[In-Depth Review] What Is Measured Is Managed

“What gets measured gets managed.” This is a famous quote attributed to management guru Peter Drucker. Some trace its origin to physicist William Thomson (1824-1907), who established thermodynamics. He emphasized, “You only know what you can express in numbers.” The important point here is not who said it first, but that it highlights the importance of measurement.

However, we may question whether what is not measured is unmanaged and unknowable. In real society and life, many important aspects are not measured. For example, the economic value of housework or child-rearing is not measured, but no one would say they are unimportant. In this regard, as V. F. Ridgeway argued in 1956, since not everything can be measured, what ultimately matters is what we choose to measure.

So, what have companies measured so far? The first thing would be financial statements reflecting economic performance. But there is a variety of information that financial statements cannot capture. For instance, although corporate activities may have social impacts, negative external effects such as environmental pollution are not reflected in financial statements. Likewise, positive effects from corporate social contributions do not appear as financial performance.

Recently, ESG has become an issue as an effort to measure non-financial information that is not shown in financial statements and is difficult to quantify. In reality, measuring non-financial information involves many qualitative aspects, making quantification challenging. For this reason, although various institutions operate ESG evaluations, companies often see them as fragmented. Nevertheless, from a long-term perspective, appropriate measurement can lead to better management and value creation, so ESG evaluations are expected to continue.

ESG evaluations may be perceived as a burden, but they need to be approached from the perspective of sustainable growth. The era of evaluating companies solely based on financial information is over. Newly emerging ESG factors such as climate change response, stakeholder capitalism, and transparent governance are non-financial information but are as important as financial information. They are another core element for sustainable growth.

Reflecting this trend, the belief that improving ESG indicators can generate better returns is spreading among investors. Globally, one-third of assets systematically managed by professional financial institutions?approximately 30 trillion dollars?are managed according to ESG evaluations. This amount has increased by more than 30% since 2016, with over 70 billion dollars invested in ESG equity funds in the second quarter of 2020 alone.

The current trend marks an era where companies must learn how to manage ESG evaluations as efficiently as financial performance. As ESG measurement becomes more sophisticated, the perception of ESG will shift from being seen as a ‘cost expenditure’ to a ‘value creation’ perspective. We are entering an era where “what gets measured can be managed.”

Kim Young-woo, Research Fellow, Institute for Shared Growth

This content was produced with the assistance of AI translation services.