By Richard Wall, the Founder and CEO of Emex, which provides ESG and EHS software solutions to businesses
While there are stark regional differences in the way ESG disclosure is approached, global standard setters appear to be aligned on at least one thing: we have to get it right – and fast.
Put simply, unless we know what businesses are up to from an ESG perspective – and are able to measure it clearly and efficiently – investment will not flow where it is most needed. And where in the past we may have had the luxury of time (an illusion, to be sure) now we do not. Governments are stepping up their net-zero commitments; businesses are following suit.
Where enthusiasm might be lacking, regulators are stepping in: climate-related reporting will imminently be mandated for listed companies in several countries including the UK and New Zealand. Non listed businesses, however, are by no means immune to this dynamic. ESG is no longer seen as a nice-to-have. It should concern every business that is thinking of its future, its place in society and its obligations towards its stakeholders – responsibilities, that is, that can scarcely be put off, much less ignored.
The longer they are shelved, the harder it will be for businesses to meet regulatory or stakeholder pressure which is only poised to increase over time. A reactive and wait-until-our-hand-is-forced mindset will also erode the trust of a business’s stakeholders. That is because regulation lags behind social norms. Regulation might be imminent, but the social norms around ESG have been with us for years – and they dictate that the time to act is now.
Meanwhile, funding is being won by businesses that can stand up to this scrutiny and genuinely prove that they “do better” – this is a journey and a mindset and goes way beyond a mere reporting exercise. It starts by acknowledging that ESG is an ethos that has to be embedded across the business rather than being simply reported on annually.
Why pledges often miss the point
While ESG pledges can make for pithy headlines, they amount to little more than white noise if there is no immediate plan or infrastructure in place to drive them forward. All too often businesses will opt for the easy PR win without the requisite appreciation of what is needed to effect those changes.
To paraphrase bestselling author, James Clear, who writes about habit formation on the individual and corporate level, “businesses don’t rise to the level of their goals; they fall to the level of their processes.”
The same goes for sustainability and ESG. Pledges and targets are reached or missed on the strength of a business’s systems and processes, not on that of its rhetoric and bravado. While that may sound obvious, it appears to repeatedly escape the attention of well-meaning businesses.
Companies may, for example, have some notion of the scale of Scope 1 or 2 emissions, but often the systems and infrastructure needed to accurately assess Scope 3 emissions are lacking. Consider BP which has previously failed to account for up to 640 million tonnes of supply chain (Scope 3) emissions. ‘Complexity’ in calculation was cited as the reason. Clearly, more investment is needed in collection systems, to enable a better understanding of existing footprints, and empower decisions on how to reduce them.
Navigating an ocean of reporting standards
The proliferation of different and competing reporting standards has been a constant source of confusion and inefficiency. By 2018, there were more than 600 ESG ratings and rankings globally. While this may have afforded the luxury of choice for companies, it has not translated into robust systems to embed a culture of ESG. If anything, it has complicated decision-making. Reports, to make matters worse, often aren’t audited – or they are audited to varying standards and levels of detail. Businesses are left with mounds of information that make for good marketing content or, at best, prompt larger and harder conversations. Crucially, though, they stop short of being the enabling tool for the types of radical decisions that are needed nowadays. To be in that position, businesses need to invest in the ESG journey rather than simply rely on reports which are a mere communication tool.
Investors face a similar hurdle; they are unable to glean information in a way that is consistent across different businesses and sectors. It should come as no surprise that poor data quality is cited as the biggest barrier to ESG investment, according to BlackRock.
As alluded to above, five leading independent standard setters have joined forces to address this. Their aim is to arrive at a comprehensive corporate ESG reporting system. The IFRS Foundation, for its turn, is planning to launch a global Sustainability Standards Board at the UN’s COP26 climate summit in November. While this may lead to greater harmonisation and clarity in reporting standards, businesses may be left scrambling if they have failed to put the proper ESG people, systems and infrastructure in place. Absent that, they may also be unable to defend their perceived external ESG rating and protect their reputation against accusations of greenwashing. In the face of ever-increasing scrutiny, ESG can make or break directors and unless businesses switch from a reporting to a culture-embedding mindset, they will lag behind more proactive peers.
Putting in place software systems to measure, manage and improve sustainability (ESG) performance is a core part of our focus here at Emex. We are working with businesses both embarking on their ESG journey or already on it to deploy precisely the types of systems that are needed to drive meaningful change.
Investing in ESG systems and solutions
More stringent regulation is looming large and there’s every indication that a global standard is on the horizon. Businesses should be under no illusion: those types of reporting rules and requirements cannot be met overnight and waiting for the day of reckoning can cost a business dearly in social capital and trust, to say nothing of possible fines and penalties. Equally, pledges and promises will ring hollow unless they are matched with a pragmatic assessment of the systems and processes that are needed to achieve them. It’s a journey, not a box-ticking exercise. Investing in people and systems to measure, manage and improve sustainability will help businesses meet society’s evolving and necessary expectations.