There is no need to recap the argument that CFOs incorporate environmental, social and governance (ESG) factors into their capital allocation, financial risk mitigation and investor relations strategies. Just look at the volume and price capital flows to global ESG-themed funds. Regardless of the incentive, CFOs and their C-suite counterparts may not have much choice for a long time.
The United States Securities and Exchange Commission (SEC) is hard at work to protect investors from any financial loss they may incur due to a lack of ESG performance data useful for business decision-making. And despite corporate finance executives obvious support for a mandatory and globally consistent set of ESG disclosure standards, business leaders are raise concerns that likely SEC action will nonetheless add to pre-existing corporate regulation compliance burden.
This ignores the business opportunity. By implementing the ESG data management and reporting capabilities needed to comply with proposed SEC rules, business leaders can lay the foundation for a more sustainable, efficient and resilient business – benefits that will far outweigh the burden of compliance. And by level the playing field with the requirement that all public companies make such disclosures, the SEC’s proposal therefore presents an opportunity.
However, to seize this opportunity, it is necessary to accurately assess what intended beneficiaries of SEC efforts — investors — expect companies to self-report climate risk and ESG performance data. With this blueprint, companies will then need to implement a sufficiently robust digital platform that will gather and store the caliber of ESG performance data needed to execute investment-grade sustainability disclosures, inform internal decision-making, and ultimately drive a culture of success.
In principle, this means following the example. Companies that want to not only comply with SEC requirements menstruation impendingbut attract ESG dollars will have to provide verifiable and useful evidence for the decision which shows that their sustainability performance is more than a charade.
In practice, it starts with introspection. No matter where they are on their sustainability journey, business leaders will need to identify gaps between the ESG performance data their company already collects and reports, if they already do so, and the criteria agreed upon by the investors for “investment grade” ESG data.
To this end, the findings of a recent investor survey commissioned by my organization are most instructive.
First, 69% of investors agree on the attributes of investment-grade ESG performance data, in that it should be accurate, timely, complete, verifiable and reliable. And significant chunks of investors say the collection and use of this data by Fortune 100, 500 and 1000 companies, i.e. public companies covered by the SEC’s proposed rule, is not credible.
Our investigation also confirmed the momentum behind the SEC’s proposal. A plurality (39%) of investors say data describing company performance on financially relevant environmental issues is most important to their investment decision-making. And an even larger share (47%) of investors say the quality of this data needs “meaningful improvement” the most.
Focus on materiality
These results provide business leaders with useful guidance. But just as no two companies are the same, neither are there two ESG risk profiles or company performance records.
Indeed, business leaders will benefit from identifying sustainability issues that not only uniquely impact their bottom line, but are prioritized by their investors who, in accordance with the previoushave the final say on what is”Material” and, in turn, what is subject to disclosure. Although it may seem like a daunting undertaking, there is no shortage of orientation voluntary reporting standard setters, whose materiality determinations are referenced throughout the SEC’s proposal, and there’s no shortage of orientation to incorporate stakeholder feedback into the materiality assessment.
When completed, a stakeholder-influenced materiality assessment offers business leaders three clear benefits. First, it will help them meet the disclosure rules proposed by the SEC, whose definitions of materiality largely follow precedent. Second, involving company investors and other stakeholders in the materiality assessment helps CxOs focus their sustainability efforts. And third, investor input will help business leaders determine consensus ESG performance management goals, achievement strategies, metrics, and methods of disclosure, enabling the disclosure of data that their investors would view as quality investments.
But establishing a framework is only one part of an ESG program. The SEC’s proposed rules require a company to disclose not only assured proof of its operational emissions inventories and climate risk exposure profiles, but their plans for managing them. That is, company disclosures will help their audience – investors – judge whether they are making progress towards their climate goals.
To achieve this progress, let alone demonstrate it, your casual observer might imagine an army of employees, consultants, and auditors equipped with an arsenal of calculators and spreadsheets. In reality, however, there is commercially available, cloud-based ESG data management and reporting systems that enable such convoluted arithmetic. And as our survey revealed, a plurality (37%) of investors want companies, large majority who fail to digitize their ESG programs, to change course.
Investors’ reasons are quite simple. On the one hand, these systems eliminate the risk of human error and delay in collecting and reporting investment-grade ESG performance data. Yet, crucially, these technologies enable end users to extrapolate actionable insights from their ESG performance data.
Users of these systems can continuously monitor their ESG performance, compare it and assess the effectiveness of their subsequent investment and management decisions. And with its data storage, traceability and retrieval functions, ESG software allows users to aggregate and report data describing their emissions, climate risks and other ESG factors in specific formats for specific stakeholders. , both internal and external.
Leveraging digital ESG data management and reporting platforms has hidden benefits that end users would do well to appreciate. From assigning responsibility for achieving ESG performance objectives to incorporating internal stakeholder feedback into ESG program development and administration, ESG software enables business leaders to cultivate a “ESG culturewhich drives program and business success.
Whether you are examining the dynamism of the ESG investment space or the potential for mandatory disclosures, it is clear that the collection, use and disclosure of investment-grade ESG performance data is quickly becoming a necessity. But that doesn’t mean it has to be a burden. There are solutions that, if adopted, will bring incalculable benefits.