With the comment period for the SEC emissions disclosure
proposal
recently coming to a close, many organizations are working to formalize their
ESG programs. Investors and the public demand transparency; and soon, regulators
will likely require an unprecedented amount of disclosure from publicly traded
companies. This, combined with the complexity of accounting for GHG
emissions,
means this work should be prioritized and started as soon as possible.
Though ESG data covers a wide range of other information, carbon emissions — and
holding organizations accountable for calculating, disclosing and reducing them
— are of particular importance. There is a clear need for transparent and
accurate ESG data — without it, organizations could suffer the consequences of a
tarnished brand reputation, financial loss or regulatory action. “Transparent”
and “accurate” are critical words here; without a commitment to data
transparency and
accuracy,
organizations will fail to produce trustworthy ESG data.
Building an ESG program that drives progress and improves results requires trust
in the data produced by the company. The practice of instilling trust in your
ESG data can be broken down into five principles:
Traceability
Foundational to transparent and accurate ESG data is ensuring it is
traceable back to the source. For example, a business’ energy and water
usage must come from the utility provider — and then, be accurately reported.
This ensures traceability of the information and helps organizations report
accurately. When calculating Scope 2 and 3 emissions from third parties, that
information should come directly from those suppliers and clear expectations of
transparency between the companies should be upheld.
This takes a lot of work — all incoming information must be compiled, analyzed
and disclosed. While immature ESG programs may be able to manage this to some
extent with spreadsheets and part-time resources, this is not a scalable or
sustainable solution; manual tracking quickly eats up valuable resources and
takes bandwidth from other strategic pursuits.
Repeatability
ESG programs are ongoing and iterative; therefore, repeatability is key. Any
successful ESG initiative must be able to scale and expand as needed; as a
business grows or regulatory action is enforced, having a framework that is
adjustable to increasing complexity is a must have.
In this case, repeatability means the organization can implement a scalable
solution to gather relevant data from all sources and deliver it in a digestible
format for investors, interested public parties and regulators. The most
difficult ESG disclosure report is the first — but once this is complete,
organizations have in place an established framework for what is measured and a
system to calculate various metrics.
Perhaps most importantly, delivering this information on a regular cadence shows
progress and a commitment to viewing ESG as a journey, not a destination. For an
ESG program to be repeatable, it must also be engrained within company culture.
When an organization demonstrates an ongoing commitment and has transparent
communication about the state of the program, it delivers the essential message
that ESG is important and here to stay.
Accountability
Recent attention to ESG in the media on how leading organizations demonstrate
accountability provides examples for others to follow. Recently, Mastercard
announced it will link all employee compensation to ESG
goals;
and other companies — including Apple, McDonald’s, Nike and
Chipotle
announced that executive variable compensation will also be tied to ESG metrics.
Establishing ESG goals and metrics as foundational values for the company is a
great way to ensure accountability across the organization.
However, it is important to keep the mission of creating a more sustainable and
ethical business in mind. As noted in recent PwC
research,
“There’s a risk of hitting the target but missing the point. An example might be
a bank that focuses on reducing its own carbon footprint, when the biggest
effect it could have on reducing emissions is through changing its approach to
financing companies that emit
carbon.
There’s a risk of distorting incentives. Research shows that incentivizing
pro-social goals can undermine intrinsic motivation …”
Comparability
How does your organization compare to others in the industry? Comparability
is important as a practice of benchmarking against your peers to help determine
where efforts should be focused.
At present, this is difficult due to varying standards and an unregulated
landscape for disclosure. Yet, there is reason for optimism — as we may see
regulatory requirements for disclosure taking effect as soon as next year. Along
with potential disclosure requirements, the various frameworks are beginning to
consolidate which will make reporting easier in the future.
With or without consolidated reporting frameworks or regulated disclosure
requirements, it is still important for organizations to benchmark their ESG
data with comparable organizations. Doing so helps establish norms across the
industry and at the very least provides a starting point for progress. Moreover,
for organizations seeking continuous improvement in their ESG efforts,
measurable progress is not possible without first establishing a baseline.
Those responsible for ESG oversight should keep up to date on related news and
actively seek out information from similar businesses. Many organizations are
producing voluntary disclosures and while there is not a consistent framework to
measure against currently, there is a wealth of useful information available to
ESG leaders. As the ESG reporting sector matures, comparability will become
easier, but there is plenty of available information that can be used to start
now.
Knowledge
The increasingly visible effects of climate
change
continue to make headlines as we reach grim, new milestones. With that level of
attention being paid, organizations are undergoing increased scrutiny from the
public and investors. As such, ESG risks can be critical for a
business;
and failure of an organization to acknowledge and address them can be
catastrophic.
Those spearheading ESG programs must be knowledgeable about all areas of
risk, not just environmentally centric ones. It is imperative to think of ESG
holistically and pay attention to how the organization addresses diversity,
gender pay parity, data governance, privacy, and many more. In summary,
well-run, mature ESG programs are not solely focused on carbon accounting.
ESG leaders should conduct regular maturity assessments to identify areas of
progress and areas of improvement. Cross-functional teams should report to the
ESG leader who spearheads and governs the program. The organization’s culture
will also benefit from this structure, as involvement from multiple departments
embeds ESG into the culture and promotes these priorities.
Is your ESG program on TRACK?
ESG data is complex to compile and sometimes difficult to disclose — after all,
organizations rarely jump at the opportunity to share mistakes and areas of
opportunity — but doing so is imperative. It is uncomfortable to admit when
progress is stagnant, or that the baseline is below the industry average. But
the old adage always proves true: What gets measured, gets improved.
So, ask yourselves — is your ESG program on TRACK?
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Karen is VP of ESG Solutions at NAVEX Global, formerly the founder and CEO of CSRWare (acquired by NAVEX Global in 2020). She is focused on enterprise growth, product innovation, partnerships and meeting market demand. Her broad knowledge of the industry has been instrumental in NAVEX's entry into the market as a gold standard ESG program.
Karen has advocated the need for Enterprise-class software solutions to manage complex global ESG and Sustainability challenges at the corporate level for many years.
Published Aug 5, 2022 8am EDT / 5am PDT / 1pm BST / 2pm CEST