ESG Modelling Framework : Quantification and Measurement of ESG Factors in the Profit and Loss Statement

This paper suggests a framework to organically quantify and measure a firm’s strategic and operational environmental, social, and governance (ESG) activities. Using the standard profit and loss statement, the framework is a guide through each financial line item, analysing incremental differences between two potential strategic paths for a firm: an as-is strategy and a green strategy. The objective of the framework is to guide financial decision-makers to model two business cases by helping estimate the opportunity costs of green strategies. First, the as-is business case quantifies the firm’s strategic path as a continuation of its historical and current strategic choices, resulting in a set of assumptions about product volumes expected to be sold, pricing, and all cost positions. Second, the green business case adjusts the assumption positively or negatively for each financial line item towards the opportunity and risk that the green strategy offers. The incremental analysis of volumes, willingness to pay (price), cost of goods sold, operational costs, personnel expenses, and selling, general, and administrative expenses quantifies ESG activities in terms of operating profit, referred to as green synergy in this paper, to underline that profit is a function of interacting and cooperating stakeholders, including people and the planet