What is the Theory of Change (ToC) and how does it complement ESG measures?

ESG (Environmental, Social, and Governance) measures have become increasingly popular in the business world as a way to assess the impact of investments and corporate behavior. 

The theory of change is a complementary approach that provides a more nuanced and holistic view of impact. It is a powerful tool for understanding the complex and often unpredictable processes that drive social change. It helps 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.

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. 

When dealing with large complex global issues, this can be a problem for scaled impact. 

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 organisations can work together 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.