Every year, the call for increased sustainability - in everything from operations to products to the very people we do business with - grows louder. Stakeholders want transparency into what businesses are doing to increase their sustainability. Customers want it from their brands, as they look for shared values when making purchasing decisions. Partners and suppliers, too, look for demonstrable actions toward ESG (that’s environmental, social and governance) initiatives. And investors, knowing that customers and partners’ evaluation of a company’s sustainability holds real weight, want that transparency as well.
Beyond the most obvious reasons for organizations to pursue real sustainability, recent years have shown that prioritizing ESG can be a competitive differentiator. Those that ignore it do so at their own peril.
If you feel like companies are paying more attention than ever to ESG, or at least being more vocal about it, there’s a pretty good reason for that. They kind of…have to. The U.S. Securities and Exchange Commission (SEC) is gearing up to enact significant ESG disclosure requirements, and similar regulations passed by the European Union in recent years are beginning to come more fully into effect. As a founder and CEO of a management platform for procurement, compliance and ESG, I believe more will likely follow, whether they be in specific industries or regional jurisdictions. Businesses, especially those operating on a global scale, are feeling the heat and taking steps to get their tracking and reporting systems in place.
ESG Disclosures and Ratings
Despite all the focus on ESG and companies’ ESG scores, many overlook a very important fact: ESG disclosures and ratings are not the same thing. First, in many cases, disclosures are required by law (or will be, as governing bodies like the SEC ramp up new rules). Ratings are not.
Disclosures are meant to provide that much-desired transparency and detail into a company’s efforts toward sustainability for interested parties. Ratings, on the other hand, are meant to give investors and stakeholders an accessible comparison of different companies’ ESG efforts. These are both incredibly important as we move toward greater sustainability, but a tricky aspect of ratings is that there are multiple rating bodies and no standardized rating system to meaningfully relate one rating provider’s findings to another. Many of these providers do excellent work analyzing companies’ ESG efforts and providing ratings, but how do you compare an “AA” rating from one provider to a 55 out of 70 score from another—and a “Laggard” rating from a third? There may also be situations where an organization rates highly on one provider’s review but low in another’s analysis since methodologies also change from one provider to the next.
Despite this awkwardness, I think both ratings and disclosures are clear steps in the right direction. These systems may have flaws, but such systems don’t need to be perfect out of the gate. They can still be useful, even as we work to improve them. Most importantly, ratings and disclosures have helped bring ESG initiatives into the common language—people are talking about them, thinking about them and planning on implementing them.
It Pays To Be Proactive As companies scramble to race the coming ESG regulations, many are going to have an important choice on their hands—how reactive or proactive are they going to be with their implementations in the coming months and years? I think organizations that don’t want to be skewered by public perception in the near future should consider thinking proactively.
Those monitoring ESG commitments will likely be looking for continuous impact—something real, lasting and evolving. In my opinion, a reactive Band-Aid approach is a short-sighted way to approach sustainability, and companies that try to cut corners will be left behind—both in the ratings and in the marketplace.
Doing good is good for business—it just takes some extra work to get it done right. The alternatives are bleak, as well: a spiral of negative associations and consequences. A company not prioritizing ESG in the early going will likely face lagging ratings and a negative sustainability profile in the public eye, which, in turn, could result in less access to capital and difficulty hiring top talent. Limited resources, both financial and personnel-related, can make it difficult for that business to catch back up to the ESG leaders in their industry, potentially allowing their rating to slip further and further behind. The cycle continues.
Starting Today So, what can companies do now to make sure their ESG efforts lead the charge instead of falling into a reactionary pattern? Many actions that will line up nicely with a sustainability-focused organization are industry-specific, but there are some industry-agnostic things businesses of all stripes can get started on.
One of the most important things is to start working on collecting master data around your company’s emissions. Having transparency into your carbon footprint will be crucial, and collecting all of the data around a company’s emissions takes time. It’s especially more time- and labor-intensive when it comes to figuring out the emissions of a company’s supply chain—which they are still graded on, as they’re considered “Scope 3” emissions.
Two-thirds of a company’s ESG responsibilities lie within their supply chain, but it’s still their leaders’ obligation to collect that data and identify where changes can be made, and then do what they can via incentives and penalties to encourage their supply chain to move in the right direction. Or, if that doesn’t work, they can show that the company is taking steps to address the problem by replacing poorly performing (when it comes to emissions) suppliers with other vendors.
And finally, don’t come at this haphazardly. Take the immediate step to build out an actionable structure to identify what actions need to be taken to improve their ESG efforts, how to get those actions moving and what to do to evaluate the initiative’s success or failure. Building a sustainable company that will be an ESG leader isn’t a one-off project. It’s an ongoing process that should be woven into the fabric of a company, and by building a structure that can be optimized and iterated on in the future, a company that can distinguish itself from the pack.
Source: https://www.forbes.com/sites/jeffkauflin/2023/07/06/brazils-nubank-is-leaving-us-digital-banks-in-the-dust/?sh=468741871544
Comments