Picture this scene: A child sits at a desk, slumped in his chair, arms crossed over his chest, a look of defeat on his face. “I can’t do these math problems,” he complains. “They’re too hard. I give up.” An adult who has been in waiting in the background steps closer and says…
You can fill in the rest. The adult probably says something like, “when you face a tough challenge, don’t give up. If you keep trying, it will get easier, but if you give up, it won’t.” Of course, this advice applies to many things other than learning math. In this article, we get into what it means for the challenges of obtaining reliable ESG-related data.
Everyone wants it – why is it so hard to get?
As we discussed in our article, Good News for Companies that Embrace Sustainability, reputable sources including the Harvard Business Review, McKinsey, and Ernst & Young (to name a few) have found that executives believe sustainability initiatives offers tangible financial benefits. Adding to that, a recent study from the IBM Institute for Business Value states that “ESG leaders are 43% more likely to outperform on profitability—and 52% are more likely to say ESG efforts have a huge impact on profitability.”
That study from the IBM Institute, titled The ESG Conundrum, says that more than 40 percent of executives rank data as a top barrier to ESG progress—an even bigger problem than regulatory barriers and inconsistent reporting standards. Similarly, only 41 percent of consumers say they have enough information to make informed purchasing decisions with respect to products’ environmental sustainability. Only 37 percent say they have sufficient data to make informed decisions about a potential employer’s sustainability track record.
Side Note: If you have the time, we recommend reading the full IBM report. It draws from two in-depth surveys: one covered over 20,000 consumers across 34 countries who were asked about attitudes toward sustainability and social responsibility, and how their beliefs affect their shopping, investing, and career decisions; the other involved 2,500 executives from companies in 22 industries, focusing on their organizations’ ESG strategies and approaches, the benefits they expect from ESG initiatives, and how they weigh ESG against other business objectives.
The lack of good ESG data ties into concerns about greenwashing, which hurts investors and consumers, along with the companies they invest in and buy from. In 2021, almost half (48 percent) of consumers said they trusted Corporate Sustainability Reports; just two years later, that plummeted to only 20 percent. Ouch.
What causes ESG data problems?
Let’s look at a few of the main causes behind the struggle to provide useful ESG data:
- Multiple, and sometimes conflicting, disclosure frameworks. It is easy to blame the problem on having too many sustainable reporting standards (GRI, SFDR, CSRD, TFCD, and others), and that is an issue. Many companies, especially those with customers and/or operations in more than one country, report under more than one standard to satisfy various regulators and other stakeholders. It can become costly to gather data to comply with these various frameworks if it requires armies of people to chase down information. That can tempt companies to take shortcuts, which degrades the quality of the output.
Having said that, to comply with just one sustainable reporting standard a company has to collect data about the things most sustainability reporting standards include. While there are differences in the metrics and definitions among them, there is a good amount of overlap. That means a solid data collection effort will produce results that can be used for more than one purpose, which spreads the cost of collecting the data around.
- ESG-related issues are difficult to quantify. With a few exceptions, like measuring Scope 1 and 2 emissions, ESG metrics are not easy to quantify – it’s just not like preparing financial statements (and before the accounting world turns on us, we realize that isn’t easy either). This highlights the need for clear, quantifiable definitions whenever possible. Standards are evolving in this direction and they will get better over time. Remember, accounting definitions and methods evolve, too.
- Many companies don’t yet have an ESG data collection infrastructure in place. We take it for granted that a company’s finance and accounting team can produce reports to support sales, marketing, and product management, computing things like customer acquisition costs, profitability per product, and so on. But the ability to do so, even for things that are relatively easy to quantify, doesn’t just pop into existence overnight.
Like the child who struggles with math, companies must build a foundation that allows them to gather good ESG data before they can produce meaningful results (don’t try to solve differential equations before you can handle “10 – x = 8”). The first few times companies attempt to collect good ESG data things will almost surely take a lot of time and cause a lot of teeth-gritting. That will expose areas of ESG data collection that are particularly challenging. With some focus and practice, it gets easier! Companies should not allow the quest for perfection interfere with a good, solid effort.
- Siloed systems and information-gathering makes it difficult to connect sustainability and profitability. Related to the point above, Wolters Kluwer, a Netherlands-based leader in information and software solutions for medical, financial, legal, and other professionals, points out that in many organizations, ESG data is collected by a separate group and remains siloed from other reporting efforts. This makes it difficult to see the relationship between ESG-related activities and financial outcomes.
They note that when ESG data is not stored in the same databases as budgeting, planning, and accounting data, companies will struggle to do scenario analyses that show the potential impact of sustainability-oriented activities on financials. If the ESG and financial data can “talk to each other,” a company can refine its strategy to achieve better ESG performance and find ways to reduce costs. You can wow investors with ESG activities, while improving revenue and being profit-minded. You can have your cake and eat it too.
To make things more difficult, with sustainability metrics those “unknown unknowns” can really matter. For example, it’s difficult to anticipate the types of crises that could lead to a breakdown in governance. Or, it is possible that questions asked in employee satisfaction surveys do not capture a slow, persistent decline that is hurting productivity or degrading customer service in a way that could damage the company’s reputation. As we noted here, we can’t manage what we can’t (or don’t try to measure).
- “I’ll show you mine if you show me yours.” Understandably, companies fear they might look bad relative to their industry peers because they don’t know where their peers stand on various ESG metrics. But the only way for that situation to improve is to have every company publish results based on the data they are able to gather, using a common standard. That’s a big part of the impetus behind the European Union’s new Corporate Sustainability Reporting Directive.
Clearly, everyone (management teams, investors, and consumers) wants good ESG data but are all frustrated at how difficult it is to get. We know about this first-hand because OWL ESG is dedicated to providing comprehensive, transparent, timely ESG data and we use all kinds of human and artificial intelligence to gather it. So, we definitely understand the frustration. But we must all – corporations, investors, and consumers – resist the urge to slump back in our chairs and declare “it’s too hard.”
To learn how OWL ESG can help your company understand the current state of ESG data, how metrics are defined, and how to make peer-group comparisons across hundreds of metrics, contact us.
