All risk managers want for Christmas from the environmental, social, and governance (ESG) metrics they work with is standardization. And accuracy. A single repository of shared ESG data also would be nice. While we’re at it, regulatory clarity and harmonization between Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) sure would be sweet to have, too.
Alas, few if any of these gifts seem likely to materialize in the immediate future. Some may never come to fruition, at least not completely (see accounting standards harmonization). “I don’t think we’ll ever get a single ESG metrics framework,” notes Shared Assessments’ Senior Advisor, Gary Roboff, “except where regulation requires using a specific framework.”
Still, a risk manager can hope. The ESG metrics “wish list” that follows consists of some big asks. Fortunately, regulatory bodies, industry consortia, and other groups of experts remain hard at work on advancing and fine-tuning ESG reporting. On that count, it would be a genuine gift if meaningful progress were made in each of the following areas during the next 12 months:
- Consistency: It’s a common refrain that the numerous and varied ESG metric frameworks in use today have produced an “alphabet soup” of measures. When a substantial collection of companies agree to one standard and an equally sizeable number of companies adhere to other standards, comparisons and risk analyses are difficult to conduct. “New standards appear regularly, other standards are merging,” says Roboff, who emphasizes that it’s important for risk managers to monitor what’s going on behind the scenes as ESG standards groups make important decisions and pronouncements. As Roboff details, a pronouncement the Taskforce on Climate-Related Financial Disclosures (TCFD) made coming out of COP26 warrants attention.
- Accuracy: “This point should appear on a Times Square billboard in flashing neon that never dims: just because you see a metric reported does not mean that it’s accurate,” Roboff emphasizes. “So, an overarching question is: who’s doing due diligence on the metrics.” Those data-verification activities need to occur within companies as they report internal ESG metrics and throughout the supply chain where Scope 3 emissions measurement challenges pervade.
- Data-sharing: Inconsistent represents marks one of the biggest challenges risk managers, investors, and others encounter when assessing a company’s ESG risks. A global alliance of top financial institutions and other businesses is aware of this challenge and doing something about it. Earlier this month, the alliance reported the launch of ESG Book, an ESG data repository that aligns with the Ten Principles of the UN Global Compact. ESG Book is designed to “sustainability data more widely available and comparable, enable companies to be custodians of their own data through a digital platform, provide framework-neutral ESG information in real-time, and promote transparency.” That’s a big claim and a welcome one. “The key phrase in that description is ‘framework-neutral,’ that’s a big deal,” says Roboff. “If that phrase were not included, this might fail.” ESG Book likely will not solve the inconsistent-ESG-data problem, but it should help many companies make significant strides.
- Knowledge-sharing: While a comparatively small number of companies have mature ESG programs, the vast majority of organizations do not. That lack of ESG maturity typically stems from a lack of knowledge, so it behooves companies with leading ESG practices to help their vendors and other trading partners get up to speed. Roboff has witnessed this dynamic in action. He notes that an “ESG leader” started this process by scrutinizing the ESG metrics their supply chain partners produced and shared. “They discovered that even the organizations that thought they were reporting the right information overwhelmingly were not doing so accurately,” he notes. The company worked with its suppliers to help them improve their ESG reporting. While the investment paid off handsomely in that particular situation, Roboff acknowledges that outsourcers with massive numbers of third parties cannot afford to conduct massive training efforts.
“A legitimate question is: How do you solve this,” adds Roboff, who suggests that the notion of “it takes a village” is probably part of the solution. “Some kind of outreach program makes sense.”
Consider that collaboration is the kind of gift that keeps on giving.