Will your company’s ESG reporting practices manage risks, or just create more of them?
For decades, companies have been engaging with sustainability/ESG reporting, using frameworks like GRI Standards and <IR> to tell their story. Reporting has been carried out by many well-intentioned businesses with an underlying logic that promises several outcomes.
According to Kenneth P. Pucker writing in HBR, by reporting, companies’ performance would gradually improve, those with a better track record would get better returns, customers and investors would reward leaders and spurn laggards, and the metrics for measuring social and environmental outcomes would become more robust and accepted.
Several decades into this reporting regime however-- and with an estimated 90% of large global businesses producing some kind of sustainability report-- there’s widespread evidence that action on material issues from climate change to biodiversity to CEO pay have been ineffective. As Pucker puts it: “It turns out that reporting is not a proxy for progress.” There are real cracks in the rigor of ESG reporting with costly implications.
Prominent critics from ex-BlackRock CIO Tariq Fancy to Future-Fit’s Chairman Paul Clements-Hunt have put words of warning to companies which may have lost the signal: businesses leave themselves wide open for reputational risk, damaged credibility, or worse. As global emergencies like climate change and biodiversity evolve, there will be increasing operational, legal, and financial risks to contend with.
This draws some challenging questions. Would a business’ responses to climate change stand up to informed stakeholder scrutiny? Is there genuine understanding among its management how environmental, social, and economic issues interplay and impact the business? Has action really been taken where it matters, or is the business awaiting its turn as a negative headline? Does the company’s report demonstrate credible management of ESG risks? Are metrics robust and defensible?
Having a good sustainability/ESG programme in place is vital. But what’s at the guts of it guiding a company to do no harm is the critical bit to get right, ultimately translating to solid performance. When it comes to reporting, businesses should convey a coherent strategy and have the metrics to measure meaningful action.
Today’s incrementalism is both a failure of leadership and a wider system. Real leaders need a robust backbone to their approach. For companies, the Future-Fit Business Benchmark is a useful tool for measuring and reporting progress on material issues defined by science and society.
Future-Fit’s 23 Break-Even Goals give companies a structured methodology to doing no harm. They’re aligned to the UN Sustainable Development Goals and offer consistent, comparable, relevant metrics that can be applied to all types of businesses. Because of this, Future-Fit can help fill gaps left by existing reporting standards and avoid the pitfall of companies setting specious targets. Its free tools are easy and straightforward to implement. Reports are also fully auditable by third-parties, allowing scrutiny of the data and information disclosed.
Reporting using Future-Fit enables genuine action, showcases real progress, and benchmarks a company against other businesses. Leaders like The Body Shop, Virgin Money, Novo Nordisk, Chanel, Tourism Holdings and Fuji Xerox NZ have sought it out as a strategic guide for solid risk management and enduring competitive advantage.
For investors, Future-Fit can also act as a proxy to understand investee company activity on material issues in a structured way, allowing for critical comparison. Investors can then reliably use their capital as a force for good and a lever for change in the world, rather than fall to unreliable ratings or unhelpful definitions to guide their decisions.
With regulators and the media increasing their scrutiny, and customers having transparency via social channels like never before, the current ESG bubble will inevitably pop for many companies. By embracing Future-Fit, leading businesses can overcome pitfalls in the existing reporting regime and credibly meet the risks and challenges of tomorrow.