As previously seen on Skytop Strategies and published with permission.
50,000 Entities
We estimate that more than 50,000 entities (companies, not-for-profits, and government bodies) generate data on their ESG (Environment, Social, and Governance) performance. They talk about how they treat their employees, what goes into their products, their impact on climate change, and many other topics.
Many Types, Factors and Data
We currently track more than 13,000 different types of ESG factors and ingest more than 10 million pieces of data per month. However, we do not get to see a lot of “dark data”—the ESG information that is shared between suppliers and their customers or between companies and regulators. We also do not see all the reports that go up and down the chain within an entity or the opinions that are offered on ESG data by auditors and assurance firms. We suspect there could be 50 million pieces of ESG generated per month—or more!
Paper, Spreadsheets and Modules
Most entities that emit ESG data have built systems to capture it. Initially, data was tracked on paper or in a spreadsheet. Nowadays, many larger entities have added modules to their software systems to capture and process data and other modules to aggregate it and prepare it to be reported.
It Takes Time and Money
Generating data, capturing data, preparing it, and auditing or assuring it all take time and money. Middle-sized ($50 million to $100 million revenue) companies have one to three full time staff handling “sustainability” issues. These people are paid $50,000 or more, each. Producing an annual sustainability report for larger entities can easily cost over $100,000. Software tools for capturing ESG data can cost over $100,000 and many thousands of dollars more to operate. Assurance for a sustainability report could cost $50,000. Getting one’s auditors involved could add $50,000 to $100,000 to an annual report process.
A Cost of More Than $20 Billion
Let’s put the average annual cost of creating ESG data at $200,000 per entity. If 50,000 entities are creating data, the total cost may be $10 billion. If we include suppliers and smaller companies, another 200,000 to 2,000,000 entities may be spending money to create data. This could mean creating ESG data is already costing the world more than $20 billion. Is this money well spent? Is ESG reporting a net value creator or a net value destroyer?
Not Necessarily Driving Change
It is easy to argue that measuring ESG factors could encourage companies to uncover sustainability-related opportunities. If a company is emitting a lot of carbon, it could lay out a plan to cut its energy use. If a company’s managers aren’t behaving ethically, it could strengthen its internal controls. However, it seems that many of the ESG factors that companies are producing do not tie to or drive change and action. For instance:
A. Measuring something doesn’t automatically lead to finding benefits. Changes in measurement methods (for instance due to changes in regulatory guidance) could swamp the effect of actual changes.
B. Improvement in one area might generate poor performance in another. Allowing remote work (good for human management issues) might reduce opportunities for employees to contribute to and learn from a company’s culture. Volunteering time to serve the community (good for encouraging community support) could create conflicts with employee attitudes and beliefs (if for instance, the supported organizations were faith based).
C. Simplifying an issue to a number doesn’t translate into impact. Ensuring that a company’s board has a balanced representation of genders and races may be desirable. But, board members also need skills and sensitivity that can’t be measured solely by their gender or color. Simple number or percent based targets may not fully capture the progress an entity may be making in the quality of its board.
Focus on Impact and Value
We often hear calls for more reporting of more indicators by more entities. Some want this data rigidly standardized, integrated into an entity’s other reports, and included in a formal audit and review process. Following this path will further increase the cost of ESG reporting. Isn’t it time to step back and focus instead on its impact and value? “Material” should not be defined as “something that matters to investors. It should instead be defined as “something that makes the world better.” It may be sensible to:
1. Encourage industry groups to collaborate with their members to pool data and search for industry-centric improvements.
2. Encourage government regulators to mandate reporting indicators only if they can be shown to directly generate “public good.”
3. Ask standards bodies to stop producing standards that are not tied to specific objectives that have positive impact on society.
Increasing Impact
People responsible for ESG reporting have told me that some of what they do is pointless, fill in the box, and cover your a**. They want to increase their impact and help change the world. Let’s give them room to do the job they signed up for by allowing them to spend money on things that really matter. Let’s focus ESG reporting on value creation rather than valueless paperwork.
Bahar Gidwani is CTO and Co-founder of CSRHub. He has built and run large technology-based businesses for many years. Bahar holds a CFA, worked on Wall Street with Kidder, Peabody, and with McKinsey & Co. Bahar has consulted to a number of major companies and currently serves on the board of several software and Web companies. He has an MBA from Harvard Business School and an undergraduate degree in physics and astronomy. He plays bridge, races sailboats, and is based in New York City.
About CSRHub
CSRHub offers one of the world’s broadest and most consistent set of Environment, Social, and Governance (ESG) ratings, covering 50,000 companies. Its Big Data algorithm combines millions of data points on ESG performance from hundreds of sources, including leading ESG analyst raters, to produce consensus scores on all aspects of corporate social responsibility and sustainability. CSRHub ratings can be used to drive corporate, investor and consumer decisions. For more information, visit www.CSRHub.com. CSRHub is a B Corporation.
