As the green agenda gains momentum, more and more companies are releasing reports disclosing their environmental impact and targets for cleaning up their act. But the standard of sustainability reporting is threadbare at best, and some of those reports may be misleading.
Only one of the world’s 25 largest companies has made a net zero pledge with “reasonable integrity”, according to research from the New Climate Institute. Unambitious targets, vague or non-existent strategies, and the failure to include downstream or upstream emissions in their value chain often render company pledges little more than a hollow promise.
As investor appetite for green business grows, it is more important than ever that the flow of capital into low-carbon enterprises is not hindered by limited, inconsistent, or outright deceptive data. And while governments are increasingly waking up to their responsibilities to introduce standardised mandatory ESG ratings, there is now a convincing case for businesses to kick the process off themselves. Greenwashing has lived out its day, and those who don’t get on board with meaningful sustainability reporting soon will find themselves bobbing without a life ring in an increasingly choppy sea.
Baby steps
The number of companies filing environmental, social, and governance (ESG) reports using Global Reporting Initiative (GRI) standards has increased a hundredfold in the past 20 years. This figure is impressive, but it starts from a very low base. It’s also not a very useful indicator of business attitudes towards sustainability, because it doesn’t account for the quality of those reports.
For many companies, ESG reporting remains a box-ticking exercise. Many corporates see bare-bones reports as enough to alleviate investors’ concerns about sudden capital outflows due to ESG screening by governments or institutional investors. One large European retailer, which purports to aim for carbon neutrality by 2040, currently appears to exclude about 80% of its locations from its reports. Meanwhile, a large American healthcare and pharmacy provider has set itself an easy target for 2030 emissions reduction by comparing it to a base year with unusually high emissions.
The underlying problem is that governments and trade bodies don’t mandate sustainability reporting. That gives some companies a free pass to withhold all information about their environmental impact. It also allows others to disclose data in a format which is not audited, and so hide or bury their most significant climate shortcomings. There is a pronounced mismatch between the way in which financial data is scrutinised (including compulsory auditing at great expense to companies) and the loose regulation surrounding sustainability data.
In a world of global supply chains, traceability is more elusive than ever. This can easily be exploited by companies wishing to conceal their impact on the environment. Emissions can easily be outsourced to third parties – known as value chain emissions or scope 3 emissions. According to CDP, an organisation which collects corporate carbon emissions data, fewer than half of the companies that disclose sustainability data actually track and report on scope 3 emissions.
Misleading definitions of “sustainable” also hinder effective reporting. Nearly two out of every three dollars classified as socially responsible investment are in “negative screen” funds, according to the Global Sustainable Investment Alliance. “Negative screen” funds count as sustainable on the basis of excluding one or more categories of investment, such as firearms or alcohol. Such investing does little to promote or reward genuine ESG impact. In fact, a Wall Street Journal investigation in 2019 found that eight of America’s biggest ten ESG funds were investing in oil and gas.
What business can do
In January, the German stock exchange Deutsche Börse launched an ESG Visibility Hub – a service for issuers on the Frankfurt Stock Exchange to publish sustainability data on the bourse’s site. Companies can now publish ESG ratings and sustainability reports alongside their key financial metrics.
To help smaller companies which haven’t reported on ESG before, the exchange is also giving out resources like a best practice guide and the ESG KPI Report. In this new reporting format, the key performance indicators selected are based on the highest global disclosure standards, including the GRI and the German Sustainability Code.
“More and more professional and private investors are including environmental, social, and ethical aspects in their investment decisions alongside traditional criteria such as profitability, growth and security,” said Eric Leupold, Head of Cash Market at Deutsche Börse in a press statement. “With our new offering, we want to give issuers the opportunity to disclose their ESG activities and thus ensure more transparency for investors.”
The Frankfurt Stock Exchange is not the only example of businesses rallying around common ESG standards. Another illustration is ESG Book, a platform created by a group of international businesses and financial institutions. It provides a centralised location where companies can upload their ESG data using a common set of measurements.
Companies and organisations contributing to the ESG Book include Deutsche Bank, Allianz, the Responsible Jewellery Council, the Climate Leadership Coalition, and the Climate Governance Initiative.
These new initiatives show that companies are coming to see sustainability as an integral part of their investment story. This is precisely the shift in mindset we need if the growing wave of green investments is to make a difference in the fight against climate change.
For now, collaboration on ESG reporting remains the exception rather than the norm. But with investors increasingly willing to look beyond unsubstantiated pledges and inspect the real impact of the companies they’re investing in, the smart players will make this necessary leap before they’re pushed.
