From: Sustainable Brands
By Karen Alonardo
August 5, 2022
Without established goals, ongoing monitoring and disclosure for accountability, progress will never be made. Organizations can instill trust in their ESG data by ensuring it’s on ‘TRACK.’
With the comment period for the SEC emissions disclosure proposal recently coming to a close, many organizations are working to formalize their ESG programs. Investors and the public demand transparency; and soon, regulators will likely require an unprecedented amount of disclosure from publicly traded companies. This, combined with the complexity of accounting for GHG emissions, means this work should be prioritized and started as soon as possible.
Though ESG data covers a wide range of other information, carbon emissions — and holding organizations accountable for calculating, disclosing and reducing them — are of particular importance. There is a clear need for transparent and accurate ESG data — without it, organizations could suffer the consequences of a tarnished brand reputation, financial loss or regulatory action. “Transparent” and “accurate” are critical words here; without a commitment to data transparency and accuracy, organizations will fail to produce trustworthy ESG data.
Building an ESG program that drives progress and improves results requires trust in the data produced by the company. The practice of instilling trust in your ESG data can be broken down into five principles:
Foundational to transparent and accurate ESG data is ensuring it is traceable back to the source. For example, a business’ energy and water usage must come from the utility provider — and then, be accurately reported. This ensures traceability of the information and helps organizations report accurately. When calculating Scope 2 and 3 emissions from third parties, that information should come directly from those suppliers and clear expectations of transparency between the companies should be upheld.
This takes a lot of work — all incoming information must be compiled, analyzed and disclosed. While immature ESG programs may be able to manage this to some extent with spreadsheets and part-time resources, this is not a scalable or sustainable solution; manual tracking quickly eats up valuable resources and takes bandwidth from other strategic pursuits.
ESG programs are ongoing and iterative; therefore, repeatability is key. Any successful ESG initiative must be able to scale and expand as needed; as a business grows or regulatory action is enforced, having a framework that is adjustable to increasing complexity is a must have.
In this case, repeatability means the organization can implement a scalable solution to gather relevant data from all sources and deliver it in a digestible format for investors, interested public parties and regulators. The most difficult ESG disclosure report is the first — but once this is complete, organizations have in place an established framework for what is measured and a system to calculate various metrics.
Perhaps most importantly, delivering this information on a regular cadence shows progress and a commitment to viewing ESG as a journey, not a destination. For an ESG program to be repeatable, it must also be engrained within company culture. When an organization demonstrates an ongoing commitment and has transparent communication about the state of the program, it delivers the essential message that ESG is important and here to stay.
Recent attention to ESG in the media on how leading organizations demonstrate accountability provides examples for others to follow. Recently, Mastercard announced it will link all employee compensation to ESG goals; and other companies — including Apple, McDonald’s, Nike and Chipotle announced that executive variable compensation will also be tied to ESG metrics. Establishing ESG goals and metrics as foundational values for the company is a great way to ensure accountability across the organization.
However, it is important to keep the mission of creating a more sustainable and ethical business in mind. As noted in recent PwC research, “There’s a risk of hitting the target but missing the point. An example might be a bank that focuses on reducing its own carbon footprint, when the biggest effect it could have on reducing emissions is through changing its approach to financing companies that emit carbon. There’s a risk of distorting incentives. Research shows that incentivizing pro-social goals can undermine intrinsic motivation …”
How does your organization compare to others in the industry? Comparability is important as a practice of benchmarking against your peers to help determine where efforts should be focused.
At present, this is difficult due to varying standards and an unregulated landscape for disclosure. Yet, there is reason for optimism — as we may see regulatory requirements for disclosure taking effect as soon as next year. Along with potential disclosure requirements, the various frameworks are beginning to consolidate which will make reporting easier in the future.
With or without consolidated reporting frameworks or regulated disclosure requirements, it is still important for organizations to benchmark their ESG data with comparable organizations. Doing so helps establish norms across the industry and at the very least provides a starting point for progress. Moreover, for organizations seeking continuous improvement in their ESG efforts, measurable progress is not possible without first establishing a baseline.
Those responsible for ESG oversight should keep up to date on related news and actively seek out information from similar businesses. Many organizations are producing voluntary disclosures and while there is not a consistent framework to measure against currently, there is a wealth of useful information available to ESG leaders. As the ESG reporting sector matures, comparability will become easier, but there is plenty of available information that can be used to start now.
The increasingly visible effects of climate change continue to make headlines as we reach grim, new milestones. With that level of attention being paid, organizations are undergoing increased scrutiny from the public and investors. As such, ESG risks can be critical for a business; and failure of an organization to acknowledge and address them can be catastrophic.
Those spearheading ESG programs must be knowledgeable about all areas of risk, not just environmentally centric ones. It is imperative to think of ESG holistically and pay attention to how the organization addresses diversity, gender pay parity, data governance, privacy, and many more. In summary, well-run, mature ESG programs are not solely focused on carbon accounting.
ESG leaders should conduct regular maturity assessments to identify areas of progress and areas of improvement. Cross-functional teams should report to the ESG leader who spearheads and governs the program. The organization’s culture will also benefit from this structure, as involvement from multiple departments embeds ESG into the culture and promotes these priorities.
Is your ESG program on TRACK?
ESG data is complex to compile and sometimes difficult to disclose — after all, organizations rarely jump at the opportunity to share mistakes and areas of opportunity — but doing so is imperative. It is uncomfortable to admit when progress is stagnant, or that the baseline is below the industry average. But the old adage always proves true: What gets measured, gets improved.
So, ask yourselves — is your ESG program on TRACK?
Karen Alonardo is VP of ESG Solutions at NAVEX.