Group & Data Analytics Officer
Global Head of Data & Analytics
Zurich Group Germany
In recent years, there has been a sharp increase in the demand for companies to be more transparent about their Environmental, Social and Governance (ESG) performance. Framed within our current milieu, typified by the looming influence of the ‘Great Reshuffle,’ companies' ESG initiatives are likely to become a key differentiator in attracting and retaining talent, as well as engaging new investors and consumers.
Undeniably, as organisations’ ESG data proficiency measures are increasingly subject to scrutiny – specifically, in regard to their data definitions and capture processes – ESG transparency is rapidly emerging as a chief concern for CDAOs across the globe.
In a recent Virtual Town Hall, leading CDAOs in both the DACH and UK & Ireland regions discussed the issue of ESG transparency. Discussion leaders Steffen Lange, Group & Data Analytics Officer, Sulzer, Kai Diener, Global Head of Data & Analytics, Straumann Group and Michael Zimmer, CDAO, Zurich Group Germany, explored the fundamental challenges in maintaining effective ESG data, as well the CDAO’s role in navigating these challenges.
Central Issue: A Lack of Shared Understanding
Principally, the central challenge lies in the absence of a shared, standardised system for measuring, processing and interpreting ESG data. This leaves scope for varied and often incongruent interpretations of ESG standards across organisations and industries at large.
On one level, organisations’ ESG data capture processes often diverge throughout the various stages of the supply chain, where the types of data collated at each stage typically correspond to the distinct KPI metrics unique to the stages’ varied parameters.
Here, the lack of a singular standard to which all supply chain bodies can conform often results in a confused jumble of uninterpretable ESG data, making it extremely difficult to paint a comprehensive analysis of an organisation’s overall ESG performance.
This ambiguity is compounded further where external bodies and ESG rating agencies typically employ their own methodologies, whose criteria are defined in accordance with their own philosophies. These differences in methodologies are not trivial and often lead to significant variations in average rating scores. As one article points out, ESG scores across six of the most prominent ESG rating providers correlate on average by only 54 percent.
The result is a myriad of distinct rating agencies with their own unique methodologies, none of which has pre-eminence over the others.
Thus, the complexities involved in ESG data are twofold: first with internal incongruence throughout the various stages of the supply chain, and second, the lack of a singular, common rating methodology to be utilised by the most prominent rating agencies.
Crucially, even in cases where a particular organisation manages to overcome the issue of internal incongruence, it is unlikely that they will have the sheer market power to influence definitive, aligned standards across their respective industry.
ESG: A Green Box Ticking Exercise?
As data leaders have experienced, ESG data can be exceptionally messy, as it comes from various bodies across different stages of the supply chain – each with its own unique set of data sources and corresponding challenges. Notably, this creates difficulty for auditors aiming to establish their own operational databases. When ESG data seemingly comes from everywhere, this creates an air of uncertainty around the accuracy of calculations and, therefore, the credibility of ESG ratings.
Moreover, reports on ESG rating systems, such as the analysis conducted by the International Organization of Securities Commissions (IOSCO) point out the potential conflict of interest where external rating agencies sometimes provide ESG services for companies whilst simultaneously implementing their own methodologies to produce the very same companies’ official ESG ratings.
Unsurprisingly, these issues can foster a sense of uncertainty around ESG ratings. At best, this uncertainty may manifest as scepticism around the accuracy of these ratings. At worst, it can result in accusations of intentional greenwashing by the organisations themselves or the ESG rating agencies they employ. In either case, ESG ratings are regarded as dubious tick-boxing exercises, rather than as sincere acts of accountability by companies aiming to do better.
Next Steps: What can Organisations do?
Despite the challenges discussed, many CDAOs remain optimistic about the future of ESG rating systems. Many favour an approach of honesty and transparency, with a focus on intentions rather than the appearance of success. Indeed, simply addressing the issue opens up a wider dialogue between organisations, which itself is a crucial step on the road to establishing shared assumptions – and hopefully, a universal ESG rating methodology.
However, this change should be conceptualised as a gradual, long-term evolution of the system, rather than a full-fledged revolution. In this context, organisations should continue to look towards alternative approaches at all levels of the supply chain, with a heavy emphasis on producing accurate, reliable reports about their environmental impacts by collating granular data from multiple sources. Crucially, organisations must gradually prepare stakeholders to be forward-looking.
Ultimately, tackling these issues requires finding a balance between the traditional paradigm of ‘supply and demand’ and the idealised circular economy, using creativity and cooperation to slowly develop an alternative system altogether.
In the meantime, it is important to consider our own individual behaviours in our personal lives, beyond the organisation – limiting online shopping, waste management, and energy saving can all go a long way.
Evanta creates an open space for CDAOs to share their experiences with each other. If you have a story you would like to share, please contact Sam Lincoln, Content Manager email@example.com. You can share your perspective with the community via our in-person and virtual gatherings such as our Summits, Virtual Town Halls, Virtual Boardrooms and also through content pieces like this.
Explore more key topics like ESG transparency with like-minded CDAO peers by joining our DACH CDAO and UK & Ireland CDAO communities. Members of these communities come together several times a year to connect, exchange ideas and experiences, and validate strategies and solutions.
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