And it’s not profit maximization, you cold-hearted, short-sighted Friedman worshippers.
“So what did you find out?” asked my friend while picking up his pint and taking a generous, hard-earned sip after a long working day. He is a Metals & Mining Asset Manager in a large and well-known investment bank. I am a Ph.D. candidate studying how environmental, social, and governance (ESG) matters can be integrated into mainstream business strategy. He was asking about my three-year research project on sustainability reporting and companies’ decision-making processes. “Is anybody actually using that sort of data? And if so, how?”
Sceptical curiosity is the most frequent reaction I get when I describe my research interests. Whomever I speak to, be they professionals, consultants, investors, academics, or managers, cannot help themselves from raising an eyebrow when I claim that collecting and disclosing ESG performance should be more a matter of effective management rather than one of compliance, reputation and corporate social responsibility (CSR). To put it simply, I believe that sustainability reporting should have nothing to do with CSR: it is a management tool (as I have already pointed out here http://www.csrwire.com/blog/posts/1496-sustainability-reports-should-have-nothing-to-do-with-csr).
On the other hand, the burgeoning ESG buzz arouses their curiosity. Today, more than two thirds of the S&P 500 firms publish a sustainability report. About 40 countries worldwide have introduced sustainability reporting policies, and the December 2014 EU “Directive on disclosure of non-financial and diversity information by certain large undertakings” requires more than 6.000 “public interest entities” (i.e. organizations with more than 500 employees) to report on environmental, social and employee-related, human rights, diversity, and anti-corruption and bribery issues. The newly introduced UN Sustainable Development Goals (SDGs) SDG 12 focuses on “sustainable consumption and production patterns”, and target 6 aims at supporting sustainability reporting worldwide, as an enabling tool for moving towards sustainable development. UN Principles for Responsible Investments reached more than 1300 signatories, among asset owners, investment managers and service providers, accounting for $ 59 trillion assets under management.
From the companies perspective, all this ESG zeitgeist is fiercely externally and compliance driven. During my research, I interviewed several CSR managers on how they collect, analyse, and manage ESG data. When asked why they started publishing a sustainability report, one of them answered, “Well, basically there was this French investment fund, they told us they needed to audit our ESG performance in order to assess whether we were compliant to their investment policies.”
The apparent point of ESG for business is the attainment of legitimacy and the construction of a sustainable corporation image. Companies can show their adherence to a system of norms, requirements, and standards spreading in the financial markets, along supply chains, within industries.
Still, there is more than meets the eye. Non-listed, smaller and less visible companies are disclosing ESG data as well. Large and listed companies are building their own metrics and indicators beyond the tick-the-box exercise fulfilling the requirements of the Global Reporting Initiative Guidelines, of the International Integrated Reporting Council, or of the UN Global Compact. One of the interviewees told me “We don’t sell toys or food. We are a weapon manufacturer. It’s not easy to write a sustainability report about bombs and missiles. I was facing a lot of scepticism internally. So I decided to put it as an exercise of accuracy and internal discipline.”
ESG metrics are not only a matter of external accountability, but provide useful information for supporting internal audit, control, and decision-making. It is sufficient to compare and contrast the first and the last sustainability reports published by an early adopter company to note the increasing grade of detail and precision of these documents. Today, a top reporting company features software for data gathering and harmonization, data ownership and responsibility diffused across organizational functions, and KPIs to track performance. The improved sophistication of ESG measuring provides data which is comparable (or at least more comparable than before), reliable, valid and able to help managers to take long-term decisions and integrating ESG elements in the decision-making.
Sustainability is like The Matrix’s green scrolling code, only for corporations. It represents the environment where they operate, but it is apparently extraneous and unintelligible. Sustainability reporting helps translate sustainability to the corporate language, which is not one of profit maximization, rather one of manageability and long-term competitive advantage.
From my vantage point, I think that creating ways to make ESG informational value more manageable and supportive of decision-making is the direction this field is taking in the near future. A direction where data materiality and ESG integration are substantial managerial actions, and not inferred from such investor-oriented signals as rankings, awards, and the like, blindly applying the Druckerian rational myth that “what gets measured gets managed”.