Have you ever noticed that investors and key stakeholders have certain assumptions about how sustainable your operations are, or they ask about your management of ESG-related issues? Ever been engaged by investors asking what you’re doing to manage your ESG risks, only for them to suggest your peers are doing things more strategically?
At any given moment, there are multiple players looking at your disclosures and comparing your performance and management of ESG concerns to peers. For instance, third-party ESG ratings providers and investors form assumptions about ESG strategies and risks based on public disclosures – but those assumptions don’t always tell the full story.
Suffice it to say, if you don’t tell your own ESG story, someone else is certainly telling it for you. It’s time to own your narrative.
Who’s Evaluating Your ESG Performance?
Various stakeholders and entities are interested in your approach to ESG, including:
|Investment managers||May have ESG-specific funds or mandates and can only invest in companies that fit the mandate.||Global ESG Assets Under Management (AUM) are predicted to be $50T by 2025.|
|Third-party ESG research and rating firms||Firms such as Sustainalytics, MSCI, ISS, and others rate companies based on their ability to manage ESG-related risks. Where there are limited company-provided disclosures, these firms use third-party data to bridge the gap.|
|Regulators||To mitigate greenwashing and validate compliance, regulators mandate certain ESG reporting standards and ensure the integrity of ESG-related data.||An SEC climate reporting proposal is expected to be finalized before the end of 2023.|
|Banks||Many banks have signed onto goals aimed at reducing their lending to carbon-emitting businesses.||A survey of 55 banks and financial institutions representing $40+ trillion in assets revealed that 46% of respondents expect to limit credit underwriting to low-carbon, ESG-aligned customers by 2050.|
|Insurance||Underwriters incorporate ESG risk (i.e., climate change) into risk models.|
|Supply chains||Scope 3 emissions, a category of Greenhouse Gas Emissions (GHG), are produced by your value chain, including your suppliers. If your company is in someone else’s supply chain, they may be looking for your carbon emissions data.||Amazon and Microsoft are among two of the largest companies mandating climate reporting from all their suppliers.|
Make Your Story Yours
The above stakeholders look at what you are or are not saying regarding your approach to mitigating ESG risks. Where there are gaps in your disclosures, they leverage alternative data sources and internal methodologies to make their own ESG assessments of your company’s operations, which may not fully capture your approach or may not account for your internal strategy for managing key ESG topics.
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Investors and other stakeholders compare your ESG strategy against your peers and make valuation assumptions and assess an embedded level of risk. However, only you know what your sustainable strategy is – it would be hard for others to gather this insight. So, telling your own story allows you to course-correct the narrative (if playing catchup) or shape it from the start (if the company is new).
Failure to engage in the larger ESG conversation with your own corporate ESG story can result in ineligibility for ESG mandates, lost investments, limited access to credit, or perhaps higher insurance premiums – any or all of which are ultimately a high price to pay.
How to Tell Your ESG Story
To write a story, start with chapter headings and content. For this purpose, the chapter headings will be based on materiality – that is, the ESG elements that are material to the business. The content will be the data that’s calculated, validated, and disclosed against those elements.
ESG Story Chapter Headings: Materiality
The first step in telling your story is to figure out which ESG-related data elements are material to your business. Materiality is arrived at in the following way:
- ESG materiality assessment: Utilize established frameworks such as SASB to gain an understanding of the ESG metrics that are material to your industry. SASB has already done the work of developing 70+ distinct industry standards that serve as a great starting point to define materiality, which has been used as a market baseline. Further, new regulations include their own set of standards – such as ISSB and the ESRS – that provide guidance on key ESG areas of focus across E, S, and G.
- Peer benchmark: Supplement the above assessment with a review of what peers in your industry are disclosing with respect to ESG and what may have been defined by industry-specific affinity groups.
- Employee, executive, board, client perspective, and the rest of your value chain: Complete the definition of your ESG story by understanding what your firm prioritizes internally at both the grassroots and board levels. Finally, talk to external stakeholders, such as key clients, and see what they are expecting from their vendors. The larger your key client, the more likely they have ESG expectations from their suppliers. So, you want to be proactive in addressing these.
Telling your ESG story requires the chapter headings to be defined. An airline and a consumer staples company, for example, both want to tell their ESG story, but their chapter headings will be quite different. The materiality assessment, peer benchmark, and stakeholder perspectives will allow you to define what components are part of your story.
ESG Story Content: Company-Specific ESG Data
After completing the materiality assessment, looking at your peers, and talking to stakeholders, it should be clear what ESG data elements are material to your business. Let’s say these include GHG and employee diversity, which means you at least have “Carbon Emissions” and “Employee Diversity” chapters in your ESG story. Now how do you fill in the rest of the content?
Some content creation will be simply a function of accessing existing company data repositories, while other content will require utilizing new, ESG-specific technologies. In this example, employee diversity data should be easily retrievable from HR systems such as Workday and Oracle – albeit it is important to consider that not all organizations are capturing the breadth of diversity data that may be required, so additional efforts may be necessary.
Calculating your inventory of GHG emissions will require utilizing a new class of tools known as “carbon accounting.” These tools can upload data on items such as your utility usage, business travel, office leases, truck fleets, etc., and apply emissions factors based on the Greenhouse Gas Protocol to come up with your Scope 1, 2, and 3 carbon metrics. Carbon accounting vendors include Sustain.life, Persefoni, Watershed, and many others.
Calculating the emissions produced by your organization’s upstream and downstream value chain, known as Scope 3 emissions, requires key collaboration for data collection and integration into your overall business strategy. This may require tools to survey your suppliers and assess their responses. Tools that help with this include Ecovadis, which was created with purposes like this in mind, and Coupa, which extends its existing procurement platform to this capability.
Don’t let the market make assumptions about your ESG story. Write the story yourself so that your company’s ESG reporting efforts and disclosures are a strategically open book – not a mystery.
For expert support defining material ESG metrics and compiling relevant ESG data, contact CrossCountry Consulting.