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The state of ESG: boiling-off the alphabet soup

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As the UK and Europe recently baked in +40C heat, the need for ESG to begin to make an impact has never been greater.  Streets Consulting’s Andrew Dunn looks at the current state of ESG reporting and the role Fintechs can play in supporting institutions on their path towards a greener future.

Time’s up for ESG ‘washing’

As the UK and Europe recently slow-roasted at more than 40 degrees C, smashing previous high temperature records in the process, media and public attention has once again turned toward climate change

Whilst disturbingly regular extreme weather patterns are driving public sentiment across the world, authorities are now starting to clamp down on greenwashing.

Forbes recently reported on these developments, as German police raided Deutsche Bank after the institution was accused of ‘fudging its ESG credentials’, and the SEC fined BNY Mellon $1.5m for ‘…Misstatements and Omissions Concerning ESG Considerations.’ 

Besides greenwashing, other types of reputation ‘washing’ also proliferate, for example, social washing or ‘swashing’, such as ‘pinkwashing’, where organisations adopt the pride flag temporarily within their brands during pride month, whilst not necessarily addressing diversity and inclusion among their workforces. During the recent International Women’s day, as many companies signalled their support, a bot was set up to monitor social media statements, replying to each corporate post with each organisation’s gender pay gap, often highlighting the disconnect between public image and underlying corporate behaviour.

Boiling-off the ‘alphabet soup’ – in ISSB we trust

At the recent ESG Fintech Summit in London, panellists were quick to point to the many different ESG reporting bodies and frameworks across the globe as a serious problem. The charge is that this ‘alphabet soup’ of acronyms and constantly updating guidance has created a complex and opaque world where greenwashing etc. can take root. In theory, the simplification of ESG reporting would make it harder for organisations to greenwash. 

Previously – and this gets into the weeds – the CDSB (Climate Disclosure Standards Board), IIRC (International Integrated Reporting Council) and SASB (Sustainability Accounting Standards Board) had all been created to address ESG reporting globally.  Each body had their own frameworks and recommendations. Each reporting organisation individually had to decide which framework to adopt.  This made like-for-like comparisons impossible by global stakeholders, as different guidance produced different measurement, analysis and reporting of ESG factors.  Progress was made when the IIRC and SASB combined to form the VRF (Value Reporting Foundation).  Then, last year the ISSB (International Sustainability Standards Board) was formed, combining the VRF (formerly IIRC and SASB) and CDSB. 

In addition, the G20’s FSB (Financial Stability Board, formed in 2009 after the 2008 crash) had introduced a ‘common global framework’ in 2015 for ESG reporting – the TCFD (Task Force on Climate-related Financial Disclosures). TCFD is already mandatory for certain large and listed entities within the UK. To help further streamline ESG reporting, the ISSB is planning to produce standards aligned with the TCFD.

By the end of 2022, the consolidation of bodies is expected to leave the ISSB as the one body setting a standardised ESG reporting framework across the world.  

Bad data is a real problem for ESG reporting

In today’s digital world, organisations are inundated with information and ESG data is seen as another layer which organisations have to deal with. This is difficult given the ‘alphabet soup’ problem, leaving many organisations unsure as to what data to measure, how to analyse the information, what information is actually relevant to their sustainability and finally, how to report this information to stakeholders.  

And while ESG reporting is being adopted at a rapid rate due to the urgency of the climate change problem, organisations are struggling to keep up – one panellist at the ESG Summit described the problem as ‘trying to build the plane whilst it is already in the air.’

The data problem is a fundamental one because the ‘E for Environment’ part of ESG, is relatively straightforward to measure and compare, using metrics such as carbon footprints and other emissions, energy and water consumption and so on, but the ‘S’ and ‘G’ components are more difficult to quantify – simply put, what ‘numbers’ does an organisation put on social impact? 

Hence, as our client Substantive Research found as it examined the ESG data market in September 2021: 53% of ESG data providers are generalists, and of the specialists, just 5% are targeted towards Social, whilst 70% specialise in Environmental and 25% in Governance. This leaves a large gap to be bridged by organisations in the data relating to ‘S’ and ‘G’. 

Fintechs to the rescue?

Under a unified ESG reporting framework, with increasing scrutiny and penalties from regulators, organisations need urgent help in securing high-quality ESG data, analytics and reporting systems – an area where technologies such as machine learning and AI can be deployed to make a difference.

Panellists at the ESG Summit highlighted that a problem for financial institutions was having to engage several different Fintech companies, each solving a different part of the ESG puzzle. For institutions this means more expense and management time as they use several different tools from several different providers.  It is no surprise that panellists representing institutions called for better collaboration between Fintechs so that institutions can reduce the number of solutions they need to absorb.

According to panellists, the problem for Fintechs in dealing with institutions is that large organisations do not have the agility to quickly pivot to new technologies.  With many of the most innovative Fintechs being early-stage startups or scaleups, even if they have the solution to make a difference, the long decision/adoption cycles within institutions represent significant revenue risk for smaller innovators.

Endgame

As society’s climate anxiety justifiably grows, regulators are increasing efforts to police ‘greenwashing’, reporting bodies are streamlining reporting standards and the Fintech industry is stepping up to provide innovative solutions to help organisations better assess and manage their ESG performance. 

It is also worth noting that McKinsey has predicted that for the world to reach its net zero targets by 2050, $9.2tn on average will need to be invested globally each year until 2050.  This is $3.5tn more than is currently being invested. This is a challenge but also a potential opportunity for financial institutions in financing this shortfall.

It is widely accepted by science that we need to ‘run’, not ‘walk’ toward a greener future, but the very pace of ESG adoption provides its own challenges for the financial markets.

Fintechs are poised to help ‘build this plane whilst it is already in the air’ and increasingly, failure is not an option.

Andrew Dunn

Andrew Dunn

Consultant,
Streets Consulting