Sustainability metrics matter: good intentions are no longer enough

Fill­ing their web­sites with sug­ar-coat­ed words and pret­ty pho­tos, busi­ness­es have found it easy to ped­dle the line that they’re work­ing to deliv­er a green­er, clean­er, more eco-friend­ly future. Indeed, a whole indus­try has grown up based on sus­tain­abil­i­ty-speak. But today’s vague com­mit­ments to do some­thing tomor­row are no longer cut­ting it with investors and oth­er stake­hold­ers. They want to see more, in the shape of cred­i­ble tar­gets and mean­ing­ful data mea­sur­ing progress towards these goals. 

Cal­i­bra­tion and trans­paren­cy are there­fore becom­ing increas­ing­ly impor­tant when it comes to cli­mate account­ing. So says Dex­ter Galvin, glob­al direc­tor of cor­po­ra­tions and sup­ply chains at CDP, a char­i­ty (bet­ter known by its for­mer name, the Car­bon Dis­clo­sure Project) that runs a report­ing sys­tem designed to help organ­i­sa­tions man­age their envi­ron­men­tal impacts.

“Trans­paren­cy is trust. It pro­vides the essen­tial foun­da­tion of account­abil­i­ty and ver­i­fi­a­bil­i­ty,” he says. “In this way, dis­clo­sure is the anti­dote to green­wash. Only with clear, con­sis­tent and com­pa­ra­ble dis­clo­sures can a com­pa­ny show stake­hold­ers that it’s act­ing in line with its pub­lic com­mit­ments.”

Cre­at­ed by the UN, CDP, the World Resources Insti­tute (WRI) and the World Wide Fund for Nature six years ago, the Sci­ence Based Tar­gets ini­tia­tive applies strin­gent tech­ni­cal bench­marks to val­i­date cor­po­rate envi­ron­men­tal tar­gets in line with those of the 2015 Paris agree­ment on glob­al warm­ing. 

“This has intro­duced much-need­ed stan­dard­i­s­a­tion and rigour into the cli­mate tar­gets space,” Galvin says. “But self-dis­clo­sure is the best the mar­ket cur­rent­ly has, as most com­pa­nies still aren’t required by law to dis­close envi­ron­men­tal infor­ma­tion.” 

To date, near­ly 1,500 of the world’s biggest and best-known enter­pris­es have signed up to the ini­tia­tive. But this is just the begin­ning. Much more inno­va­tion is need­ed, accord­ing to Lihuan Zhou, an asso­ciate at the WRI’s Sus­tain­able Finance Cen­ter. 

“The finan­cial mar­kets don’t yet have con­sis­tent and com­pa­ra­ble infor­ma­tion from all par­tic­i­pants. With­out this, investors may not be able to allo­cate cap­i­tal invest­ments effi­cient­ly to sup­port the econ­o­my in line with cli­mate goals,” he says. “Manda­to­ry cli­mate-relat­ed dis­clo­sure can poten­tial­ly address this chal­lenge and lev­el the play­ing field.” 

Transparent disclosure can drive action

The inde­pen­dent ver­i­fi­ca­tion of cor­po­rate emis­sions data and oth­er key envi­ron­men­tal met­rics is cru­cial, there­fore, but not every­one around the world is on the same page when it comes to such issues. 

“We don’t need more stan­dards; we need more trans­paren­cy,” argues Mas­ja Zand­ber­gen, head of sus­tain­abil­i­ty inte­gra­tion at Robe­co, a glob­al asset man­age­ment firm based in Rot­ter­dam. “Euro­pean com­pa­nies are fair­ly trans­par­ent on rel­e­vant issues, but we still lack a lot of infor­ma­tion from those in oth­er regions. In the biggest part of the mar­ket, even the more objec­tive out­put mea­sures, such as car­bon data and water use, are still esti­mat­ed. We would make great progress if more com­pa­nies start­ed report­ing against any stan­dard.”

Although numer­ous glob­al sus­tain­abil­i­ty bench­marks exist, def­i­n­i­tions of sus­tain­abil­i­ty still dif­fer in var­i­ous parts of the world. Mea­sur­ing envi­ron­men­tal per­for­mance also costs mon­ey, as does inde­pen­dent ver­i­fi­ca­tion. 

“We do see many com­mit­ments, our­selves includ­ed, to net-zero car­bon emis­sions by 2050, but it remains very uncer­tain as to how we’ll get there,” Zand­ber­gen adds. “We are devel­op­ing research into the extent to which dif­fer­ent sec­tors need to decar­bonise, what tech­nolo­gies will be need­ed and how well com­pa­nies are pre­pared. But this is all still quite unclear,” 

The vast bulk of most com­pa­nies’ envi­ron­men­tal impacts reside in the sup­ply chain. Recent CDP research has found that sup­ply-chain car­bon emis­sions are, on aver­age, 11 times high­er than oper­a­tional emis­sions. More infor­ma­tion and inno­v­a­tive ways to gen­er­ate data on sup­pli­ers from around the globe will there­fore be cru­cial in the com­ing years. 

Ray Dhi­rani, the World Wide Fund for Nature’s UK head of sus­tain­able finance, believes that progress is being made in this respect. “While it can be dif­fi­cult to get the right infor­ma­tion, this is chang­ing rapid­ly with the advent of spa­tial data and oth­er nov­el approach­es, which bet­ter iden­ti­fy the risks relat­ed to assets on the ground,” he says.

Time to normalise reporting on sustainability

For instance, busi­ness­es are work­ing with satel­lite imagery providers to ver­i­fy that farm­ers in their sup­ply chain are actu­al­ly using the sus­tain­able agri­cul­tur­al meth­ods that they claim to be prac­tis­ing.

The Tran­si­tion Path­way Ini­tia­tive is a glob­al scheme, cre­at­ed by investors for investors, that assess­es how pre­pared com­pa­nies are for the low-car­bon econ­o­my. It is chaired by Adam Matthews, who is also chief respon­si­ble invest­ment offi­cer on the Church of England’s pen­sions board.

He says: “It is becom­ing ever more com­plex, yet ever more crit­i­cal, to build a shared under­stand­ing of what the glob­al low-car­bon tran­si­tion looks like. We need to enable com­pa­nies to inno­vate and advance while being held account­able for deliv­ery through their dis­clo­sure.” 

The appetite for sus­tain­able invest­ment has increased as a result of the Covid-19 pan­dem­ic, yet it is still ear­ly days. Some peo­ple can imag­ine a future where envi­ron­men­tal, social and gov­er­nance (ESG) report­ing is as com­mon, cred­i­ble and clear as any oth­er type of cor­po­rate dis­clo­sure. 

The Lon­don Stock Exchange’s head of sus­tain­able finance for cap­i­tal mar­kets, Claire Dor­ri­an, is one of them. “Com­pa­nies need to treat sus­tain­abil­i­ty report­ing in the same way as they com­mu­ni­cate their finan­cial per­for­mance to investors,” she says. “They must pro­vide the mar­ket with detailed infor­ma­tion in pub­licly avail­able annu­al reports.” 

Until that day hap­pens, there is a lot to play for in the ESG report­ing space, but the days of the glossy brochure filled with green­wash are, with any luck, num­bered.