- ESG metrics have become increasingly important to investors and customers.
- They are demanding greater transparency and disclosure in this area.
- Data quality and poorly defined goals are holding firms back in improving their ESG reporting.
It is undeniable that we are in an era of change as we deal with the impact of human behaviour on our world. Our food, transport, energy sources and the way we live need to undergo fundamental transformation. Companies like those represented at Davos this year have an opportunity and imperative to lead the way in supporting the sustainability of our communities and our planet. Our stakeholders are already demanding this - along with reliable proof of our efforts.
Over the last three years, environmental, social and governance (ESG) metrics have become a key input in investor, employee and customer decision-making, with a particular emphasis on the “E” - even for those companies that aren’t otherwise regulated by environmental laws.
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Investors initially used ESG as a screening factor - to limit investments in particular industries or companies with reputational issues. From there, investors constructed portfolios with companies with higher ESG scores, and today both active and passive investors are on the hunt to determine which ESG attributes are the best indicator of long-term performance.
With respect to other stakeholders, it is certainly clear that a company’s reputation and position vis-a-vis environmental and social issues is a significant contributing factor to purchasing decisions for consumers. Surveys and employment data show our workforces and hiring successes are impacted by the same.
Even without stakeholder-driven interest, regulators around the world are requiring transparency and disclosure across industries – even those not traditionally known for ESG related issues.
While, thematically, the direction is clear – more disclosure and transparency – there are two issues that currently limit the impact of ESG reporting and evaluation:
1. Quality of data. It is not uncommon to hear company executives, investors and regulators highlight the lack of quality in published ESG data. While many companies are working to improve their data and related analytics, and a whole new industry of advisers, auditors and analytic experts have emerged to assist in these efforts, progress and true visibility will be limited until we agree on common meaningful standards and build trust in how data is reported. Without common standards, even high-quality data will result in comparing apples with oranges.
2. Goals and targets. The metrics and models that do exist as standards today are backwards-looking, and, as a result, only really tell part of the story. Yes, past behaviour can tell us a lot about future trends and future behaviour. But this wealth of information comes without each company’s targets, goals or commitments. What are companies aiming for in terms of reducing their carbon footprint? How are they improving diversity in their boardrooms and senior staff? Are they investing in their employees to deliver their future?
Our stakeholders may be leading the way by telling us what they care about, and our regulators are pushing hard for change, but it is up to industry to provide our investors, employees, customers, regulators and politicians with the visibility they are demanding. Companies need to engage more deeply in the ESG-reporting processes and help information services providers get to the right data. And we all need to be bold and identify ambitious targets across ESG, to help our stakeholders see where we are going, and how and when we hope to get there.
We, as members and partners of the World Economic Forum, have the responsibility to take the lead on one of the greatest challenges our world has ever known. We need to drive towards sustainability in our actions and share our successes and failures with our stakeholders. We can rise to that challenge – but the time for action is now.