Richard Wall is the Founder and CEO of Emex, which provides ESG and EHS software solutions to businesses
Fifteen years ago, the UN introduced six principles to encourage the inclusion of ESG into investment practice. A great deal has changed since not least the norms around ESG disclosure. However, while interest in ESG has soared, a disconnect persists: mounting pressure coming from investors and stakeholders has not been matched with the adoption of consistent standards or adequate ESG infrastructure on the part of most businesses.
This is not lost on global standard setters or governments; efforts are underway to create a global system where investment can flow where it is most urgently needed. This will be a critical tool in the race to net zero, helping meet the funding needs associated with the Paris Agreement goals and the UN’s Sustainable Development Goals (SDGs).
It is also absolutely essential at the level of the business. Unless companies are equipped with quality ESG infrastructure, they will struggle to make the kinds of necessary, drastic decisions that are often needed nowadays. They may also be overtaken by events; forced by regulators or stakeholders to sharply step up their commitment but not afforded enough of a “grace period” to develop the necessary systems, processes and know-how to meet those standards. Doing so is best viewed as a journey – it requires time and a good deal of institutional learning for an ESG culture to become embedded across a business.
COP26 will no doubt catalyse pledges around ESG. Commitments made by countries and governments will be welcomed and mirrored by companies around the world. A milestone moment, the conference provides a brilliant opportunity for businesses to articulate or revisit their ESG pledges. However, UK companies should also ensure they have the infrastructure to drive those commitments forward.
They might otherwise run the risk of breaking their promises. It will ultimately be the strength of a company’s systems and processes that determines its success rather than the ambition of its pledges. To assess how to make drastic and lasting changes at pace, UK businesses would be wise to begin investing in putting these necessary building blocks in place and shifting from a ‘reporting’ to a ‘journey-oriented’ mindset.
Sorting through the ESG “alphabet soup”
ESG rose to prominence on the back of a growing body of evidence suggesting that businesses can be aligned with the public interest – and those that do, tend to reap the rewards. In this new model, profitability and sustainability are no longer viewed as competing forces – a zero-sum game that would condemn businesses as either “broke saints” or “heartless capitalists.”
Businesses are instead best understood as complex organisms, being constantly shaped and shaping the world around them. To be legitimate, they rely on trust and social capital – a complex net of relationships that they can ill afford to risk or ignore. Businesses that are attuned to the needs of the broader ecosystem that sustains them, know that. Proactive businesses act on it.
ESG has been at the centre of our collective “rethinking” of business and its role in society. There is an increasingly broad recognition among investors that businesses that neglect their ESG responsibilities are bad bets. To weed them out, investors have had to rely on varying and competing standards.
This is because as institutional interest in ESG grew over time, so too did the number of ESG metrics. By 2018, there were more than 600 ESG ratings and rankings globally. This has added a great deal of cost, complexity and risk to both companies and investors. Requirements can vary in scope and quality, and the same applies to audits. The concern is that, unless there is some semblance of a “ground truth”, decisions will continue to depend on swathes of data of varying value and utility. It is small wonder that data quality is cited as the main barrier to ESG investment, according to Blackrock.
The Road to a Global Standard
More consistency in measurement and disclosure is now in sight. In the past year, independent standard setters have joined forces to devise a comprehensive corporate ESG reporting system. The EU, for its turn, has begun to force financial firms to disclose “double materiality” which includes risks posed to society and the environment as well as profitability. More pertinently, the IFRS Foundation is expected to launch a global Sustainability Standards Board at COP26. The exercise, however, is not without its critics, and it may well be a while before we arrive at some version of universal standards, let alone see them being widely adopted. There are also legitimate questions about the extent to which comparisons can be effectively made across different sectors and jurisdictions.
Regardless, businesses that approach this with a proactive mindset stand to benefit. Successful companies will put in place the necessary people, systems and infrastructure to measure, manage and improve performance. Businesses will more and more need to be able to properly back up and support their perceived external ESG rating to protect their reputation. 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 reporting
While the UK has been recognised for its efforts in ESG – listed companies, for example, will imminently be mandated to report on climate-related risk – it should not rest on its laurels. For one thing, businesses have not fully kept pace with the frameworks. As of March 2021, fewer than 50 public companies were comprehensively reporting on climate risk in line with Task Force on Climate-related Financial Disclosures (TCFD).
Private businesses should also take heed. In the long run, no company will be immune from ESG-related scrutiny – and COP26 will almost certainly be a catalyst in that direction. Investing in people and systems to measure, manage and improve sustainability will enable businesses to get ahead of the regulatory and standard-setting curve, and meet stakeholders’ complex and evolving expectations.
