ESG reporting

ESG — From boardroom discussions to a tailored data strategy (Part 2)

Deep Parekh, Managing Partner, Epistemy BV

ESG reporting is the roadblock – how do we deal with this?

In Part 1 of this series, we explained the fundamentals of understanding environmental, social and governance (ESG) factors and their urgency and importance for companies. Here, we highlight the most immediate roadblock — ESG reporting.

We are at a critical intersection today

We are at the nexus of three important factors: 1) Consumers are demanding greater visibility into the provenance of materials used to deliver the products that they buy; 2) Authorities and regulators are rolling out new frameworks for governance, transparency, and reporting; and 3) Financial markets are using ESG metrics to guide their decision-making, as part of their risk analysis exercise.

 

burning platforms

Source: ESG8 (www.esg8.eu)

1. Consumers are driving ESG change in companies

Consumers are increasing pressure for companies to be more transparent in their ESG business practices. A recent IBM / NRF survey showed that consumers are willing to pay a premium for brands that offer ‘clean’ products. Unilever reported that their sustainable living brands are growing 65% faster than the rest of the business and delivered 75% of the company’s growth in 2019, a clear indicator that consumers are behind ESG adoption by the company.

 

consumers ESG

 

2. EU is rolling out ESG regulation shortly

EU regulation around ESG factors is being developed and rolled out, effective January 2022, based on three goals (from Impactivate):

  1. Avoid greenwashing. Along with preventing firms from perpetuating unsubstantiated or misleading claims about sustainability and the benefits of their products, this pillar also seeks to increase market awareness of sustainability.
  2. Achieve regulatory neutrality. This refers to the EU’s drive to harmonize the new disclosure rules across EU member states.
  3. Level the playing field. This pillar specifies the products and services managed by the new rules: investment funds, insurance-based investment products, private and occupational pensions, individual portfolio management, and insurance or investment advice.

 

The regulation can be broadly categorized into 9 pillars:esg regulation

Source: Graphics by ESG8 (www.esg8.eu); original content by Factset (www.factset.com)

 

3. The finance world using ESG metrics to evaluate companies

Increasingly, financial services and investment firms are using ESG factors to make investment and fund management decisions, impacting inclusion and risk-driven decisions (interest rates, debt obligations, and loan-worthiness). Companies and funds are being penalized for their holdings in fossil fuels and socially unjust firms and rewarded for holdings in sustainability-centric firms and socially inclusive operations.

finance esg

Source: ESG8 (www.esg8.eu)

 

Reporting hinders ESG ambitions

When we consider what hinders companies’ ESG ambitions, it’s easy to point to the massive structural changes that may be required to fundamentally rethink business models, material sources or business practices, but the reality is far more banal — you can’t impact something if you can’t satisfactorily measure it!

Three key issues hindering progress on reporting

reporting esg

Source: ESG8 (www.esg8.eu)

 

1. Too many dimensions and no clear standards

We provide an example of two companies, ABInbev (beer maker) and Unilever (consumer goods giant) being rated under two different sets of standards, methods, approaches, and data sources: MSCI and Sustainalytics.chema esg

Source: Analysis by ESG8 (original charts from MSCI and Sustainalytics)

MSCI uses a bond rating approach, whereas Sustainalytics uses a risk scoring methodology. Whereas MSCI gives ABInbev an ‘AA’ rating, Unilever gets an ‘A’ rating, which might impact Unilever adversely when investors seek to put their money in fast moving consumer goods equity. However, if a fund manager uses the Sustainalytics rating schema for both companies, they would see that Unilever carries a lower risk profile than ABInbev. The key message here is measure or get measured — companies must take back control of their ESG narrative and not be subject to an opaque ‘black-box’ logic.

2. Level of effort in doing ESG reporting

CFO magazine states that a US firm takes a median of 32 calendar days to conduct an annual budgeting exercise. This is with known data sources, well-defined measurement criteria and accepted methodologies, and limited stakeholders.budgeting esg

 

ESG reporting requires considering different geographic locations, numerous rating agencies with different data demands, and multiple stakeholders (consumers, vendors, internal managers and leaders, employees, investors, and regulators).complexity esg

Source: ESG8 (www.esg8.eu)

 

3. Multiple data sources and types, with questionable provenance and interpretation

reporting esg

Source: MSCI (www.msci.com)

 

MSCI shows the degree of standardization involved with company related ESG information, but the specific data that they mine through company reports and disclosure information is also widely susceptible to interpretation and hence of questionable value and weight.  What is susceptible to even wider speculation is the information from other sources. MSCI uses these not only for performance metrics but also composes metrics on risk and controversy. External data sources are of unknown provenance and quality, and are also subject to broad interpretation and contextual reference.

 

 

About the author

Dr. Deep Parekh, Managing Partner, Epistemy BV

Dr. Parekh is a serial entrepreneur and currently serves as the Managing Partner of Epistemy BV, a Belgian firm dedicated to developing sustainable strategies.

Deep has served in executive leadership roles at Please Platform BVBA and Triamant NV in Belgium at the intersection of digital transformation and life, health and social technologies, and helping to shape Belgian legislation on the on-demand work economy. Prior to this, he co-founded an investment and advisory firm Asteroidea AG in Switzerland. Deep also co-founded and served as Managing Partner of management consulting and advisory services firm Equus Group in the US and Latin America. Prior to his journey on the course of serial entrepreneurship, Deep held executive advisory positions at various companies, including Unilever, Ernst & Young, Booz Allen Hamilton and IBM.

This article series is a result of a recent webinar titled ‘Powering Your ESG Ambitions through Data’, hosted by Juvo, a professional services company in Belgium that specializes in making data profitable, and ESG8, a Belgium-Netherlands based ESG advisory services firm.