ESG measurement, reporting and ratings today are the wild west. That is without a doubt. As to their usefulness, it depends entirely on how the ESG data is being applied.
In a recent Harvard Business Review article focusing on Sustainability, Inc., Kenneth P. Pucker makes some solid arguments. He highlights what he sees as the limitations of ESG reporting, and states that in and of itself, “reporting should not be used as a proxy for progress.” The article points to sustainability reporting efforts as confusing, complex, and incomplete. Supply chains as shrouded in mystery, or simply swept under the rug. And, despite good intentions within “Sustainability, Inc.,” many well intentioned people getting lost in the reporting chaos and ‘greenwishing.’
As a former member of that group, Mr. Pucker shares that many of his cohort have “soured on the promise of sustainability measurement and reporting.” And that in aggregate, corporate sustainability efforts have not made much, if any of a difference in what they purport to achieve.
It’s easy to poke holes in what those working to advance the field of ESG are doing. But there’s just not enough time to be pessimistic!
ESG requires more than just ratings to be understood
On the proliferation and incompatibility of ESG ratings systems, we have to remember that reporting is still very young. Yes, work needs to be done – and is being done – to align frameworks. Companies are scrambling to collect their data and respond to myriad reporting requests, unfortunately eating up much of the time sustainability teams can focus on driving impact. Good.Lab can accelerate that transition, and is in good company with new U.S. policies aimed towards ESG regulation and standardization.
There was a time when financial reporting was young too, and it grew up. Also remember that no reporting system is perfect; an equity analyst lives not just on the tables in a 10-K but on the management discussion.
When it comes to effective impact within sustainability, audited data, the ratings, and the discussion need to complement each other. Much like evaluating a professional athlete with impressive stats, without the full picture of team chemistry and other intangibles, evaluation remains incomplete.
Scope 3 is essential to understanding ESG
Mr. Pucker’s article makes Scope 3 sound like such a challenge that it’s not worth trying to tackle. This is a classic case of making perfect the enemy of good.
Transportation of most goods, except items with a high volume to mass ratio (e.g., pool noodles) or via air freight, represents only a small fraction of lifecycle emissions. Much more important (and easier to estimate if not calculate) is the embodied energy and footprint of the material itself. Our intuition that complex supply chains are impossible to measure because of shipping stems from the reality that moving 170-pound people around in 3,500-pound vehicles is inefficient. Container ships and trucks, by contrast, move things incredibly efficiently, pound for pound.
The companies taking action on their full-scope emissions shows that these calculations can be done and are being done in line with the Science Based Targets initiative (SBTi). Many companies are leading here in the zero-carbon transition by setting aggressive emissions reduction targets and working toward those goals.
For true ESG impact policy must come into play
Emissions data cannot be thought of in a silo. Everyone’s Scope 3 is someone else’s Scope 1. At some point, someone has control of their operations, and that’s where policy comes into play. A sensible plan for carbon dividends is exactly the kind of mechanism that would close the “green premiums” for CO2-based fuels and circular material flows.
In the article, Mr. Pucker quotes Patagonia founder Yvon Chouinard’s mantra that ‘growth, growth, growth is destroying the planet.’ But there will be a time (perhaps not too long from now) where renewable energy will become cheap enough that eco-economic decoupling will be possible. Again, policy has a role to play in accelerating innovation.
The broader context of ESG
Let’s not forget the “S” for social in ESG. A generation ago, a self-proclaimed “skinny kid with a funny name” rising to the highest office in the land was nothing but a dream. In the same generation, a billion or more people in Asia have risen from abject poverty. Let’s also not forget the “G” for corporate governance in ESG. Good.Lab is one of the 3,500+ B-Corps that are working toward the structural change that Mr. Pucker says is needed.
Moving the needle on ESG impact
We have no counterfactual of a world in which there are no ESG efforts. It seems difficult to imagine that without these initiatives, regardless how error laden Mr. Pucker labels them, that society and environment would be better off. So, why not focus on both corporate leadership and driving policy? ESG efforts decidedly should not crowd out policy efforts.
Leading companies are going beyond the morass of basic ESG reporting and are implementing solutions to automate these mundane processes. Once the data is captured, sustainability teams within companies can focus on true impact, not on data management. And leadership can play a role at the policy level and learn not just to tackle the low hanging fruit or easiest to affect areas, but how to use their amassed ESG data to drive greater impact.
There’s much work to be done and it can take many forms. Corporate actions must continue to play a role and will only be complemented by grassroots action and policy advances. Has enough been done yet? No. Is there more to do? Yes. Good.Lab, is working with clients to help them better understand their material impacts and seek systems change, internally and externally. Let’s roll up our sleeves and focus on the prize: a better future for us all.