Impact Investments Demand Transparency, Spotlight
Investors are scrambling to get their arms around the risks associated with the new normal. Climate change, carbon emissions, supply chain, equality, and human rights represent unknown risks in financial markets.
Nearly nine out of 10 millennial investors want sustainable investments. ESG-related instruments have already attracted $35 trillion. The sector will likely exceed $53 trillion by 2025. A recent study found that Millennial investors are twice as likely to invest in companies targeting social or environmental goals, while 72 percent of Gen Z believes in responsible investing. In response, many organizations are embracing sustainability as part of brand management. Many companies now see environmental, social, and governance (ESG) reporting, as a tool to attract customers, investors and financing. It’s also a benchmarking tool that helps stakeholders find the best corporate performers.
In a recent survey, EY found that 82 percent of CEOs embrace ESG as a strategic opportunity. ESG strategy can help a company build customer loyalty, attract and retain loyal employees, attract capital and more.
“ESG is Brand Management 101,” said Gary Chandler, CEO of Crossbow Communications. “If we can keep the green washers out, ESG can be part of the solution.”
In order to realize its full potential, ESG reporting and investing demands consistency and accountability to prevent fraud. The business world must promote trust, good governance and best practices by creating clear standards for ESG reporting. Standardized performance measures will help investors avoid the following risks:
Environmental: Is the organization a steward of the environment? Is its footprint growing or shrinking? Is it reducing carbon emissions, preserving biodiversity, improving air and water quality, combatting deforestation, or managing its waste?
Social: What is an organization doing to improve lives? Does it nurture its people and workplace? Does it have gender, BIPOC, and LGBTQ+ inclusivity initiatives? Does the company have community involvement, human rights and labor standards?
Governance: What is an organization doing to prevent corruption and ensure its investments remain sustainable in the future? Does the company have internal controls, policies, principles and procedures governing leadership, board composition, executive compensation, audit committee structure, shareholder rights, bribery, lobbying, political contributions, and whistleblower programs?
What’s the difference between ESG and CSR?
ESG aspires to be a set of disclosure standards that companies complete to communicate sustainability initiatives. Stakeholders, like investors, use ESG reports to screen their investments. CSR is a philosophy where a company strives to improve the world around them.
As ESG has become a priority for investors and companies alike, ESG scoring aspires to grade organizations on its ESG efforts. Like a credit score or a bond rating, an ESG score denotes a company’s ability to meet its ESG commitments, its performance, and its risk exposure.
Assigned by third-party providers, ESG scores are calculated based on a set of ESG metrics. Each agency uses a different set of criteria to score organizations.
Bloomberg ESG Data Services Bloomberg’s Environmental, Social & Governance (ESG Data) dataset offers ESG metrics and ESG disclosure scores for more than 11,800 companies in 100+ countries for over 410,000 active securities.
Isometrix A leading integrated risk management software developer, providing state-of-the-art solutions for ESG management.
Dow Jones Sustainability Index Family is a pioneer of ESG indexing for benchmarking, screening and analysis.
RepRisk: The RepRisk ESG Risk Platform is the world’s largest database on ESG and business conduct risks. Delivered as a Software as a Service (SaaS), it allows you to conduct in-depth risk research on companies, infrastructure projects, sectors, and countries. Identify the industry-specific material ESG risks in line with the SASB standards, assess ESG risks of companies and projects through RepRisk’s lens.
These organizations are free to present ESG information in almost any format. However, common formats include:
Nasdaq OneReport is a secure, cloud-based solution for collecting, aligning, and sharing your ESG data.
Global Reporting Initiative (GRI) is a framework that helps companies disclose both the positive and negative impact their business has on the environment, the economy, and society. The GRI Standards have been strengthened so they deliver the highest level of transparency for impacts on the economy, environment and people, with a major update to the very foundation of the world’s most widely used sustainability reporting standards, the Universal Standards, and the introduction of the first GRI Sector Standard. GRI is the most referenced ESG framework among all industries.
The Sustainability Accounting Standards Board (SASB) SASB Standards connect businesses and investors on the financial impacts of sustainability. SASB’s Materiality Finder provides stakeholders with a visual representation of their portfolio’s exposure to specific sustainability risks and opportunities.
The Task Force on Climate-related Financial Disclosures (TCFD) The Financial Stability Board created the Task Force on Climate-related Financial Disclosures (TCFD) to improve and increase reporting of climate-related financial information. The TCFD has developed a framework to help public companies and other organizations more effectively disclose climate-related risks and opportunities through their existing reporting processes.
Carbon Disclosure Project (CDP) CDP is a nonprofit organization that runs the global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts. CDP actually ranks the top ESG scores for companies around the world. Unfortunately, it lists some serious offenders as leaders, including a tobacco company. It also touts the achievements of Unilever, which has been concealing its role in tropical deforestation for palm oil.
Streamlined Energy and Carbon Reporting (SECR) is a framework created by the UK Government that guides organizations on how to report on their carbon emissions and energy usage on an annual basis.
The Workforce Disclosure Initiative (WDI) is an investor collective that formed to help companies communicate labor practices to stakeholders. It aims to improve transparency and accountability on workforce issues by providing companies with a framework for disclosing comprehensive and comparable workforce data. As ESG’s popularity grows, its critics become louder. They claim that scoring a company on these metrics is subjective. They claim that ESG ratings rarely inspire meaningful change. Unfortunately, they have been used to cover up environmental crimes. For example, many companies that purchase palm oil have waived the flag of sustainability, while fueling wholesale deforestation and an assault on biodiversity and humanity. They hide behind the name of sustainable palm oil, which is a meaningless term thanks to the Roundtable On Sustainable Palm Oil (RSPO) and its deceptive creators. Thanks to the RSPO, several companies are promoting ecocide, while waving the green flag.
There are plenty of incentives for companies to lie. The Security and Exchange Commission created a Climate and ESG Task Force to help identify misconduct. It also created a website to receive ESG-related tips, referrals, and whistleblower complaints.
The key is to maintain safeguards, ask tough questions and invest in better reporting. We must define what constitutes material information. We need standardized frameworks and definitions for issues such as climate impact, human rights, and income inequality. Transparency and consistency are essential. Failure isn’t an option.