting Purpose Initiative is doing to help governing bodies make decisions regarding what metrics to choose and be held accountable for in relation to their stakeholder concerns.

So the question is?

What is— what's the EPI doing to help the boards of companies to identify what are the key metrics that they should be using?

So I'll just comment briefly on the EPI and then just give, I think, a sort of slightly broader answer to tie it back in with the answers to the last couple of questions, if I may. The EPI is seeking to try and find common ground between what boards are trying to do and what they're currently reporting and what investors are requesting, and in that respect, you know, I think it's, you know, it's obviously there's some really critical insights, and our next report is coming out in early March, actually in mid-March because we're in early March now. The broader question I think that you're getting to is this, and I'm going to tie it back, if I may, to the last couple of answers, the last couple of comments, is that when we're talking about accounting, you're talking about reporting essentially for financial stakeholders. What I think we're trying to do in this paper is to also add in this middle area of metrics, which is about producing reporting which is on impacts and on what a business is aiming to achieve. And that idea, that separation between what a business is aiming to achieve and what is the value to shareholders from that set of objectives, are 2 very different forms of reporting. So Colin, your early comment about who should drive this, you know, should it be SASB, IASB, the Accounting Standards Board? I personally, I think that some of the comments are right, the IASB and the Sustainability Standards Board, this new idea of the Sustainability Standards Board, are good ideas, but it still puts it in the framework of what's the monetary and accounting value, when actually what I hear from boards and what I'm hearing from investors is let's at least be clear about the purpose of what business is trying to achieve in doing whatever they do as purposeful activity, and then we'll have a second step of how do we value that. Now the reason why I'm going back to that is that the valuation question then I think actually depends on which stakeholder is looking at that metric. The same metric will be valued differently by different stakeholders. So for example, if Elena's bank does a series of activities around financial inclusion, right, a big push for Intesa Sanpaolo, investors will take a look at that and they'll take a look at whether that might produce greater loyalty, more engagement, and they'll put some sort of financial valuation on that. But if I was the Italian government, I'd place a much greater financial value on that because of what it's going to produce in terms of a societal step up in their financial education. So I think the model that we're trying to put forward in this paper is really focusing on the metrics part, not the which accounting standards board or which valuation tool is right, and focusing just on who should drive it from an accounting perspective I think misses the main point, which is let's have more focus on what companies are trying to achieve, what is the absolute purpose of business, and a second stage should be how do each stakeholder group— how does each stakeholder group actually value the same activity? And I think you'll get very different answers on exactly the same piece of corporate activity.

Thank you. Saori, we've had a number of questions come in which to varying degrees might be interpreted as slightly skeptical about whether or not companies really are embedding purpose in their business. For example, Joanna Sullivan says that it's really about embedding long-termism into the concept. Jason Yip says, how does a company's purpose ensure it's integrated not only with its business but also aligned to the need of the community in which it operates. And so it'd be useful if you could really just say how— to what extent do you think that companies really are successfully embedding purpose in their business, and what does it take in terms of measurement to really ensure that it is better aligned with strategy and implementation than it is today?

Yeah, well, thank you, Colin, for the questions, also to the audience. Well, of course, there are all kinds of examples what companies do, but I can at least refer how we as BASF approach it. And I do see that we are in the age of increasing dilemmas that need solutions, problem solving, you mentioned, Colin. And it starts with the responsible business conduct that we, for example, discussed intensively, guidelines of if we have such a purpose, what does this actually mean? How do we stand? What is our attitude towards certain human rights topics? And I have to admit, it's not always clear-cut. So the way how we solve, for example, such topics is we installed an external advisory board out of practitioners in the sector of human rights to better understand what is the perspective of society and what would be, you know, option fields. What do I mean by this? If you think about, like, agricultural solutions where we have on one hand the need for more biodiversity, and on the other hand, you know, we have lost 40% of land surface due to climate change. At the same time, the population will grow by another 3 billion. The question is how to solve this huge challenge without impairing the state of nature. And these are dilemma questions that we are faced with day in, day out. Now, if you ask me on the measurement, how could measurement help us for better decision-making? First of all, there was a question also on how we do this. Someone asked whether we could share the framework. It's not our framework. In the meantime, we have given it out to all kinds of companies to test it, whether it's applicable and usable, because I fully support what Elena and Jasmine said. Today, especially in the taxonomy, we have a huge complexity, and our aim is to make sure that whatever comes out as joint standard is applicable and usable. Now, this can be found on our Value Balancing Alliance website, we have officially put the method paper out there with all the coefficients that are behind. Now, how do we use this impact measurement that Rupert is talking about? Let me give you a concrete example. We had an investment decision whether we should put a plant for a catalyst site into Poland or China. When you have impact measurement, You can for the first time see what the results of these decisions are. So we of course had a profit number. Let's assume it's a 10 million whatever EBIT that it creates. It's just a number. But then we also had the social value we create, for example, via employment. And so we could see what does this do to society. We also saw the environmental impact of this decision. for Poland and for China. In this specific case, what was very clear is that in China, we would have built in a water-stressed area, and this would have a much higher environmental cost than putting it in Poland. And so for this, it was very interesting that the sum of all these impacts that we were measuring helped us for better decision-making. And this is where the long-term impact can be improved. So a chemical like ours is not A company like ours in chemistry, as you can imagine, is not perfect. But having clarity on what we do in terms of impact helps us concretely, as I showed in this example, for better decision-making. Now, let me add one last comment to what Rupert also mentioned on the frameworks, because there's one element that wasn't discussed. While I fully agree what Eleanor said on EFRAG, IFRS, SASB, be. I do see at the moment a global discussion for a joint standard, and we need to have alignment on the input factors, whether we like it or not, because companies are not operating locally. And also investors would like to compare across industry. Beyond the fact that there is a high complexity at the moment, too complex, I think simplicity is key. There's one other factor that will be of utmost importance, and that's inclusiveness. What do I mean by this? There's a tendency in investor landscape to currently just invest in green tech. And this will not help to reach the Paris Climate Protocol. Why? Because, you know, the companies that are at the beginning of a value chain, like a chemical or petrochemical side, they have a huge lever to improve. Because we have emitted 40 million tons 10 years ago of CO2. Now we stand at 22 million and we are further trying to decline it. But if in a taxonomy framework, for example, only those areas get access to capital, for example, windmills, wind parks, and so on, and I'm not against it, don't get me wrong, this will lead to only 20% of the already good businesses getting access to capital, and there will be no incentive to improve the rest. So if you ask me, inclusiveness is what I'm looking at with concern. I think that's a major paradigm that we need to think about if you want to achieve the Paris Climate Protocol.

Thank you. Thank you very much.

Saori, can I make a comment on that? Yes, no, I absolutely agree with you. From what we've seen from the, let's say, the Joint Research Centre of the European Commission, we have seen that globally, looking at the economy overall, taxonomy-aligned activities account for something around 5-6% of our portfolio, which means really, which makes your point exactly, that is very limited. So, I think that as financial institutions, we have to work very much not only on that small portion, but on the transition of all the others that are trying to get to highest standards. So, that's for sure. And to do that, we also require a lot of data. Data availability is for financial institutions a key point. And we are very much struggling on that, not so much with big companies, but with small and medium-sized corporates, which accounts for 90% of European economy overall.

And here science comes in. That's why Colin and Rupert are important methodology-wise to work together with all of us.

Thank you. Um, Jessamine, uh, could I bring you in to address first of all a question that, uh, David Bickerton has raised about relating, uh, incentives— uh, oh no, sorry, it's Francine Pavot who's asking this— uh, in relating executive bonuses and incentives to ESG-related metrics. Is that a good idea? And also at the same time, perhaps you could address the idea that Rupert mentioned that Unilever at least is using, and that is to include stakeholders as essentially part of an AGM or part of an equivalent type of general meeting. Are these good ideas or bad ideas?

Yeah, thank you. So on ESG measures in remuneration, I am a big fan of the balanced scorecard approach and for setting objectives and measuring performance and for that to be reflected in remuneration outcomes where there is there are incentives, as most companies will have. Somebody else posted in the questions, you know, are there some lessons that can be learned from the nonprofit sector? And certainly, I think, you know, when you're not actually driving for profit, you know, from my years of experience at Save the Children and Oxfam, you know, you had to come up with measures because, you know, our stakeholders did want to know what impact we were having and how funds were being used and what were the outcomes and then ultimately the impacts. So I think that's probably where I, you know, why I became such a fan of balanced scorecard approach where yes, you do have the financials, but that's one of the quadrants. And I think that that has moved quite significantly over the last several years in the corporate setting where it used to be really only the quadrant with financials that was, and then perhaps some measurement around customer net promotion score or new business, and then the idea of employee engagement scores, and most recently, yes, ESG measures. The problem is there are just so many and so different— so many different ways of defining those. The one I mentioned in my opening remarks that I think is coming closest to to a standard measure that can be measured across companies is around carbon and science-based targets. And I think, yeah, more to happen there, but I think it's all moving in the right direction. On the point about a stakeholder— a sister event to the AGM, which is for stakeholders, I mean, I think rather than focusing on a one-off event, 'cause I'm not sure that actually AGMs are the best way of getting sort of rounded engagement with investors either. I do think that ongoing engagement, I think many companies are paying much more attention to ongoing engagement with the whole range of stakeholders rather than just investors. And I think that's very much a good thing.

Great, thank you very much indeed, Jasmine. There's a question that's come in for you, Rupert, which I think is an important point of clarification from Sulea Kirioçu, who says, you noted the difference between metrics and the value of things. Can you expand on that, and what is your view on the merits of seeking to value human and other capitals?

Well, I think the pandemic has shown very clearly the value of human capital and the need for organizations to pay particular attention to that incredible source of organizational value. I also think that actually that there's a lot of work that's already been done for many years by organisations in trying to capture the value of intangibles, but it comes back to, I think, the point, I guess, behind your question, which is, can you put a price on everything? And the answer's got to be no. I mean, I think that there is a value in lots of things, and some of them are priced over multiple years if you want to do it that way. My point is that also that the price will depend on which stakeholder is viewing it, you know, the point about government valuing something perhaps differently to an investor. So I think that you can certainly have metrics on everything which seeks to value things, and then you can then choose a valuation as a second stage.

Thank you. Perhaps Bruno, could you just give give us your views on the extent to which one can legitimately think about valuing human and social capital, etc.?

Yes, and I'd like to maybe take a— to build on what you just said, Robert, in a sense that we are here talking about something which is very contextual. Company A, for instance, operating in the mining industry, or company B operating in the consumer goods or in chemical, would de facto have different pain points to solve. So to go back to the definition that purpose is about solving people or planet problems profitably, I mean, the problems are very specific, and actually you could even argue that the problems are at the level of a business unit and not necessarily at the level of a corporation. So I think it's very important to understand that the same way strategy is very specific, purpose is also very specific, and therefore the delivery of purpose through profitable business model is also very specific. It doesn't mean that at some stage we don't need to have a standardized a set of metrics to essentially provide a common language or common grammar. But the starting point is really about what has been driving the work we're doing with Colin and Rupert, essentially purpose of business. What is purpose of business? Purpose of business is not to maximize profits, right? The purpose of business is to maximize profitable solutions to the people on the planet. That's the starting point. Having said that, it's kind of obvious that to achieve this, companies need financial capital, of course. We need money from the bank, we need money from the lenders, we need money from the shareholders, but we also need other forms of capital. We need also people, we need social capital, the quality relationship, we need human capital, knowledge, we need natural capital if we are in a business of transformation. So the idea that you would only focus on the management of financial capital is really suboptimum. You need other forms of capital, especially at a time when scarcities have changed. 50 years ago, financial capital was scarce and natural capital was overly abundant, so it makes sense at that time and way to put more emphasis on management of financial capital. Today, just the opposite. So it's just good business practice, it's not ideological, it's not just because we want to look good, not because we are— we want to look as good corporate citizens. I mean, it's not bad to be a good corporate citizen, but I think from a business perspective, it's just good business. I mean, I think there are 2 revolutions ahead of business. It's the revolution of digital, which actually is going to change the way we do business, and the second revolution is the revolution of purpose. And companies that do not embrace these 2 revolutions will just decay and die. And it's good business practice, so therefore, having said that, for instance, the investment in social and human capital for Company A, for instance, may look very different than an investment in social capital in Company B, right, and it's the same thing like when you're investing in marketing or you're investing in R&D, you have your own way of doing things. Having said that, I mean, the research we've done for the last 15 years shows actually that it's possible. to measure input, output, outcome, and impact. And this is not rocket science, it's actually a good business practice, and therefore for some companies it will require a higher investment, for instance human capital, than others. For other companies, it may require that you have to invest more in natural capital. It all depends on where you start. So having like a top-down approach to say, yeah, we all need to do carbon footprint, there is nothing wrong with that, but for instance, the consumer goods business, for instance, is not a big emitter of carbon footprint, right, and it's much more the impact on biodiversity and the impact on water is actually much more important than carbon footprint. So I think it's important also to understand that if we— if business really wants to be in the game, right, over the next 10, 15 years, they will have to embrace this notion of delivering business models that actually are aligned with their purpose. It's not a secondary discussion, it's not a Friday afternoon discussion, it's not something that should actually be driven just to look good, it is a fundamental question of strategy. So therefore, it's a long response to your question, Colin, but essentially, yes, it is possible to identify the type of capital that a company needs to perform, and the capital is very often in the area of social and human capital, and some of them, it's also in the area of natural capital, and therefore understanding the, in a sense, the pain points that actually are in your environment, that actually are material to delivery of purpose and performance is a critical strategic exercise that all companies must do. And that actually is something that will drive eventually performance and impact. And we've done that, we have now enough experience and enough data to show that it's possible. The same way actually that marketing was a new practice that emerged in the '70s and '80s, eventually led to the concept that brands are both a way to drive performance, but also methodology to— well, it's both a driver of performance and a repository of value, and that actually was a fairly new thing in the '70s and '80s. Today, actually, companies that do not embrace the idea that it is it is their duty but also their opportunity to invest in the ecosystem in which they operate according to different forms of capital and eventually build strategy in such a way that the investment they make in social, human, natural capital in the ecosystem in which they operate will yield a higher return on investment than any other form of investment is actually, yeah, I mean, it's the core of what companies will face in the next 10-15 years. And companies that will do that will thrive and prosper. The companies that don't do that are the same companies that refused to invest in marketing and brands 20 years ago, 30 years ago, they eventually decayed and disappeared.

Thank you very much indeed for that. We've got a large number of other questions, but I'm afraid that we're running out of time, so I'm going to have to bring it to a close at this point. I'd just like to thank all of our panelists, uh, Jasmine, Bruno, Alana, Rupert, uh, and Saori, uh, for their tremendous contributions, uh, to today's discussion. I think we've had a very rich and insightful discussion around this issue of measurement. I hope if you haven't had a chance to look at it yet that you might take a look at the paper to which I was referring on measuring purpose, and we'd very much welcome any comments that any of you might have in relation to it. So I'd just like to close by thanking the Enacting Purpose Initiative and the British Academy, in particular Henry Richards, for having coordinated today's events. I'd like to thank you all for having participated and for the wonderful set of questions that you've all raised. Thank you very much indeed and goodbye.