Donovan Hornsby is corporate development and strategy officer at Benchmark Digital Partners. Views are the author's own.
The case for CFOs to incorporate Environmental, Social and Governance (ESG) factors into their capital allocation, financial risk mitigation and investor relations strategies need not be recapitulated. One need only look to the volume and rate of capital flows into global ESG-themed funds. Regardless of the incentive, CFOs and their C-suite counterparts may not have much of a choice before long.
The U.S. Securities and Exchange Commission (SEC) is hard at work to protect investors from any financial losses they may suffer for want of decision-useful ESG performance data from companies. And despite corporate finance leaders’ evident support for a set of globally consistent, mandatory ESG disclosure standards, business leaders are raising concerns that the SEC’s likely action will nonetheless add to companies' preexisting regulatory compliance burden.
This ignores the business opportunity. By implementing the ESG data management and reporting capabilities needed to comply with the SEC’s proposed rules, business leaders can lay the foundation for a more sustainable, efficient and resilient enterprise—advantages that far outweigh the compliance burden. And by leveling the playing field with the requirement that all public companies make such disclosures, the SEC’s proposal, then, presents an opportunity.
Capturing this opportunity, though, hinges on accurately gauging what the intended beneficiaries of the SEC’s efforts—investors—expect of companies’ self-reported climate risk and ESG performance data. With this blueprint, companies will then need to implement an appropriately 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 foster a culture for success.
In principle, this means walking the talk. Companies that not only want to comply with the SEC’s imminent rules, but attract ESG dollars will need to provide verifiable, decision-useful evidence that shows their sustainability performance is more than a charade.
In practice, this starts with introspection. Regardless of where they are in their sustainability journeys, business leaders will need to identify the gaps between the ESG performance data that their company already collects and reports, if they do at all, and investors’ agreed criteria for “investment grade” ESG data.
To that end, the findings of a recent investor survey commissioned by my organization are most instructive.
First and foremost, 69% of investors are in agreement on the attributes of investment-grade ESG performance data, in that it must be accurate, current, complete, auditable and reliable. And sizable shares of investors say the collection and usage of such data by Fortune 100, 500 and 1000 companies—i.e., public companies covered by the SEC’s proposed rule—aren’t credible.
Our survey also confirmed the impetus behind the SEC’s proposal. A plurality (39%) of investors say data describing companies’ performance against financially relevant environmental issues is the most important for their investment decision-making. And an even larger share (47%) of investors say the quality of this data is most in need of “significant improvement.”
Homing in on materiality
These findings offer business leaders some helpful direction. But just as no two companies are the same, neither are any two enterprise ESG risk profiles or performance records.
Indeed, business leaders will benefit from identifying the sustainability issues that not only stand to uniquely impact their bottom lines, but are prioritized by their investors who, in accordance with precedent, have the final word on what is “material” and, in turn, what is subject to disclosure. While it may seem a daunting undertaking, there is no shortage of guidance from voluntary reporting standards organizations, whose materiality determinations are mentioned throughout the SEC’s proposal, nor is there any shortage of guidance for incorporating stakeholder input into the materiality assessment.
Once complete, a stakeholder-influenced materiality assessment affords business leaders three clear advantages. First, it will help them satisfy the SEC’s proposed disclosure rules, whose materiality definitions largely adhere to precedent. Second, bringing the firm’s investors and other stakeholders into the materiality assessment helps CxOs narrow the focus of their sustainability efforts. And third, investor input will help business leaders determine consensus ESG performance management goals, achievement strategies, metrics and disclosure methods, thereby enabling the disclosure of data that their investors would consider investment-grade.
But establishing a framework is only one component of an ESG program. The SEC’s proposed rules require that a company not only disclose assured evidence of its operational emissions inventories and climate risk exposure profiles, but their plans for managing them. This is to say that companies’ disclosures will help their audience—investors—judge whether they’re making progress toward 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 are commercially available, cloud-based ESG data management and reporting systems that enable such convoluted arithmetic. And as our survey found, a plurality (37%) of investors want companies, the vast majority of whom are failing to digitize their ESG programs, to change tack.
Investors’ reasons are simple enough. On the one hand, these systems eliminate risk of human error and delay in the collection and reporting of investment-grade ESG performance data. Yet, critically, these technologies enable end-users to extrapolate actionable insights from their ESG performance data.
Users of these systems can continuously monitor their ESG performance, benchmark it and evaluate the effectiveness of their subsequent investments and management decisions. And with their data storage, traceability and retrieval functions, ESG software enables users to package 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 ulterior advantages that end-users would do well to appreciate. From assigning responsibility for ESG performance goal achievement to incorporating internal stakeholder feedback into ESG program development and administration, ESG software enables business leaders to cultivate an “ESG culture,” which drives programmatic and enterprise success.
Whether you look to the dynamism of the ESG investment space or the potential for mandatory disclosures, it’s clear that the collection, usage and disclosure of investment-grade ESG performance data is quickly becoming a necessity. But that doesn’t mean it needs to be a burden. There are solutions that, if adopted, will yield untold advantages.