Better ESG data will only get you so far

Several years ago, at the Corporate Register Reporting Awards, I participated in a public debate about whether companies report non-financial information that investors want and need. I noted that investors don’t really know what they want companies to report; they don’t REALLY know what they are looking for.

When Goldman Sachs first created their GS Sustain model in 2007, they started out looking at 300 different KPIs.  As they got better at understanding ESG data, they were able to narrow this down to under 80 KPIs within 3 years.

Currently, there is a multi-investor project led by State Street Bank called the Delphi Project which is about to come out with ideas on the ‘super’ ESG factors–a list of possibly only three.

Everyone is learning.

Getting to the heart of good risk management and illuminating management quality have always been tricky issues.  (I have a hard time keeping a straight face when analysts tell me they like to judge management quality by ‘looking in the whites of the eyes’ when they meet executive management teams.)

The most important responsibility and sustainability issues for companies are often very difficult to report on because they have such a long time horizon (like the health impact of selling sugary colas) or because we don’t yet have the right accounting tools to measure indirect or social impacts.

Financial accounting has been evolving for at least 150 years and environmental accounting has a 40 year history.  Social accounting, however, is in its infancy.

Better data is important, but we should be honest that this is likely to be a long journey.  Explaining what’s going on during the journey is a communications dilemma and there is a huge role for communicators in the gap that data cannot yet fill.

One of the tricky parts of integrated reporting is the danger that companies will take existing models of management and reporting and try to apply them to everything.  While financial accounting systems work well for assessing profitability, the same systems don’t work for everything.  Revenues and profits have become how we think of corporate performance because it is what we can most easily measure.

The true value created (or sometimes destroyed) by companies is much broader and more complex than the financial picture.  But we can’t get at it with such precision.

We should still try to understand how value is created and destroyed but we may have to accept that the entire picture will not be summed up as neatly as financial performance.  Beginning to make the abstract tangible is the first step.  This great Sasol video on the five capitals model (sometimes presented with six capitals) is one way to look at the task at hand.

 

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