“It’s as if a person committed to a diet and fanatically started counting calories, but continued to eat the same number of Twinkies and cheeseburgers” — Auden Schendler, author of Getting Green Done
The more than hundredfold increase in ESG reporting over the past two decades is by no means an indicator of progress; it has become a means to an end, not a means to improve social and environmental outcomes.
When it comes to ESG reporting, a surprising number of corporate executives are content to sit in the middle, not aspiring to be an ESG leader, but unwilling to be seen as a laggard. They improve just enough to pat themselves on the back, but not enough to make any meaningful change to the status quo.
Company executives have an overwhelming tendency to benchmark their performance against that of their peers. This results in disclosing ESG KPIs that show their performance is on par or better than their competitors, without considering whether those KPIs make strategic sense for the company.
While there are hundreds of articles and blogs on ESG reporting, very little is written about ESG strategy. Focusing on reporting without tying it to an overarching ESG business strategy allows corporations to avoid the work of truly integrating ESG into their business processes. So, what are the consequences of reporting without a strategy?
Incomparable data can be misleading
Companies may feel obliged to disclose specific ESG scores in response to investor interest, but those scores may not be meaningful if they aren’t comparable to other companies. For example, if a company realizes its employee engagement score isn’t comparable to that of its peers, it may happily disclose the information — even if it isn’t particularly useful is assessing progress.
Standing on shaky ground
A 2016 survey conducted by PwC found that 100% of corporations were confident in the ESG data they disclose, but less than one third of investors shared this confidence. I recall sitting in a meeting with C-suite executives and pointing out the many errors and false claims in their sustainability report, which had been published and was no doubt being used by rating agencies.
The ABCs of ESG
All too often, we see companies collecting data for the sake of feeding it into a disclosure request, as opposed to using it to inform business decisions.
Companies should start their ESG efforts with a materiality assessment. These assessments provide insight on sector- and company-specific ESG risks, and play a fundamental role in directing companies’ ESG efforts in an impactful way. Companies can review their ESG materiality assessments with their corporate strategies to identify opportunities to leverage ESG actions to meet larger corporate objectives.
An ESG governance framework that allows for a systems-wide approach to interconnected ESG topics is essential. Companies can set up an ESG Council of senior executives from a range of departments and task them with the overall accountability for ESG-related outcomes. ESG is now considered a business imperative and therefore requires leadership from across the corporation, not one specific department.
A company’s ESG reporting and disclosure plan will be informed by its strategic priorities for ESG, so when an investor asks why the company has aligned to one framework as opposed to another, the company can connect its rationale to its strategy.