Corner office consensus over the merits of ESG performance data collection and reporting has not only withstood multiple headwinds but has been confirmed by companies’ investors, regulators and other stakeholders.
It’s encouraging to see, then, that most business leaders are pulling out all the stops to meet this imperative. Findings from a recent survey of business leaders at U.S. non-financial companies conducted by our company suggest that the vast majority of companies have either already implemented an enterprise ESG program or are in the process of doing so.
The trouble, though, is that our survey found evidence that many companies’ appraisals of the ESG imperative, as well as their approaches to accommodating it, are creating risks of blind spots and opportunity costs.
Indeed, it appears that many companies are still treating the collection and disclosure of ESG performance data as an obligatory reporting exercise when, in reality, the complete ROI of an ESG performance measurement, management and disclosure effort lies in how it guides business management and investment decision making.
In short, ESG’s value is a function of how well it’s operationalized.
To that end, business leaders must first develop thoroughly stakeholder-influenced ESG risk management targets, performance metrics and management responsibilities. Second, business leaders will need to equip personnel with cross-functional communications channels, as well as mechanisms that enable the continuous extraction and application of decision-useful ESG performance insights.
To their credit, the issuance of investment-grade ESG performance disclosures, as the majority of our respondents report doing, is a fundamental component of any credible enterprise ESG program. But this practice will generate precious little ROI if the disclosures do not depict how well a company manages the sustainability risks that matter most to its unique mission-critical stakeholders.
Unfortunately, the 2022 Benchmark ESG Survey found that most business leaders are collecting ESG performance data and, in turn, issuing disclosures primarily at the behest of their organizations’ senior leadership, as opposed to regulatory bodies, or their investors, suppliers, vendors or end-consumers. Moreover, most business leaders we queried see the positive impacts of their enterprise ESG programs manifest as brand reputation, employee retention and employee recruitment outcomes.
In other words, business leaders are disproportionately focused on accommodating the expectations of stakeholders whose decisions to engage with their firm are not only easier to anticipate but accommodate. The risk is that such a narrowly scoped approach may accomplish little in the way of winning over the most representative range of mission-critical stakeholders.
Operationalizing an ESG program capable of delivering continuous results needs the buy-in of internal stakeholders, too.
The findings of our survey betray an alarming degree of internal dysfunction.
Two main findings underscore this assertion.
First is the correlation between respondents’ seniority and their impressions of ESG’s ROI. Survey-takers that were relatively more senior—and more likely to be driving demand for ESG performance data—were more likely to report seeing positive sales, investor relations and sales lead generation outcomes from their respective ESG programs than their junior counterparts.
Second is the correlation between respondent seniority and their confidence in the competencies of their respective enterprise ESG programs. Most troublingly, the share of VP-level respondents who said they were “very confident” in achieving compliance with the U.S. SEC’s proposed corporate climate risk disclosure rule was nearly double those who self-identified as junior to a VP—a discrepancy with clear regulatory risks.
For an enterprise ESG program to be effectively operationalized, it must be developed and implemented with clear internal consensus. And it will need to be supported by mechanisms that enable program administrators—regardless of their seniority—to resolve any data management and reporting challenges they encounter over the course of the program’s lifecycle.
As far as solutions to these challenges, our survey-takers shared helpful insights.
Business leaders that reported using ESG data management and reporting tools sourced from a vendor (i.e., an external provider), as opposed to ESG tools developed in-house, were more likely to operationalize truly data-driven, forward-looking, stakeholder-influenced enterprise ESG programs. These respondents were also more likely to report that their systems were fully interoperable with their other enterprise data management systems.
These respondents also reported that their enterprise ESG programs were managed by a greater balance of cross-functional teams with transferable expertise in sustainability and corporate finance—an approach necessary for programmatic resilience and returns. This may help to explain Deloitte’s recent discovery that 99% of public companies have their sights set on technological advancements in their ESG data management and reporting capabilities.
The timely relevance of these findings cannot be overstated. Because while respondents to our survey who reported using vendor-sourced ESG tools expressed far greater confidence in achieving compliance with the SEC’s imminent rulemaking, the issuance of mandatory or voluntary disclosures is not the be-all and end-all of an enterprise ESG program.
To have a lasting bearing on companies’ bottom lines, simply issuing standardized disclosures won’t suffice. ESG programs must accommodate diverse external and internal stakeholder expectations. And they must be capable of driving continuous progress toward stakeholder-agreed targets.
But it’s only through continuous data collection and visibility, real-time predictive analytics and, of course, dependable cross-functional communication and collaboration that this can be achieved.