ESG Reporting: Measuring Sustainability

At the time of writing this article, world leaders are meeting in Egypt for the COP27 summit on climate action. With the effects of manmade climate change now an undeniable [despite the efforts of some insincere commenters] fact of observation, the need for urgent action has never been higher.

Whilst it remains to be seen whether COP27 will result in real action or just be another greenwashing exercise in political posturing or self-promotion, their exists extreme and ever-increasing pressure on companies to clean up their operations and promote their ESG credentials. Evidence shows individual action is not effective at reducing the effects of climate change, which means corporations and governments must step up.

The attention of the financial industry is therefore increasingly focused on how ESG data is gathered and reported, so sensible and environmentally conscious investment decisions can be made.

ESG Data

One of the fundamental issues with ESG data in its current form is that there is not a single agreed upon and standardized method of reporting – something we are seeing a push for from many corners of the financial industry.

ESG data needs to be dependable, valid, and comparable if firms are to make educated and informed decisions on the best way to allocate resources to support genuinely sustainable endeavors and to identify and blacklist those brands engaging in greenwashing strategies. Achieving global harmonization regarding ESG data will allow for greater transparency into environmental corporate impact and empower better decision making among financial institutions.

"The promised land of harmonized ESG data is a long way off; it may even be a mirage,” says Toby Mitchenall of New Private Markets.” Consider the GP-LP reporting of financial returns; this should theoretically be a pretty black and white, unambiguous exercise, but the most prevalent data point – the internal rate of return – has for decades been the subject of criticism for how variable its calculation can be.”

However, there are developments occurring in the US Securities and Exchange Commission which will remove much of the opacity surrounding ESG reporting and assist the industry towards a more standardized form of reporting. In May 2022, the government body approved a new rule which would require US investment advisors to disclose their use of ESG factors. Questions remain regarding exactly how these categories will be defined, however.

"The US Securities and Exchange Commission (US SEC) is working on new regulations that will—perhaps as soon as early 2023—require some companies to quantify and verify their climate-related risks,” said Deloitte’s Tanya Ott. "It’s a big change, one that companies are watching closely.”

Measuring Sustainability

The very nature of the modern business world makes it incredibly difficult to even begin to measure the sustainability of individual brands.

The global and complex supply chains many of today’s businesses rely on add layers of additional considerations to the equation. A company may be doing everything it can to achieve sustainability within its own four walls, but how they you guarantee a supplier further down the value chain is putting in the same effort? Constant assessment and vetting of vendors is an expensive and labor-intensive process but is essential to achieving a complete picture of environmental impact.

Automation is normally the go-to solution when it comes to overcoming these kinds of challenges, but ESG data reporting makes this difficult. Leveraging automation for the reporting and processing of financial information is simple as there are globally agreed upon values and conversion rate for this kind of data. However, when it comes to non-financial information the application of automation is hampered by the lack of standardization once again.

"Data governance, data risk governance, master data management, having technologies in place to be able to actually ingest and consume all this data, look at the information holistically, do a proper scenario analysis from a climate perspective and actually determine what the potential financial impact may be, is a big challenge for companies because they may not have technologies or platforms that speak to each other within the organization,” said Deloitte’s James Cascone.

However, technology is the best solution for unlocking the challenge of ESG reporting and we need to invest in the areas which will make this happen.

"The less manual the process, the more automated, the more tech-enabled a process, the higher the level of assurance, whether it be internal assurance from a management perspective that you can trust information or external assurance if you’re being audited,” added Cascone.

Final Thoughts

If the fight back against manmade climate change is to have any chance of success, it will require a concentrated effort from corporations and governments. This must start with solving the problem of ESG reporting. Once we have a standardized and automated method of reliably and holistically measuring the environmental impact of companies, we can make sure investment is directed appropriately.

ESG reporting is sure to be part of the conversation at FIMA 2023, being held in April at the Westin Copley Place, Boston MA.

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