Businesses need to digitise data management to make the most of opportunities and help calm the highly divisive climate around ESG investments.
Smart business leaders know that environmental, social and governance (ESG) is about informed risk assessment and investment decision-making – not virtue signalling. Let’s stop pretending it’s the latter.
Despite competing analyses, there’s clear evidence linking strong ESG practices with robust corporate performance. Companies with superior ESG records report stronger financial performance than peers, demonstrating better resilience, operational efficiency and innovation capacity.
A joint Bain-EcoVadis study reveals companies with sustainable procurement and supply-chain practices saw 3 per cent greater Ebitda compared to less-sustainable peers. They also report higher employee satisfaction correlating with three-year revenue growth up to 5 percentage points higher, and margins 3 to 6 percentage points higher than less sustainable companies. Shareholders that invest in companies working with low-risk suppliers, with fewer negative ESG events, saw an additional 6.77 per cent return on investment over baseline.
The data shows we can be pro-business, pro-planet, and pro-people, which makes politicising the ESG movement so perplexing and counterproductive.
Tearing down ESG hurts us all
ESG factors are increasingly recognised as material to risk assessment and value creation. Yet the charged anti-ESG discourse disregards growing consumer demand for more ethically and sustainably produced goods, plus increased investor demand for responsible investment options. Businesses risk alienating customers and investors by shunning ESG initiatives or failing to adequately pursue them.
Substantial capital flowing toward sustainable solutions is needed to achieve the transition we need. Investors require clear, consistent signals to make informed decisions. ESG scepticism can scramble these signals, leading to confused, inconsistent, and counterproductive decision-making.
Investors that buy the anti-ESG narrative, questioning the importance of sustainability-focused investing, will exclude themselves from industries of the future. Companies and investors that reject this narrative stand to profit handsomely, while working to preserve the planet and protect fellow citizens.
Supply chain stewardship
We have seen how relentless impacts to global supply chains – from pandemics to bridge strikes and collapses, to droughts and canal closures, to regional conflict and maritime risk – can disrupt business opportunities, viability, and new revenues. Emphasising supply-chain stewardship will be key for investors seeking to minimise shareholder risk.
ESG-related risk management, and compliance laws and regulations intended to mitigate negative environmental and social impact, have become business requirements for companies worldwide. These trends will continue with little backsliding, despite the ESG backlash.
Take climate change for example: 99.9 per cent of climate studies agree human activity has been driving the change for the last 150 years. Investors must confront near- and long-term risks associated with changing weather patterns and intensifying weather events. After all, it’s difficult to run or profit from a flooded operation.
Companies must also comply with laws and regulations addressing environmental and social risks. We see some convergence across major compliance frameworks, such as CDP (the Carbon Disclosure Project) and International Financial Reporting Standards (IFRS). So, companies completing CDP disclosure requirements can use them for IFRS, and vice versa, which will reduce resources spent on reporting and improve compliance.
Evening the standards
Certain areas of ESG have well-established methods to calculate and measure impact. Other areas, such as climate-risk data analysis, lack standardised processes and entail much guesswork. Automated data management, analytics, and reporting tools help companies centralise their ESG and supplier data and facilitate analysis and reporting. But to what standard?
The Greenhouse Gas (GHG) Protocol has been the standard for calculating emissions for 30 years. But there are multiple accepted methods to estimate data to comply with Scope 3 protocols, leading to a tiered methodological accuracy. This makes it difficult for companies to comply with confidence; and for governing bodies to meaningfully compare results across entities.
Even new ESG legislation intended to combat climate risk – including the EU’s Corporate Sustainability Reporting Directive – has fewer reporting methods and compliance protocols. Although it adopts the Task Force for Climate-Related Financial Disclosures, there are many different models to consider. Companies want – but are not receiving – prescriptive guidance on which climate-risk modelling methods to apply. This confusion leads to indecision, which can paralyse companies beginning ESG journeys and investors comparing ESG risks across potential targets.
This is why businesses need to document everything, including assumptions, sources, and methods. This will enable firms to repeat processes, answer regulators’ questions, create a digital footprint, and provide context for results. Automated data management, reporting and analytics solutions will repeat processes at scale, facilitating compliance, but with little operational impact. It is also vital to engage legal teams about compliance requirements, materiality, and risk exposure. Some companies may take a more conservative approach to materiality claims and disclosure than others.
Reports of ESG's death are greatly exaggerated. While there are significant methodological and data-management challenges to achieve a more ethical and sustainable future, there’s enormous financial and non-financial value in play. Instead of demonising the ESG movement, disregarding its merits, or arguing it is anti-business, understand that sustainable companies aren’t just pro-planet and pro-people, they’re also pro-business. The proof is in the profit.
Peter Walsh, senior director, sustainability and ESG digital solutions, Benchmark Gensuite
