Gathering credible ESG data is a challenge
SEC proposes new rules for mandatory ESG disclosure, but gathering credible ESG data on third-party business partners is a challenge
The SEC recently announced rule amendments that require public companies to include ESG related information in their registration statements and periodic reports. When adopted, the breadth, specificity and complexity of the rule amendments would arguably result in one of the most sweeping changes to public companies’ disclosure obligations in recent history. Therefore this announcement has not gone unnoticed. ?
From activism to mainstream
ESG aspects of business have long been considered the realm of activists. Owning a single share in a company violating ESG principles, activists would show up at shareholders’ meetings to ask the board about the company’s sustainability, or diversity targets. They would almost always propose stronger targets. Their proposal would almost always be rejected.?
In recent years however, the agenda pushed by the earlier activists has gotten a stronger position on the day-to-day agenda. A record number of Environmental & Social related shareholders’ proposals won majority support in 2021 (see publication by Skadden), not only focussing on carbon emission reduction plans, but also on issues such as board diversity, prevention of child labor in the supply chain, and reduction of the gender wage gap.?
What has changed? Have shareholders suddenly grown a conscience? Have activists accidentally acquired majority stakes, one share at the time? None of the above. An increasing number of shareholders are realising that Environmental, Social and Governance aspects of business are inseparably and fundamentally connected to the economic success of the company. According to McKinsey, value drivers connected to a proper ESG framework are access to market opportunities, cost reductions, reduced regulatory and legal interventions, productivity uplift and asset optimization.?
ESG drives financial performance
A 2021 NYU meta-study of over 1,000 research papers showed an overwhelming positive relationship between ESG integration and financial performance. The NYU study also found that mere disclosure of ESG parameters does not drive financial performance. BlackRock CEO Larry Fink understands that difference.?
In his annual letter to CEO’s of companies BlackRock invests in, Fink pushed for action on climate, asking companies to do more than set a long term net zero target. “We are asking companies to set short-, medium-, and long-term targets for greenhouse gas reductions,” Fink wrote. “These targets, and the quality of plans to meet them, are critical to the long-term economic interests of your shareholders.” With $10 trillion in assets under management, BlackRock is a force to be reckoned with. In May 2021, the asset manager caused a stir when it voted to replace 3 directors at Exxon Mobil Corp. because it believed the oil company wasn’t moving quickly enough to incorporate clean energy sources.
With mounting shareholders’ interest and action, the SEC announcing mandatory disclosure of ESG related information, and the EU expected to do something similar, we can conclude that ESG is not a ‘one and done’ or checkbox exercise, but rather a dynamic domain that requires continuous monitoring. For companies with large extended business environments, monitoring of ESG related aspects of vendors, suppliers, counterparties and competition should be standard business practice.?
Gathering credible ESG data is a challenge
Yet a March 2022 Deloitte survey of 300 CFO’s and other senior executives working at US public companies with annual revenues exceeding $ 500 million found that gathering credible data on greenhouse gas emissions by suppliers and other third-party business partners has emerged as one of the most difficult steps in sustainability reporting. More than half (57%) view securing high quality data as the No. 1 challenge in meeting rising demand for disclosure on business sustainability.?
A complication in ESG data gathering and its credibility is the largely voluntary, self-reporting, unregulated nature of its disclosure. Voluntary means that smaller companies might not report ESG data at all, whereas self-reporting means that even when disclosed, the credibility might be questionable. Unregulated means that reporting is freeform and unstructured, making it hard to benchmark data.?
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The aforementioned concerns can be tackled. Not voluntarily disclosing ESG data does not mean there is no data. Questionable self-reporting does not mean there is no credible reporting. Unstructured, freeform data can be structured and benchmarked. To deal with these complications, certain capabilities are required that not every company possesses. In fact, four out of five (82%) in the Deloitte survey say they need to reinforce company capabilities to provide detailed reports on environmental, social and governance (ESG) performance for stakeholders such as investors and the SEC.
If you share the opinion of these four out of five respondents, you should contact Owlin and request a demo of our ESG dashboard. Owlin knows where to look for involuntarily disclosed ESG information, how to verify self-reported records, and how to structure and benchmark unstructured, freeform data.??
Owlin's ESG lens
Owlin’s AI-driven news analytics platform continuously deep dives into 750 million sources in 18 languages. Natural Language Processing and Machine Learning technology clusters unstructured data into several categories or themes. Owlin’s initial focus was on financial risk signals, but little over a year ago we added ESG to the theme list. Looking through the ESG lens, the platform continuously monitors ESG related aspects of our users’ third-party connections. Relevant, actionable information is pushed in real time.?
Our global, multi-language coverage overcomes the problem of not disclosing ESG information by smaller companies. Selective self-reporting is dissected against the backdrop of alternative data sources. Our Knowledge Graph technology structures unstructured data and compares actors with each other and industry benchmarks. Our onboarding process of third-parties allows for adverse media analysis, from a financial risk perspective but also from an ESG point of view. Advanced entity detection and our Explore Tab visualise and contextualise ESG impact in fourth and nth-parties.?
An example might shed some day-to-day light on the above. Consider yourself a US based company with lots of overseas suppliers. When onboarding a new Vietnamese supplier, their financial and technical metrics are up to par. However, one year ago, local media reported about workers getting fired after protesting unsafe working conditions. Our platform will guide you to this story when onboarding the supplier. Another supplier, based in China, has been a business relation for several years. An accident caused a chemical spill, which they failed to report to you. An environmental agency starts an investigation. Continuously monitoring your suppliers, our platform immediately sends you an alert. Our Explore Tab even goes one step further. When the labor conflict or chemical spill did not take place at your supplier, but at your supplier’s supplier, our advanced entity detection enables you to see ESG related data throughout your entire supply chain.???????
Leveraging Owlin’s advanced analytics platform is a cost efficient alternative to setting up a dedicated ESG working group, which is something only 21% of respondents currently have created. If you are considering using Owlin’s technology to improve your company’s insight in ESG related affairs in your third-party business partners, you’re in good company. Nine out of 10 (92%) of the executives in the Deloitte survey agree with you. They say their companies need to increase spending on technology to ensure reliable ESG measurement, reporting and disclosure.?
To learn more about continuous monitoring and uncovering ESG aspects throughout your business ecosystem, contact us (https://owlin.com/contact-owlin/), or read our recent white paper on TPRM transformation (https://owlin.com/whitepapers/third-party-risk-management-transformation/).?
Skadden publication: https://www.skadden.com/insights/publications/2022/01/2022-insights/corporate/investors-press-for-progress
McKinsey article: https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/five-ways-that-esg-creates-value