Death by Survey

Over the past year we have spoken with dozens of companies about ESG performance and disclosure. Sustainability teams are thinly staffed and overwhelmed by the sheer volume of surveys, requests for information, and the alphabet soup of reporting frameworks competing for their attention.

The good news is that there is increased recognition in the market that material ESG factors matter. The bad news is that there’s a lot of noise in the data and reporting landscape. Most third-party data providers do a decent job of rating company disclosure, but insight into actual corporate operational performance remains elusive.  While each year more companies report on ESG factors, the data are not often useful for investor decision making. The proliferation of reporting frameworks with different metrics makes it difficult to compare performance across companies in the same vertical, let alone across industries.

So what have we been telling companies?

  • We feel your pain. Before joining Inherent Group, I was a sustainability executive in the oil and gas and pharmaceutical industries. So I was that sustainability leader frustrated by stakeholders who don’t seem to know what data they want or how they want it presented. Remember that sustainability is a business function like any other, and as such, should align with business strategy and priorities, set targets, measure performance, and adjust execution as appropriate.
  • Figure out which ESG factors are important to the business. The key is to focus on a handful of ESG factors that are important to the business and to drive them through operations. Sustainability is about operational excellence, not report writing. Look no further than the Deepwater Horizon tragedy in the Gulf of Mexico to see the impact of a negative ESG event on a company’s cost of capital. Critical ESG factors vary industry by industry. For example, occupational health and safety performance is more material to manufacturing firms than to service businesses like banking. Supply chain labor standards are more material to apparel firms than to software developers. Resource efficiency is a factor that, on the other hand, is critical in most if not all industries. Several studies conclude that green house gas (GHG), water, and waste intensity are highly correlated with financial performance.
  • Start with what you are already doing. Manufacturing company? Chances are someone in the organization is already tracking occupational health and safety performance. Health insurer contracting with Medicaid or Medicare?  Somebody in operations is focused on patient and provider satisfaction metrics. For nearly all companies—has management identified talent or cyber security as risk factors in the company’s SEC filings?  Let stakeholders know specifically how these issues are being addressed.
  • Provide clear definitions and denominators. If you audit 400 of your suppliers each year, disclose the total number of suppliers in the chain and what percentage of inputs the 400 represents. If you plan to reduce GHG emissions by 20% by 2020, share both the baseline data and the process used to set the reduction target. Do you have a health and safety policy?  That’s a start—but we want to know how it is implemented, not that it is posted at your facilities.
  • Map sustainability governance. Explain who in the organization, and on the board of directors, is responsible and accountable for sustainability strategy and governance. This helps us understand how closely sustainability is integrated into the business.
  • Provide a balanced picture of performance. We don’t expect perfect. We do expect companies to focus on the top ESG factors that are either material risks or opportunities for the business and to achieve a sense of positive momentum over time. Share challenges as well as accomplishments.

When I was a corporate sustainability executive, my goal in each role was to put myself out of a job in the hopes that sustainability would be fully integrated into operations. As investors, we hope that ESG becomes a standard part of every investment process.