By Lea Borkenhagen, ESG strategist and advisor to Finboot
To truly make the transition to a low carbon economy enterprises must change their operations, helped in part by setting and implementing goals around ESG to not only minimize risk but also create business value. There is a strong business case for investment in sustainability practices and it is now expected for investors, consumers, and employees.
However, ESG goals are only meaningful both to the individual company and to the global effort to move to net zero if they are backed by data from the outset and they can be reported on consistently over time. Not only by the leading companies, but the majority of companies. Not only in their immediate operations, but through their entire supply chain.
If a company wishes to implement ESG goals, it must consider its approach to data, tools and transparency as enablers that will work for them, that can extend through their supply chain, and that will work today and tomorrow.
More often that we’d like, companies set goals before knowing the details of what can they deliver and what would be aligned with their business strategy. To determine what goals to set, the company can draw a Venn Diagram of Climate Impacts: assess its operations broadly and decide what parts of its operations it can control change; where is it required to manage change; and which parts are important to change.
We know the latter from the IPCC reports, what we need to do to move to a climate friendly world. Clean energy and energy efficiency in manufacturing, inputs production and transportation; methane reduction in food systems and in fossil fuel use; waste reduction and circular value chains are important priorities aimed at getting after the most egregious GHG, methane, and then going for reducing carbon dioxide emissions, embedded carbon, or carbon generation through habitat change.
When areas are decided, don’t jump into collecting data, create your own approach or strategy. Take a step back and think ten years out. How will ESG data support your business growth and what data will you need then. One of the biggest insights in recent years is that ESG isn’t just about removing risk, it is about an opportunity to create business value, whether through building a new business that thrives on demand for renewable energy, or developing regenerative agriculture processes that both yield crops at the same time as tourism benefits, or creating product offerings to meet consumer demand for sustainability.
Over time, this link is likely to get stronger. So, build a data system that allows you to integrate your ESG data. And develop a data strategy or approach to integrating your data in a system that allows simple management, insight development from, and reporting based on the data.
Then figure out your tools. Use tools that are going to help you today and tomorrow. Like capital investments, data systems are hard to switch out, becoming ingrained in company culture and therefore are durable investments. Separate, arcane systems of data management on environmental or social compliance, relying on excels or pdfs in disparate computers or even information filled in on paper, won’t allow you you benefit from the ESG business opportunities and will severly hamper your reporting requirements. For companies early in this transition, there is a huge opportunity to leapfrog by thinking through your data strategy and tools. Investing in data tools and tech to collect and store the data will enable companies to accurately record and report on progress towards achieving their goals.
Try to make those tools fit for the increased transparency and responsibility requirements coming our way. Companies need to give consideration to how they implement systems that can be used across supply chains. Many farmers, mill managers, or factory leaders don’t have the digital capability or the tools today to enable big brands to report meaningfully and accurately on their supply chain. Yet investors are requiring insights into operations and banks are including reporting requirements as part of the terms of their loans. With the European Supply Chain Due Diligence Directive proposal adopted in February this year and the requirement of compliance with human rights and environmental standards, so are regulators.
Investors don’t want to lose big money due to ESG risk, so if companies can’t show their operations comply, they may be divested off. Soon, when we figure out how to leverage the growing interest – not just in word but in action now – of consumers in sustainable products, those with data systems that can allow insight into key ESG criteria will be able to catch the attention of consumers.
At the same time, there is significant distrust in the data by regulators, banks and investors, according to PwC. But here, emergcing tech like Blockchain can be part of the solution. Don’t think this is too new or too complicated. It’s a data repository with excellent functions. Digital acceleration and Blockchain specifically will be key in enabling data collection at all levels in the supply chain and in doing so, driving accountability. Investing in technology not only helps reduce emissions at a company level, but it also offers a trusted, traceable and reliable way to record and monitor data.
Don’t let perfection be the enemy of the good. While there are legitimate concerns over data now, if we can quickly amass data in tools that allow comparability quickly, over time we can see outliers and data collection can be improved across the entire supply chain. It will also allow us to standardize our data, so they can be comparable both over time and across a sector or sectors.
Eventually this information rolls up into the IPCCs accounting. Have we increased or decreased the amount of GHGs in the air. Governments are tracking this and they are relying upon corporates to track it, including in their supply chain. To minimize double counting, Article 6.2 of the IPCC report creates ITMOs. Many today are pushing for these transactions to be made on B lockchain (e.g., Blockchain for Climate Change).
Setting a precedent
At the same time, shining a light on supply chain practices and company operations leaves fewer places to hide for those companies doing more harm than good. Reliable data will not only offer a true and accurate reflection of a company’s practices, but it also sifts out those involved in greenwashing and jumping on the sustainability bandwagon as a marketing tool.
Over time, exposure, expectations and universally accepted standards will force high standards and qualities – which can only be a good thing.