Mukund is CEO of Benchmark Digital Partners, LLC.
Klaus Vedfelt
Both skeptics and proponents of sustainable business have long decried the lack of universal, mandatory standards governing the measurement and disclosure of companies’ ESG performance. And they shouldn’t be faulted for their misgivings.
The lack of guardrails is the principal inhibitor to a well-functioning ESG investment ecosystem. And while investors, regulators and non-governmental reporting standards organizations are racing to bring structure, order and transparency to the evolving ESG landscape, the keystone is non-financial companies’ self-reported ESG performance data.
Business leaders, for their part, are prioritizing the much-needed advancement of their ESG management and reporting capabilities. But the findings from a recent survey commissioned by Benchmark Digital Partners (of which I am the CEO) suggest that, despite their efforts, business leaders are still failing to produce the caliber of ESG performance data that investors need to commit capital with confidence. But that doesn’t mean there aren’t measures companies can take to produce this vital information.
To satisfy investor expectations, companies will need to establish ESG performance measurement, management and reporting systems capable of producing “investment-grade” ESG performance data. And these systems will need to be adaptable, both to ad hoc investor inquiries as well as to various voluntary reporting frameworks and mandatory disclosure requirements. Above all, though, these systems must be able to accurately depict the financial outcomes of the company’s management of its ESG issues, especially regarding environmental matters—the priority for today’s ESG investors.
Charting a course of adaptation will require a tranched, stakeholder-engaged approach. In the near term, whatever system companies adopt will need to be premised upon a holistic materiality assessment that’s anchored by investor input. And these systems will need to be undergirded by an appropriate system of record for monitoring ESG performance KPIs.
Before they embark on their ESG journey, however, it’s important business leaders realize the critical value of their self-reported data. This is the information that upholds the whole sustainable finance edifice. And without high-quality company ESG performance data, investors can do little more than infer whether their capital is achieving intended ESG outcomes. Unsurprisingly, of the 770 respondents to our survey of investment decision-makers, 85% said companies’ self-reported ESG data is “more important” than other data for informing their investment approaches.
Take this with the lack of ESG performance measurement and reporting standards and it’s clear that investor input is fundamental to a robust ESG performance management program capable of producing data that investors will value. This is especially important considering the variance in the company ESG performance measures that investors prioritize. Across our survey, 39% of respondents said data regarding “environmental factors” was the most important for their investment decisions, with 35% and 26% saying the same for “governance factors” and “social factors,” respectively.
This speaks to the lasting value of a holistic, investor-influenced materiality assessment, which should be performed at the outset of any corporate ESG program. Specifically, business leaders need to engage their priority investors to agree upon the manner in which the corresponding performance data is collected, collated and reported to investors. This is especially important in markets like the U.S. where prescriptive, government-mandated ESG disclosure rules have yet to be enacted.
But the expectations of investors, both at the firm and industry levels, have proven to be both dynamic and divergent. For instance, while advancing climate and environmental outcomes may still be the primary objective of the sustainable finance community writ large, there’s evidence that social factors are gaining prominence—among investors and governments alike. As for divergence, our survey found a considerable degree of variance regarding the areas of companies’ ESG data that investors say are in greatest need of improvement.
Importantly, this dynamism and divergence in expectations for company ESG data go beyond the investor community. Companies’ employees, B2B suppliers, customers and other stakeholders each have a role to play in shaping the initial ESG materiality assessment, adding complexity to the task of meeting investors’ priorities.
This is where the comprehensive, cloud-based ESG KPI accounting system, or system of record, is most advantageous. Today’s digital ESG data management solutions enable enterprise end-users to automate processes for collecting, analyzing and reporting troves of performance data with traceability across distinct business units. In plain English, the implementation of these systems amounts to an ESG “compliance” software, equipping their users with the ability to fulfill regular and ad hoc disclosure requests without having to worry about the accuracy, timeliness or veracity of their data.
In effect, this is to say that business leaders can apply a nimble, remotely-accessible quality control mechanism to their ESG data. Further, these systems are capable of both forecasting and monitoring the financial outcomes of companies’ ESG performance management efforts, and translating those insights into accessible terms for investors and other audiences.
Among investors, whose chief concerns with companies’ self-reported ESG data are over their integrity, comparability and financial relevance (i.e., usefulness), business leaders’ use of these solutions polls well. When asked about the quality of companies’ self-reported ESG performance data, a plurality of respondents to our survey (37%) said the “biggest driver of improvement” would be to “provide digital technology and tools that help [companies] collect accurate and reliable [ESG] data.” Yet, even without these technologies, CXOs can still leverage the insights of their materiality assessment to improve their ESG performance, albeit with a lesser degree of continuous insight. For example, should a retailer learn that the lion's share of its "E" impacts can be attributed to its supply chain, then it can reform its procurement contracting processes to require that suppliers provide auditable evidence of their own operational emissions' alignment with the retailer's stated emissions abatement goals.
While an interpretation of the survey findings may not be necessary, it bears repeating that investors want better ESG data. And through countless mediums, they’ve made their case for business leaders to get their ESG performance measurement, management and reporting processes in order. At least this time, they offer some clearer direction.
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