Getting ESG data right is vital not only for financial institutions’ bottom lines and to meet regulatory obligations but for the very survival of the planet.
The hard-hitting observation was made by Phillip Miller, Co-Founder and Co-Chief Executive at software manager Solidatus in a keynote address to the inaugural A-Team Group ESG Insight Data and Tech Summit held last week in London. Peer pressure to save the planet is very strong he said, and financial firms can seize the opportunity to do good as they seek revenue.
That will only happen with good data. In a delivery that outlined seven essential things we need to know about the sustainabile finance space, Miller said that trust and transparency would be among the defining characteristics of firms who do ESG well and those who don’t. That trust would come with good quality and consistent data.
ESG is now a priority for CEOs, Miller said, and consequently there is a sense of urgency among firms to get their processes in order. Miller said, however, that ESG wasn’t the challenge – the data and processes required to meet the expectations of investors, regulators and consumers are the challenge. Getting the software and processes right at the start of a company’s ESG journey will be important to prevent a “mad rush” to comply when regulations fully kick in or when investors step up transparency demands.
Success will depend on making sustainability part of a company’s culture, Miller said. Unlike past changes to the ways businesses have been expected to operate, ESG is an “all encompassing” project, one that will touch on every part of an enterprise and society. Getting all stakeholders invested in the transformation will be essential to making it work.
While change is happening within organisations, a great deal of external pressure is also reshaping attitudes.
The most obvious source of external influence is regulators, who are expecting financial and non-financial companies to begin “marking their own homework” on their ESG credentials. Ensuring that they do that honestly are a host of other external forces. Consumer preference for goods and services produced by companies that share their own sustainability values is a powerful motivator, but so also are business rules that look favourably on companies with good ESG credentials.
One example that Miller cited was that of the UK government, which is to place new emphasis on small- and medium-sized companies with transparent sustainability records when it comes to making decisions on public procurement. Get your ESG homework marking wrong, and you won’t win any lucrative contracts, Miller warned.
Challenges to doing ESG right remain.
The lack of reporting standards makes it difficult for firms to know if they have the necessary data to comply with the changing face of international rules. And the lack of balance between the E, S and G elements of environmental, social and governance, means many firms will inevitably get their social disclosures wrong.
But this is no reason to sit and wait for international convergence of the multiple standards that exist, Miller argued. Organisations can implement their own reporting standards now, based on those that already exist. When harmony is brought to reporting measures, those companies will be well positioned to comply. Even if their own internal methodologies differ from those eventually adopted, those companies will still be in a better position than their peers that were starting from standing position.
Also, the war in Ukraine has shifted priorities for investment managers, with the resultant energy crisis demoting ESG strategies below other considerations, such as gas and oil supplies. But again, this is no reason for institutions to ease their foot off the ESG accelerator. Regulators and consumers won’t wait, Miller said – they will still demand transparency into their sustainability records.
More importantly, though, the planet can’t wait.
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