Companies Must Make ESG Reporting a Valuable Tool for Organisational Change
Environmental, social, and governance (ESG) is becoming increasingly important for companies worldwide. The heightened awareness around the need to improve environmental performance to combat climate change is one of the chief drivers, and growing numbers of regulatory requirements force that awareness. According to the Governance & Accountability Institute, 92 percent of the S&P 500 companies published sustainability reports in 2020.
An ESG report deals with disclosing data about each company's initiatives across the three reporting strands. It is designed to provide a snapshot of the company's sustainability and responsibility to investors, regulators, consumers, and employees. However, viewing ESR reporting as an annual snapshot spurns the opportunities to gain business insights from the data at a granular level to improve sustainability performance.
The challenge is that collecting the data needed for an ESG report can be time-consuming and expensive. At the same time, many companies still need to gain more knowledge of the ESG domains to discover and benefit from insights offered by the ESG data.
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More than an annual report
Atomiton has worked with clients from various industries to achieve carbon footprint reductions, including food and beverage, manufacturing, energy, supply chain, and process industries. We have discovered that ESG reporting cannot be treated as reporting per se, which means it has to be a commitment to organisational change or improvement that can make the company's energy and carbon footprint more efficient.
A company with a strategy of organisational change will have designated roles at different layers responsible for ESG. They will be led by not only sustainability managers but also executive committees and oversight from the board. They have these roles because you need people who are continuously focused on ESG performance, not just once a year for a report. If you do it once a year, you spend several weeks on it and then put it aside. But if they want to take the metrics seriously, make improvements, and set the target, it is a movement in a company.
When companies do this, different layers of the organisation become more educated and knowledgeable about carbon footprints. For example, they start to understand that different fuels will give them different carbon emissions or that switching refrigerants will reduce emissions. As a result, their performance improves from the bottom up, and it becomes an organisational change.
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Lack of priority in reporting
Despite those advantages, some companies still consider this a passive response. They recognise they have no choice but to do it, but they want to delay it as much as possible or only do it for external consumption purposes so they will minimise the amount of investment they put into it. These organisations may have a sole representative as their ESG data reporting manager, or do not even have a designated role, but try to gather the data once a year.
In those instances, it is tough to avoid the miscommunications that result in bad data quality because it requires multiple departments to input data, and there will be different interpretations as a result. They could even outsource to a consultant, meaning they do not have to worry for now, but they may have data transparency issues over time.
The reporting landscape is fragmented, with some companies reporting on ESG for over a decade and handling it well. Some companies have more recently started looking into it, and they treat this seriously but are behind some of their competitors, and then others still try to resist it as much as possible.
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Understanding the role of ESG
There is a great deal of misunderstanding about the meaning of ESG, with a prevalent belief that it centres around a company trying to be altruistic and doing good for society, which may or may not directly contribute to shareholder value. However, that has proved to be not true. If you look at progressive companies with strong brands that are performing well, they invariably treat ESG with importance. The reason is that ESG can deliver numerous outcomes.
The first is that companies must make their exposure to climate change risk more transparent to their investors so that they can fully appreciate the potential risks of environmental events such as rising sea levels or wildfires, and better judge its future value.
Secondly, even when a company decides it does not want to respond to climate change, its wider environment is invariably responding anyway. Customers are changing their requirements and requiring a more sustainable supply chain. If a company does not change, then its competitiveness is affected. This means many have no choice as it is about growth and maintaining marketplace competitiveness.
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A cost or a way to drive business value and improvement?
One concern is that many organisations still view ESG as a cost rather than a valuable tool that can deliver crucial business insights. Companies tend to see ESG differently depending on the attitude of their direct customers. Some companies are close to the consumers in the value chain, and then some companies provide raw materials, parts, and components that they sell to other businesses.
Companies closer to the consumer or direct-to-consumer view ESG activities as business value because the awareness and concerns about climate change come from the purchasing individuals. But many companies who work, for example, in mining or oil and gas, still see it as a cost and burden unless their business customers expect them to improve sustainability performance. This could be an automaker who wants its suppliers to improve the carbon footprint of the car components they are sourcing from.
There is also a difference between public and private companies, particularly in the US, because the US SEC (Securities and Exchange Commission), which regulates public companies, has proposed a rule to require climate disclosures. So, public companies start seeing this as a must-have sooner or later, and private companies still see it as a cost or burden. However, the good news is that gradually more companies are starting to see the value and realise that they might as well use this as an optimisation opportunity if they have to do it.
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Even with growing awareness of the business value, companies are often constrained by a lack of data and workforce skills. The data has to meet the knowledge, and they are not being combined. There is plenty of available raw data in a company. It exists, but it is not processed or structured in a way from the perspective of emissions or climate risks. Instead, data is traditionally processed to focus solely on revenue or cost. Companies would need to add another layer of knowledge to this data to make use of it to understand what it means for carbon emissions or sustainability.
The key takeaway here is that, because this data resides in different silos, it is almost impossible to educate every single source of data or employee from the organisation to explain how the data converts to carbon emissions. That is the big gap where the knowledge is not meeting the data, and this presents a huge opportunity for improvement.
Jane Ren is the Founder and CEO of Atomiton, which offers data and analytics-based solutions to help companies drive their sustainability transformation using strategic, business, and operational insights.
Check out KnowESG's huge listing of Company ESG Profiles for published ESG ratings and reports.