Beyond the bottom line: Measuring the non-financial performance of firms through the lens of the OECD Well-being Framework
By Vincent Siegerink (Vincent.SIEGERINK@oecd.org) Centre on Well-being, Inclusion, Sustainability and Equal Opportunity (OECD)
Improving people’s well-being is at the core of the OECD’s mission. Working with governments and civil society, the OECD Centre on Well-being, Inclusion, Sustainability and Equal Opportunity (WISE Centre) continues to pursue an over-a-decade long measurement effort aimed at assessing and reporting on current well-being and sustainability, in particular through the OECD Better Life Initiative and How’s Life? publication. The concept of well-being emphasises both individual and societal opportunities to thrive in a wide range of dimensions that matter most to people’s lives, including not only material conditions but also quality of life and sustainability. The OECD Well-being Framework, first introduced in 2011, focuses on outcomes of individuals and households, and their distribution.
However, government is not alone in affecting people’s lives and the environment, the private sector has considerable influence on these too. A growing interest in understanding business impacts on well-being and its sustainability has resulted in the emergence of a burgeoning landscape of frameworks and metrics. The OECD WISE Centre has previously shown that companies’ frameworks do not adequately consider all aspects of well-being (Shinwell and Shamir, 2018), and other OECD work has demonstrated how environmental, social and governance (ESG) ratings vary significantly from one provider to the next (OECD, 2021). The recent initiative by the International Financial Reporting Standards Foundation (IFRS) to create global corporate sustainability disclosure standards will provide harmonisation in business sustainability reporting, although the focus of these standards will primarily be on the risks that ESG issues pose to enterprise value, rather than on business impacts per se. Underpinning these developments is a need for businesses to measure what really matters to people, and to do so in a standardised manner, allowing for broad interoperability of sustainability data.
From ESG risks to impacts
So far, when considering sustainability issues, investors and financial markets have primarily focused on data and ratings that reflect how ESG issues impact companies’ bottom line, or “financially material risks”. Examples include the regulatory risks that companies are exposed to in the face of forthcoming climate change regulation, or human rights issues, which may present reputational risks to companies. However, current ESG metrics fall short of actually measuring companies’ impacts on people or the planet. Against a backdrop of growing criticism of this narrow focus on ESG risks, there are growing calls for companies to measure and report on their impacts on society and the environment. Some jurisdictions, like the European Union, intend to go beyond mandating businesses to disclose financially material ESG risks by adding such impacts to disclosure standards. For example, the European Commission’s draft sustainability reporting standards include reporting requirements on workforce-related issues (e.g. the share of temporary staff or the number of working hours of employees) and on businesses’ impacts on communities’ economic, social and cultural rights (e.g. adequate housing, food, water).
It should be noted that measuring companies’ impacts on stakeholders can be useful to inform an understanding of risks to the bottom line as well as possible opportunities, with many instances where impacts on well-being and the environment ultimately affect companies and investors’ financial returns (see Figure 1). For example, existing research combining over 300 studies and almost 2 million employee observations, has overwhelmingly demonstrated that happy and healthy workers are more productive and boost business performance (DeNeve, Krekel and Ward, 2019). Evidence shows that this is a causal relationship, as well-being in the workplace spurs morale, reduces absenteeism and facilitates cognitive processes. In the long run, climate change, persistent inequalities and the systemic risks that these issues pose to economies and societies also strengthen the case for measuring the impacts of businesses on well-being and sustainability.
Figure 1. Stakeholder well-being and sustainability can affect long-term value creation and have an impact on society and the environment
Measuring the non-financial performance of firms through the lens of the OECD Well-being Framework
Despite growing interest in measuring and reporting on impacts, the market and regulators have not yet zeroed in on robust ways to measure businesses’ impacts on people. Existing frameworks and standards focus primarily on business activities and policies, rather than on measuring their outcomes, which risks painting a distorted picture of business performance. Existing frameworks do not always consider the range of issues that matter to stakeholders, and if they do measure outcomes, they focus solely on objective measures of well-being (such as workplace incidents and fatalities), neglecting the rich information that can potentially be derived from stakeholder surveys. In the absence of a conceptual and measurement framework for measuring business performance in the social dimension, the OECD Well-being Framework and related measurement guidelines provide a useful starting point.
In response to these observations, the OECD WISE Centre has developed a framework for measuring the non-financial performance of firms (see Figure 2). People are central to the social performance of firms, and so the first step in understanding the components of the social dimension is identifying the stakeholders whose well-being firms affect and depend on. The framework identifies four broad categories of stakeholders whose well-being is relevant from the perspective of measuring performance in the social area: employees, consumers, workers in the value chain, and communities. Firms affect the current well-being of these stakeholders either as a direct result of their own operations or indirectly through the supply chain.
Figure 2. The four components of the social performance of firms
The WISE Centre framework features a set of indicators related to employee well-being and business contributions to societal resources, such as taxes and R&D. These are also called “Scope 1” issues, because they are internal to the firm, and the measurement of these issues can be performed wholly inside the firm and are applicable to almost all firms. Future research may focus on developing additional indicators for other stakeholder groups, such as consumers, workers in the value chain, and communities.
Striving towards harmonisation in the measurement of businesses’ environmental and social performance
One of the goals of the framework is to foster greater harmonisation of metrics between firms, but also across actors, including national statistical offices. Greater interoperability between official statistics and firm data would enable companies to benchmark their performance against sectoral or national averages, allowing them to better understand their strengths and weaknesses in social and environmental areas. Statistics Canada has recently launched an experimental ESG Dashboard for precisely this purpose. There is also scope to better harmonise employee well-being data across countries, as working conditions surveys still differ widely between OECD countries, limiting international comparisons.
To complement regulatory efforts, the OECD together with a number of other key organisations and standard-setters are managing the Impact Management Platform, a platform to guide a range of practitioners, from corporations and investors to banks and development finance institutions, through the landscape of impact management. Together with these partners, the OECD intends to strengthen the various tools and standards available to businesses and investors to manage their impacts and drive further clarity and harmonisation across these resources. Greater clarity, alignment, and transparency of sustainability data is, ultimately, one important step towards private sector action for people and the planet.
For more information on the OECD’s work on measuring business impacts on well-being and sustainability, see: https://www.oecd.org/investment/measuring-business-impacts-on-peoples-well-being.htm.
- DeNeve, J., C. Krekel and G. Ward (2019), “Employee wellbeing, productivity and firm performance”, CEP Discussion Papers, Vol. 1605, https://cep.lse.ac.uk/pubs/download/dp1605.pdf.
- OECD (2021), ESG Investing and Climate Transition: Market Practices, Issues and Policy Considerations, OECD Paris, ESG Investing and Climate Transition (oecd.org)
- Shinwell, M. and E. Shamir (2018), “Measuring the impact of businesses on people’s well-being and sustainability: Taking stock of existing frameworks and initiatives”, OECD Statistics Working Papers, No. 2018/08, OECD Publishing, Paris, https://doi.org/10.1787/51837366-en.
- Siegerink, V., M. Shinwell and Ž. Žarnic (2022), “Measuring the non-financial performance of firms through the lens of the OECD Well-being Framework: A common measurement framework for “Scope 1” Social performance”, OECD Papers on Well-being and Inequalities, No. 03, OECD Publishing, Paris, https://doi.org/10.1787/28850c7f-en.