The Sustainability Data Challenge

The Sustainability Data Challenge

Data — the biggest challenge to sustainability

We are entering the ‘Decade of Action’ which is fitting as it is common knowledge that the world is facing a decisively fateful climate crisis. This crisis is impacting virtually every aspect of society and everyone is scrambling to take action. But what is the single most important factor that will transform our current modus operandi and achieve critical sustainability objectives, like those set out in the Paris Agreement in 2016? Is it better use of renewable energy and materials? Is it preventing the destruction of rainforests and other systemically important ecosystems? Is it innovation and new technology to reduce industrial carbon emissions? While each of those is important, the answer is none of the above. The SINGLE most important factor is DATA, and therein lies our biggest challenge in accelerating our ability to achieve crucial sustainability targets and objectives.

It’s also important to remember that this ‘Decade of Action’ is occurring deep in the heart of the ‘Information Age’ and if there is anything current generations have learned during this era, it’s that data and information is the foundation for advancement. We need data to validate hypotheses, to identify risks and opportunities, set goals achievable goals, make critical business and life decisions, and most importantly, to measure and validate our success. Without data as the foundation, none of these activities can be done effectively. And not just any data is acceptable. Data needs to be of high quality, complete and robust, standardised and comparable, traceable and verifiable. This is the one segment of the Sustainability Domain that has not accelerated as quickly as the demand for positive impact has. Market stakeholders overwhelmingly state that data is the biggest barrier to the adoption and acceleration of sustainability.

By the time you are done reading this article, you should have a better understanding of :

• Why data is the biggest challenge to achieving sustainability objectives?
• What are the main factors that contribute to the data challenge
• What can be done to remove data barriers?
• How to function within the current state of available information while the evolution of data catches up with the vision for global sustainability?

What is the challenge and why?

As the importance of sustainability has become mainstream we have seen a huge demand from all stakeholders, including investors, consumers and society in general, for companies to demonstrate and disclose their sustainability impact. Companies have taken that demand seriously and are quickly taking steps to communicate their positive impacts. International standards associations like the TCFD, PRI, SASB and the UN with its Sustainability Development Goals (SDGs) have provided frameworks companies can use to assess, manage and report progress. And governments, like the EU, China, Singapore, and even the U.S. are now stepping up the effort to define taxonomies that will standardise the details of what sustainability means and how it can be measured on a level playing field. But while everything is accelerating with good intention, global vision, corporate strategies, regulations and stakeholder expectations are all accelerating faster than the data required to support it. Without true, verifiable data from each individual company, claims of sustainability action and impact cannot be measurably justified can only amount to ‘marketing hype’. Ever hear of greenwashing?

So what are the main sustainability data challenges?

There are multiple sustainability data challenges. First, ESG data generally just doesn’t exist at the company level in sufficient detail. The concept of measuring sustainability is relatively new and hasn’t been measured in detail or in breadth before. If ESG data does exist, there are usually huge data inconsistencies. Companies in the same sector can use different technical methods to measure and gather the data or report on different sustainability factors that one company believes is more relevant than another. In the other direction, data providers use different methodologies to create ESG data by modelling and estimating it. Each data provider can therefore calculate vastly different data and ‘scores’ for the same company. 

There are also numerous misalignments in the way companies aggregate data for various reporting purposes. This creates internal misalignments as the ESG reporting framework may be completely different from the financial reporting framework. The misalignments are then amplified by conceptually small but quantifiably material differences between multiple ‘generally accepted’ ESG frameworks (e.g. TCFD, PRI, SASB, and the UN-SDGs, EU Taxonomy). In addition, current ESG data management processes tend to be highly manual, prone to human error and infrequently verified by third party assessment, leaving the quality of the data in question. And there are currently no silver bullet solutions to solve these challenges. This is already leading to a high investment of capital and resources to implement the systems that are required to automate and control ESG data management.

Ultimately, the main challenge is the cost of data acquisition faced by individual companies. But we are not referring to the simple cost to access, manage and disclose ESG data. The real cost comes from the effort required to integrate ESG factors into the existing business model and infrastructure of a company which will lead to the creation of the data. To be effective, the integration needs to start at the strategy and policy level and disseminate down to management activities, process transformation and systems changes. Only then can the relevant ESG data be created and disclosed to satisfy stakeholders and regulators regarding the sustainability footprint of an individual company. This burden is especially heavy for SMEs where the cost of integration is disproportionate to their size. It is also heavy for private companies that have not been required to disclose non-financial data under regulations like the NFRD.

One thing is clear, ESG scores, proxies and estimates will no longer be sufficient for satisfying stakeholder and regulatory disclosure requirements. As an investor, would you accept a company’s annual financial disclosure if it simply estimated actual revenue based on a the average of its 5 closest competitors? I assume your answer would be no. Likewise, investors will no longer accept estimates that a company has reduced its carbon emissions by 20% just because the average carbon emission reduction of their 5 closest competitors was 20%. All stakeholders will want to know the actual data from the actual company and obtain confidence in that data through verification of its validity by a qualified third party.

Where are we today and what can we do?

Sustainable Finance will not last forever… tomorrow, it will just be regular ‘Finance’.

The challenge is real and we need to accept this. It is not going away, and the only way to get past this challenge is to go through it. But there is good news on the horizon. We are seeing an acceleration of activity on a global basis to align frameworks and regulations to establish sustainability measurement and reporting standards.

· The International Platform on Sustainable Finance (IPSF) has appointed China to oversee harmonisation of member countries’ sustainability taxonomies. The report is expected to establish a ‘Common Ground’ taxonomy that should be produced soon, during the third quarter of 2021.

· The GRI, SASB, IIRC, CDSB and CDP issued a Statement of Intention in September of 2020 to collaborate on a Comprehensive Corporate Reporting System focusing on how to align sustainability standards and frameworks.

· The IFRS will publish its findings on how it could add value to global standardised sustainability reporting in September 2021

· France is seeking to open talks with the U.S. to align a future US taxonomy with the EU Taxonomy.

But while the convergence of standards continues to progress in order to achieve clarity and consistency, we need to make progress with the assets we have available. Sustainability is not about creating a completely new business model. And it’s not about creating data for the purpose of compliance and stakeholder reporting. It’s about integrating ESG into the assessment of existing strategies to identify where change and improvement is needed to improve a company’s sustainability impact. And whether that identifies the need for a completely new business model or modification of the existing model, as alluded to above, it starts at the top and works its way down through all aspects of the company. One of the outputs will, of course, be the data.

In undertaking this transformation to integrate sustainability into a business, there are some key actions that can be taken to mitigate the data challenge. These are relevant to all stakeholders including companies, investors and lenders.

Establish common ground on sustainability with stakeholders. Engage with clients, shareholders, local communities, regulators and industry associations to gain understanding of their expectations and industry best practices for sustainability.

Align stakeholder expectations with strategy to prioritise actions and integrate ESG factors into process and systems.

Align financial, operational, ESG and relevant business factors into a common framework for management and reporting.

Implement a long term data management strategy to feasibly access granular company level ESG data, maintain consistency with current ESG frameworks and regulations, and transform company level data into standardised ESG data.

And remember that we are at the beginning of the journey. Sustainability definitions, regulations, methodologies for measurement, innovative technologies for improvement and stakeholder expectations will continue to develop and evolve. We can’t achieve the final result in one day, or even one year. This is a transformational journey. So flexibility and a plan for continuous data management improvement are a central component for success. By leveraging the tools, knowledge and experience that is available today and applying a structured approach to monitoring stakeholder expectation and regulatory change to identify and prioritise opportunities for improvement, companies as well as institutional investors and lenders, will place themselves in the best position to maintain a competitive sustainability edge.