This leaves little time to fulfil the true purpose of their roles: devising sustainable strategy and ensuring the capital they deploy is put to work achieving ESG goals.
ESG professionals are not alone in their frustrations around the volume of administration. But they can fairly claim to be on the frontier of an emerging field that is under scrutiny from regulators - and is evolving in terms of best practice.
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‘Greenwashing' is a now-familiar concept and has blighted some firms' ESG efforts. However, many of these cases are down to over-enthusiasm and the nascency of the space, rather than a cynical desire to misrepresent. Wherever you sit on the spectrum - from sceptic to evangelist - the spotlight on ESG is changing the way we think about the impact of investments on people and the planet. This can only be seen as positive.
Investee companies and asset managers are now grappling with this question: how can they take a perceived qualitative good and turn it into a tangible, standardised data point that can be used to report, benchmark and measure progress?
As easy as E, S, G?
Given the amount of data that fund managers and investees sit on, they can be left wondering where to start.
The easiest way to break this down is to view ESG in its respective ‘subheadings': E, S and G. Many argue governance data is the easiest to tackle as it primarily involves hard information such as sanctions, board composition and adherence to laws. However, another key part of governance is understanding and quantifying the culture of a company, which can prove much more challenging.
Environmental data brings its own set of challenges. Firms are facing new requirements to report on Scope 3 emissions - including the indirect emissions found in organisations' supply chains. For many firms, Scope 3 emissions account for around 70% of their carbon footprint, yet tracking and reporting on this data is often near impossible due to a long tail of emissions stemming from suppliers' suppliers. Likewise, nature loss risks, such as pollution, biodiversity loss, water scarcity and resource over-exploitation tend to not be well understood by organisations.
Meanwhile ‘S' or social data tends to be subjective, less developed and less scrutinised. Measuring social impacts (such as community cohesion) accurately can be incredibly complex and hard to quantify.
Driving change with data
The complexity of reporting often results in very poor fulfilment rates when investors request data from companies. Smaller companies tend to struggle the most as they simply do not have the capacity to respond to these questions meaningfully. Imagine running a small scale-up and having a general partner ask you a hundred questions about topics like the use of renewables in your supply chain. In many cases, it is not simply a matter of gathering existing data; it requires active data generation.
ESG reporting is part science, part art. With the spotlight on greenwashing, firms must ensure they have data on the desks of people who need it, when they need it. Managers must be able to back up their green claims with hard evidence. If a fund claims to reduce carbon emissions annually, they must ensure that carbon-related inquiries are directed to the portfolio companies. This way, the manager can report back with complete confidence that they have achieved their goals.
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Standardised metrics and unified reporting technology also enable meaningful benchmarking, comparison and healthy competition between companies. The aim is to demonstrate the portfolio's results and ultimately showcase continuous improvement over time. Managers can harness technology to automate and streamline ESG data collection - resulting in less manual processing, better data and more time to focus on delivering on their investment strategy.
While the hard data, ‘science' side of the equation is important, managers must not overlook the human component. Selecting the right specialist partners who can hone in on the right questions to ask and filter the right information for regulator and stakeholder communication is critical. Even with huge technological advancements in recent years, only humans possess the flexible brainpower and industry nous to ask the right questions and generate meaningful outcomes. Combined with good data collection and workflow technology, the ESG reporting workload can be lifted, and ESG outcomes improved.
Sustainability in black and white
ESG professionals often find themselves buried under regulatory compliance, facing huge hurdles when trying to harness ESG data effectively. Technology can ease this burden, helping managers to connect the dots, process the sheer quantity of data and free up their time to focus on decarbonisation efforts, data interpretation, impactful transformations and activism. Ultimately, firms can evolve to be more sustainable through the use of technology, empowering ESG professionals \to make a lasting impact.
Lyons O'Keeffe is ESG director at IQ-EQ.