The trouble with ESG metrics: Navigating frameworks
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Issue #98: A weekly update on responsible investment.
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\\ Weekly Insights \\
I saw a particularly good Financial Times article this week “Navigating the thicket of ESG metrics.” It dives into a number of key ESG 101 topics that point to how challenging navigating this rapidly changing space can be for people and companies. A few of the problems it points out:
- Lack of a single market standard
- Differences between ESG rating agency scores
- No standard definition around an “ESG [financial] product”
- Acronym OVERLOAD (Quiz: GRI v SASB v CDP v IFRS v DJSI v GEI v TCFD v TNFD)
- ESG due diligence in public equities versus private markets
Like any new industry, the problem list is long but my view is we must understand the key industry challenges in order to begin overcoming them. The article then shares some cases of how public equities investors focused on ESG may go after an engagement model to improve the E, S or G performance of their investments. Similarly, for individual capital or money coming from family offices, increasingly there is demand from this group to make impact investments in order to get direct insight into what exactly their money is doing. For investors interested in impact in particular, comparison between investments is even harder as “What is impact investing” can be an even wider range of definitions than ESG.
The article concludes by sharing some work done by the Impact Measurement Project where it aims to help investors measure social and environmental performance via a 5 dimension approach. The first three:
- “What”
- “Who”
- “How much”
Finally, the article offered a very helpful guide I wanted to re-share:
Alphabet soup: a guide to ESG reporting bodies
The Global Reporting Initiative (GRI) launched its sustainability-focused reporting guidance in 1997 (its Global Sustainability Standards Board sets standards for sustainability reporting). Organisations such as the Global Impact Investing Network (GIIN) and B Lab later developed impact assessment methodologies.
Some organisations provide reporting guidance on an industry basis. For example, in 2018, the Sustainability Accounting Standards Board (SASB) launched a set of standards covering financially material issues for companies in 77 industries.
Others take a single issue as the focus for reporting guidance — such as the Task Force on Climate-related Financial Disclosures (TCFD), which has become the leading framework for corporate climate change disclosure.
Efforts to streamline and standardise ESG reporting have led to collaboration that could make life easier for companies, investors and their advisers. In April, B Lab and the GIIN, for example, aligned their impact assessment tools, enabling investors to use B Lab’s tool, the B Impact Assessment, and the GIIN’s Impact Reporting and Investment Standards (IRIS+) together.
In June, the SASB and the International Integrated Reporting Council (IIRC) merged, to become the Value Reporting Foundation.
\\ Nossa News \\
We were featured in FinTech Times!
“As a female founder, I view it as my duty to support other women groups and minority groups to develop themselves within the fintech sector. There are a few key ways that we have focused on doing this within our own organisation.”
Ethics in Tech
What issues do you see as most salient within ESG and tech?
“Starting with the environmental (E) sustainability of digital systems, one issue is the computational efficiency of technology; this relates to how an organisation is thinking about the environmental impact of its tech footprint. The environmental impact entails things such as policies on digital waste (disposing, repairing, upgrading) and location of its data centres. Over the last few years, we’ve had this trend of moving to the cloud, and now there’s a trend towards ‘edge compute’. Edge is where you throw the computation down to the point where the data is collected; the problem is that you don’t necessarily have as much control over two things: 1) the efficiency of the computation with when it happens at the edge. 2) the carbon footprint, particularly if the edge is no longer within your organisation.”
\\ Top Stories \\
6 Elements You Need to Build Effective ESG
Today, successful organizations see ESG not as a cost of doing business but as a critical function of business strategy. Having a powerful and effective ESG platform is intrinsic to growing your business and leading your competitors as well as to serving your customers, workforce, partners, investors, communities, and the planet. How can you do it?
- Decarbonization
- Ethics
- Governance
- Resource efficiency
- Equity
- Employability
Accounting for Climate Change
Corporations face growing pressure — from investors, advocacy groups, politicians, and even business leaders themselves — to reduce GHG emissions from their operations and their supply and distribution chains. To begin solving this problem, the authors propose that companies tackle ESG reporting in a more targeted and auditable way. They should first develop specific and objective metrics for the most important and immediate ESG problems, rather than produce catchall reports that are often made up of inaccurate, unverifiable, and contradictory data.
Harvard Business Review.
Facebook and climate change — a story of low hanging fruit
Measures suggest Facebook pays much less attention to environmental, social, and governance (ESG) issues than its peers. GlobalData’s company filings analytics show that Facebook mentioned ESG 92 times in 2021, while Alphabet (Google’s parent company) mentioned ESG 1,101 times. Mentions is not action, but is Facebook addressing it’s ESG issues? It is hard to say. The company recently announced that it would begin to clamp down on the illegal sale of protected Amazon rainforests on its peer-to-peer ecommerce platform. However, the company has so far failed to release details of how it will tackle the problem. This raises questions about how far the company will go to prevent illegal listings and the legitimacy of Facebook’s ESG promises more broadly.
The Verdict.
How Private Equity Can Converge on ESG Data
The pressure on companies to make progress on environmental, social, and corporate governance (ESG) issues has rapidly escalated within the private equity industry. But the lack of a consistent ESG data collection and reporting framework has made it challenging for general partners (GPs) to ensure their portfolio companies are making progress on material ESG goals, to assess the link between ESG and financial performance, and to share meaningful ESG performance metrics with their limited partners (LPs), who have their own ESG investment goals. LPs, in turn, cannot benchmark the ESG performance of different funds. And portfolio companies cannot prioritize their own ESG efforts without a clear understanding of their optimal impact and value.
BCG.
Stepping from Enterprise Value to Double Materiality
The UK announced this week that it is joining Europe in requiring investors and corporates to both report on their impact on the environment as well as the environment’s impact on them. This is also known as double materiality. Applying to pension schemes, asset managers and asset owners, the Sustainability Disclosure Requirements (SDRs) aim to combat greenwashing by ensuring that sustainability claims are justified and, where appropriate, supported by credible net-zero transition plans. The SDRs will be building on the UK’s existing climate disclosure framework, based on the Task Force on Climate-related Financial Disclosures (TCFD) guidelines, but will also require UK-based investors and companies to report in line with the UK’s planned Green Taxonomy.
ESG Investor.
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\\ Report Highlight \\
Greening Finance: A Roadmap to Sustainable Investing
HM Government
This paper sets out the UK government’s long-term ambition to green the financial system and align it with the UK’s world-leading net-zero commitment.
This is set out in three phases:
- Informing — ensuring decision-useful information on sustainability is available to financial market decision-makers
- Acting — mainstreaming this information into business and financial decisions
- Shifting — financial flows across the economy shifting to align with a net-zero and nature-positive economy
This paper sets out the first phase, informing. How will informing happen? Via new economy-wide Sustainability Disclosure Requirements.
How does information capital flow through the economy?
What to expect:
- Integrated — investment products, financial services firms, and real economy corporates will be required to report consistent information on sustainability.
- Streamlined — the regime will streamline existing disclosure requirements — such as the UK’s commitment to make reporting aligned with the Task Force on Climate-Related Financial Disclosures (TCFD) mandatory — with new requirements, including on reporting environmental impact.
- Consumer-focused — investment products will need to set out consumer-focused disclosures showing the impact, risks and opportunities of the activities they finance on sustainability. This will be accompanied by a consumer-facing label developed by the FCA so that consumers can make informed investment decisions that take sustainability into account.
- Credible — asset managers, asset owners and investment products will be required to substantiate sustainability claims they make.
- Robust — disclosure requirements will include reporting under the UK Green Taxonomy, which will provide a robust list of economic activities that count as environmentally sustainable.
- In line with international standards — the UK is a strong advocate for international standards for sustainability reporting, and is preparing the ground to adopt international standards in this area (subject to consultation).
\\ Leading Across ESG \\
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Thank you for reading! Tell us what you think!Hi, I want to say thank you for subscribing to Nossa Data’s weekly email on ESG. There is a growing expectation that the same way a company’s financial information should be accessible, so should a company’s ESG or non-financial information.
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Julianne
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Julianne Flesher
Co-founder of Nossa Data
