What “ESG Impact” red flags should you be aware of?
Here’s a note from Evan Vahouny:
Here’s my rapid fire on things to look out for as we use increasing amounts of data to move the ESG and impact needle:
1. Garbage in garbage out. Data reported in aggregate on behalf of multiple companies (e.g., by a fund) is less reliable than data self-reported by each company individually, and data self-reported by individual companies is less reliable than raw source data extracted directly from company databases. Getting data as close to the source as possible is going to become an issue of growing importance as stakeholders make data-backed decisions.
2. Lack of data validation. Human error is part of every industry, and ESG/impact isn’t exempt. Results that self-calculated and self-reported by the disclosing company, without internal or external data validation, are much more prone to unintentional (or intentional) inaccuracy of results.
3. Reporting in a vacuum. I often see ESG reports and disclosures from some of the world’s largest companies displaying results of only the last year. No results from prior years, no benchmarks, and no quantitative targets. This makes it difficult (if not impossible) to assess progress. It also doesn’t acknowledge that ESG and impact strategies often take 5-10+ years to produce measurable results. Reports and disclosures should include the longitudinal results for as many years back as possible.
4. Lack of qualitative explanations. Without contextual explanations and well-thought out improvement plans provided alongside specific metrics, ESG and impact data is not actionable. Leaders and stakeholders will only have half of the story, will not be able to interpret the hodgepodge of visualizations, and will form inaccurate conclusions (for better or worse). Transparent context and action plans are critical!
5. Lack of third party assurance. Cherry-picking specific metrics and calculating results in ways that are designed to make the company look good, while dropping or ignoring results that don’t, is going to become increasingly more common as pressure mounts for transparent reporting. Without a third party who assesses to the depth of these two issues, the risk of this practice will continue.
6. Commitments that hinge on one executive. Commitments to impact and sustainability should be built and embedded into the governance structure at all levels of the organization. Without this top to bottom integration, changes in leadership will give in to economic or political shifts that revert back to the old ways of profit > everything.