Hybrid Metrics, keeping companies on track by linking sustainability and financials

Hybrid Metrics, keeping companies on track by linking sustainability and financials

by Francesca Gostinelli, Head of Group Strategy, Economics and Scenario Planning at Enel and Board Member Enel Americas and Giulia Genuardi, Head of Sustainability Planning and Performance Management at Enel and Board Member Enel Americas

The positive relationship between corporate sustainability performance and companies’ financial outcomes is clearer now than it has ever been. Environmental, Social and Governance (ESG) indicators are part of the basis for evaluating corporate performance in order to create long-term value and ensure a competitive advantage.

Fortunately, there have been growing efforts from the market to consider a shift from costs to value when assessing the economic, environmental, social and technical outcomes of all potential solutions, such as investments, projects and alternative options, aimed at making the energy transition happen quickly and to the benefit of all.

In this context, hybrid metrics represent a new frontier in measuring value creation linked to sustainability performance and business evolution. While they are still being defined and analyzed, these metrics will be able to combine corporate, social and environmental impact with standard indicators of financial performance. The increasing need for effective metrics to measure sustainable value creation has been fueled by an important paradigm shift in which businesses are asked to ‘do good and do well’ at the same time. With this in mind, our non-profit organization the Enel Foundation, in collaboration with Mark Kramer – Co-Founder and Managing Director of FSG and member of the Shared Value Initiative – published a study last year entitled “Hybrid Metrics: Connecting Shared Value to Shareholder Value”. The study was an early effort to demonstrate the potential of such metrics, exploring the best way to combine ESG and financial indicators.

Sustainability is a driving force as we tackle challenges and work together to define a new development model that leaves no one behind. The result is that today we are applying sustainability-based thinking to all our business areas, including in the financial sphere. A clear example is our decarbonization strategy, through which we expect to generate 40 euros/ MWh of EBITDA by 2030 compared to 31 euros/ MWh in 2020, while simultaneously reducing unitary emissions from the generation business (Scope 1) by approximately 80% from a 2017 base year and with a circularity improvement of 86% by 2030 to the benefit of society as a whole. This underscores the importance of looking ahead when trying to assess our sustainable path, since the plans and targets that drive our transformation can provide relevant insights alongside actual outcomes. Although the quantitative measurement of sustainable value creation through integrated metrics remains challenging, we have been working on several fronts towards this aim. For the second consecutive year we disclosed in our Strategic Plan a clear alignment of our investments to the targets set out by the UN Sustainable Development Goals (more than 90% of our consolidated investments for 2021-2023) and internally, we have implemented an assessment methodology to look beyond the economic returns of projects alone by also focusing on the social benefits of our investments. In parallel, the Company is constantly endorsing new quantification methodologies that integrate business and sustainable perspectives, such as the possibility to calculate Circular EBITDA, which will represent how much of Enel’s EBITDA is attributed to circular activities, as better explained in the Group’s 2020 Sustainability Report.

The main challenge at the moment lies in standardizing the framework to support the full implementation, reliability and comparability of hybrid metrics. First, the data to be taken into consideration should cover the overall impacts and operations in a holistic way, by including, for example, all greenhouse gas (GHG) emission scopes for a more transparent and coherent comparison among delivered and declared decarbonization efforts. Furthermore, the timeframe of reference should include, alongside results achieved as of today, the commitments, targets and strategies being implemented in the short-, medium- or long-term.

Metrics based on commitments and future planning allow for more robust and reliable long-term strategies while better representing our Group’s ability as well as willingness to face and adapt to future challenges in a sustainable way. Such metrics give clear signals on the next actions and paths through which we can deliver on our sustainable strategy.

We are committed to further engaging with efforts to develop a common language and framework around ‘value for all’ business models so that results are properly measured and disclosed. Hybrid metrics can be applied to any sector and have the potential to support better-informed decision-making, identifying key value indicators for both companies and investors. Every stakeholder represents an engine for action and, if properly measured, actions and commitments can accelerate the change the world is looking for, increasing engagement while generating value for all.