By Mark Jones
On those occasions when I’m asked, “How stupid do you think I am?” my standard smart-ass response is “What units would you like me to use?” There is, to the best of my knowledge, no recognized unit of stupidity. Lack of recognized units, whether for stupidity or other measures, can be a problem.
Environmental, social, and governance (ESG) reporting is now all the rage. The business world measures and tracks things it cares about. The blossoming in ESG trackers shows a clear desire on the part of business to care about the planet and society. Scott Adams took aim at ESG in a series of Dilbert cartoons. He describes ESG as worse than something devised by “a crooked politician and a crooked financial advisor.” I don’t agree about crooked intent, but I do see systemic issues. I trace many to a lack of units.
Units are important. Society recognized the importance of standardization for both engineering and finance centuries ago. Platinum/iridium cylinders and rods in vaults are evidence of the importance placed on standardization in engineering and commerce. A recognition that there were many meters being used (all slightly different) led the French to define the meter in the late 1700s based on natural quantities. The meter would be one ten-millionth of the distance from the equator to the North Pole. The distance was measured, math done, and a platinum bar crafted to length. Except, they got it wrong. The meter was defined as the length of miscalculated bar, off by 0.2 mm. In 1960, the meter was redefined based on krypton-86 emission. In 1983, the distance light will travel in a vacuum in 1/299,792,458 of a second became the meter we use today. The speed of light now replaces the pole-to-equator distance as the natural quantity. The meter is invariant in time and place, still off by 0.2 mm from the original intent.
Engineering relies on units being invariant in time and place. The inputs to calculations are not subjective. They are absolute with error bars defining precision. Engineering exists to do something useful, to make products and processes for society. Engineering and economics combine to determine whether a product or process is practical. Success is measured in dollars, cold hard cash. Everything collapses to a single figure of merit, an NPV, an IRR or simple ROI, that, when compared to other investments, shows promise or not.
The push to add ESG metrics to the mix, noble as it is, has a units problem. Measures of ESG are indices. An index is an admission there is no single figure of merit. Different measures are mushed together, each with subjective coefficients to make an index. Let me explain. For the environmental part of ESG metrics, there will be various metrics tracked, such as total GHG emissions, spending on environmental projects, the amount of renewable energy used, and more. Kilograms, dollars, and watt-hours can’t be directly compared. The creator of the index applies subjective coefficients when creating the index, ultimately presenting a unitless result. Some may value GHG emissions, others different metrics. Further, the coefficients are not guaranteed to be constant year-to-year. The result is an uncertain, ultimately subjective, metric that can vary in place and time.
We are left with ESG being an inexact add-on to business metrics we’ve come to know. ESG is a Dilbert topic because of the ambiguity, the lack of clear units, and the subjective nature. We’ve got to get closer to something everyone agrees upon, like we did with the meter … even if it is imperfect.
Filed Under: Commentaries • insights • Technical thinking
