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ESG to fight climate change and pollution

Sustainability

Under attack from multiple angles, does ESG’s evolution need a helping hand? 

Published 5 February 2024 in Sustainability • 7 min read

Standards, supply chains, and ‘white spots’: ESG’s star is still in the ascendancy – but businesses and banks need immaculate data to report with confidence.

It is fair to say that global optimism surrounding ESG could do with a boost. Existing positivity in the ESG space is well justified, thanks to the development of instruments such as Science Based Targets (SBTi) which track the progress of companies more and more effectively towards their Net-zero targets. The availability and quality of data have significantly improved thanks to initiatives like CDP.

Yet many corporate ESG advocates remain shocked by the recent pushback, and that certain banks are abandoning ESG not because they don’t believe in it, but because the decarbonization plans are not robust enough and therefore not credible.

Many enterprises that interface themselves directly with consumers rightfully claim that most of their emissions are Scope 3 (in other words, resulting from activities that the organization indirectly affects in its value chain, rather than those that it directly controls). To reduce these emissions, enterprises will need to integrate their businesses with their supply and value chains and develop business strategies to advance their SBTi targets. This integration has profound implications for the way we operate our economy and its foundations, such as competition law. Policymakers around the world need to develop frameworks that incentivize the acceleration of an ecosystem-based economy while maintaining the functionality of markets.

In front of such a situation, many investors claim they have no choice but to continue investing in the existing linear economy which relies heavily on fossil fuels and doesn’t sufficiently account for externalities. Either way, ESG seems insufficiently persuasive on the shareholder floor.

Evidently, this is not going in the right direction. Any realist will therefore admit there are mixed signals on ESG progress. The risk is that the more confused or distracted we become, the higher the price we will eventually pay – in every sense.

Data demonstrates drive

At TCS, we have oversight of all costs – from financial to human and from intellectual to natural and social – and address materiality with a very ambitious ESG strategy. Our results have been published in integrated annual reports for several years now, and the compliance of such data is to the highest Integrated Reporting Framework and GRI standards.

To drive data quality globally, the business community must go way beyond limited assurance. India is moving in the right direction. In Europe, similarly, the Corporate Sustainability Reporting Directive, seeking the much-needed harmonization, data assurance quality standards, is welcomed.

To increase the quality of ESG reporting and turn ESG into a strategy instrument for business integration, we believe that system integration is the key success factor.

“One often hears that companies struggle to integrate ESG considerations into their business model. Our belief is that, once the quality of the data is right, and escalated into the board, people cannot look away. ”

We, and everyone else who chooses, can do even better because the standards are ever-improving. But for data to be of sufficiently high quality, corporates need to use digital technology like the Cloud, offering complete traceability. This data can no longer just be derived from an exercise on spreadsheets. The quality needs to meet the same standards as the purest financial reporting. That’s the long-term vision to integrate ESG comprehensively.

The right standards and solutions: a happy partnership

The European Sustainability Reporting Standard, the ESRS, is extremely specific on what needs to be reported. Increasingly, TCS clients and wider companies are creating that specific link between the data standard, reporting and real life. Some are becoming advanced in their thinking and asking us to help develop new data models, or going even further by asking, “How do we use them in a standardized way?”

All of this needs to become normal practice, and there are good reasons why. We have some clients that are at the beginning of the supply chain, but many are at the end, offering either a product or a service.

These clients might be within the banking or retail sector. Many of our clients are very large enterprises at the interface of society and must understand how thousands and thousands of products are made, coming from thousands and thousands of operations, involving millions of workers. Are ethics respected? Are there good working practices, or indeed health and safety practices? What about wages?

What about climate problems, pollution challenges, or waste and biodiversity loss being impacted by future scenarios? A lot of data will need to be collected, analyzed, and modeled – much of which is not easily available.

These are what we call the infamous ‘white spots’. For these, we need to find solutions. New data solutions for these will probably involve the use of tools such as artificial intelligence; a very important use case. We foresee all this. But for the time being, it is about building the structure and systems integration.

Boardroom integration

One often hears that companies struggle to integrate ESG considerations into their business model. Our belief is that, once the quality of the data is right, and escalated into the board, people cannot look away.

Nor can they say, “Let’s focus on profit and not on a labor condition or pollution problem.” Once you have the data, convey the data, and it hits the board, in the same way that pure financial data hits the board today, we believe the issues will be taken seriously.

So, we believe in ESG business integration too. Here, we are putting the board within the control tower to see the reality of things. Then they cannot turn away; they must focus on the numbers.

Every CEO needs to be capable of getting their head into the annual report and seeing stringent or urgent issues in the future. The CEO then needs to drive work on integrating programs in parallel. It’s quite an art, but short-term versus long-term thinking will need to become a common management skill. Planning and the right resourcing are a delicate balancing act.

“We know deforestation is taking place to accommodate agriculture. When and where is it taking place? This is the challenge.”

Eventually, when CEOs have clarity and confidence around ESG reporting, things will change. When a CEO opens a pure financial report and looks at the final number, they don’t ask whether that number is right or wrong. They assume it is right; this company is losing money. The result, for an investor, is to take out my shares. When we all believe ESG reports with the same immediacy, see an enterprise is degrading the planet, reducing the amount of forest, or employing minors, and we trust ESG, we are comprehensively going to divest from that company.

ESG is never an easy ask

We are seeing a new level of scrutiny on ESG to succeed. Some argue we’re very far from that place, and many people are resisting this process because it’s difficult. It’s worth considering that it took several decades to get to proper financial reporting standards where everybody follows them in such a way that stakeholders open the report, look at the numbers, and choose to invest or not.

Once we have clarity around ESG, people will trust, and then things will change. In sustainability, there are more parameters – particularly loose-ended parameters. How do you measure child labor? How do we make sure the figures are correct?

We know deforestation is taking place to accommodate agriculture. When and where is it taking place? This is the challenge. That’s where governance and technology need to fill the gap.

Tomorrow’s ESG: a new dawn?

My picture of ESG may appear vexing but the truth is, it’s a vexing discipline. It’s under attack from many angles – from many different stakeholders that have vested interests in not seeing the ESG flourish.

Criticism also comes from within ESG circles, and that’s okay. We need to turn all the criticism into an opportunity to convince the skeptics that ESG is right for society as a whole and that it needs continuous improvement to reach the highest possible level of accuracy. As we have previously highlighted, difficulties include data availability, data quality, data source quality, agnostic presentation of performance, standardization, and data governance.

What makes integration more complex and intriguing is that present-day ESG reporting is often suggestive and largely pursued to improve brand image rather than being a mandatory practice. Truly futurist CEOS will employ regulation, standards, the best data, and the best digital solutions, including AI, to help with the ‘white spots’ – and help us finally realize ESG’s potential.

Authors

Eugenio Longo

Sustainability Director at Tata Consultancy Services Europe

 

Eugenio Longo is Sustainability Director at Tata Consultancy Services (TCS) Europe. He spoke on the panel “The ESG Dilemma: Will Your Strategy Make You More Sustainable?” at the Global Peter Drucker Forum in Vienna in November. The theme of the conference was Creative resilience: Leading in an age of discontinuity. 

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