Beyond ESG - Measures That Matter: The Benefits of Theory of Change

In recent years, the business world has placed a growing emphasis on environmental, social, and governance (ESG) measures as a way to assess the impact of investments and corporate behavior. While ESG measures are a valuable tool, they have limitations. 

The theory of change is a complementary approach that can provide a more nuanced and holistic view of impact.

According to Professor Liz Grant, Vice Principal (International) and Director of the Global Health Academy at the University of Edinburgh, 

"The theory of change is a powerful tool for understanding the complex and often unpredictable processes that drive social change. It helps us to identify the underlying assumptions and mechanisms that influence the success or failure of a particular intervention or strategy."

One of the main benefits of the theory of change over ESG measures is its ability to identify unintended consequences. While ESG measures focus on specific metrics, such as carbon emissions or diversity and inclusion statistics, they do not capture the full range of impacts that a particular intervention or strategy may have. The theory of change, on the other hand, takes a more holistic view of impact, considering the potential unintended consequences of an intervention or strategy.

In New Zealand, for example, the theory of change has been used to assess the impact of the country's social welfare system. In a report commissioned by the Ministry of Social Development, the theory of change was used to map out the causal pathways that lead to positive social outcomes, such as improved employment rates and reduced poverty. By identifying the various factors that contribute to success or failure, the report was able to make recommendations for how the system could be improved.

Another benefit of the theory of change is its ability to identify areas where companies or organisations can collaborate to achieve common goals. While ESG measures are often used to compare the performance of different companies or organizations, this can create a competitive environment that discourages collaboration. The theory of change, by contrast, emphasizes collaboration and partnership. By mapping out the various factors that contribute to success, it can help to identify areas where companies or organizations can work together to achieve common goals.

This was exemplified in a project carried out by the World Wildlife Fund (WWF) in collaboration with the seafood industry. The project aimed to improve the sustainability of the industry by reducing the impact of fishing on marine ecosystems. The theory of change was used to map out the various factors that contribute to successful sustainable fishing practices. This allowed the WWF to identify areas where the industry could collaborate to achieve common goals.

Finally, the theory of change can help to build a shared understanding of how change happens. 

While ESG measures are often used by investors to assess the performance of companies and to make investment decisions, this can create a narrow view of impact that is focused solely on financial returns. The theory of change, by contrast, emphasizes the importance of understanding the underlying processes that drive change. By building a shared understanding of how change happens, it can help to create a more collaborative and sustainable approach to investing.

As Dr. Stephanie Bertels, Director of the Centre for Corporate Governance and Sustainability at Simon Fraser University in Canada, notes,

 "The theory of change provides a way to engage stakeholders in a meaningful dialogue about how to achieve meaningful impact. By building a shared understanding of the processes that drive change, we can create more effective interventions and achieve more sustainable outcomes."

ESG measures have gained popularity among businesses as a way to assess the impact of investments and corporate behavior. However, the theory of change provides a more comprehensive and nuanced approach to impact assessment. By identifying unintended consequences, fostering collaboration, and building a shared understanding of how change happens, the theory of change offers a valuable framework for understanding and achieving meaningful impact.

For instance, consider the case of The Body Shop, a cosmetics and personal care company that has been a leader in ethical and sustainable practices. While ESG measures focus on specific metrics, such as carbon emissions or diversity and inclusion statistics, The Body Shop has gone beyond those measures by adopting a theory of change approach to assess its social impact. In collaboration with the University of Brighton, the company developed a data-driven theory of change model to measure the impact of its Community Trade program, which sources ingredients from marginalized communities around the world.

The theory of change model helped The Body Shop identify the underlying assumptions and mechanisms that drive social change through its Community Trade program. As Sarah Mitchell, Global CSR & Activism Director at The Body Shop, explained,

 "Our data-driven theory of change model has given us a more comprehensive understanding of the impact of our Community Trade program. We are now able to measure the impact of the program beyond the traditional ESG metrics, and identify where we need to improve our practices to achieve even greater positive impact."

Another example of the theory of change in practice is the work of the Center for Economic and Social Rights (CESR), a global human rights organization that advocates for social justice and equality. The CESR has developed a theory of change framework to assess the impact of government policies and corporate practices on human rights. The framework takes into account not only the intended outcomes of policies and practices, but also the unintended consequences that may arise.

As Niko Lusiani, Senior Director of Programs at CESR, explained, 

"The theory of change approach allows us to identify the various factors that contribute to human rights outcomes, and to understand the complex relationships between policies, practices, and social norms. By taking a more holistic approach to impact assessment, we are better able to identify opportunities for advocacy and intervention."

One specific example of the CESR's work is its analysis of the impact of austerity policies on the right to health in countries such as Greece and Spain. The organization used a theory of change framework to map out the causal pathways that lead to negative health outcomes, such as increased rates of infant mortality and suicide. By identifying the various factors that contribute to these outcomes, the CESR was able to make recommendations for policy changes and advocate for greater investment in social services.

Overall, the theory of change provides a more comprehensive and nuanced approach to impact assessment than ESG measures. By identifying unintended consequences, fostering collaboration, and building a shared understanding of how change happens, it offers a valuable framework for understanding and achieving meaningful impact. As Sarah Mitchell from The Body Shop noted, 

"By adopting a theory of change approach, we are able to move beyond the limitations of traditional ESG measures and truly make a difference in the world."

In conclusion, while ESG measures are a valuable tool for assessing the impact of investments and corporate behavior, they have limitations. The theory of change is a complementary approach that can provide a more nuanced and holistic view of impact. By identifying unintended consequences, fostering collaboration, and building a shared understanding of how change happens, it offers a valuable framework for understanding and achieving meaningful impact.