Tag Archive for: Global Reporting Initiative

With sustainability practitioners strained to deploy limited resources internally to navigate the myriad of standards and frameworks to meet the growing appetite for environmental, social, and governance (ESG) information, we continue to ask, “Isn’t there an easier way to do this?” Navigating ESG Anyone who has worked to align standards and frameworks, corral internal champions around disclosure requirements, and marry quantitative performance data with narratives on management approach, knows that this is no easy feat.

The uphill battle to integrate data and other systems is often complicated by trying to pull others along in the organization—regardless of where their hearts lie.

So how is it that we can focus in on what’s relevant and minimize the reporting burden on others?

At the risk of seeming to oversimplify the process, I’ll attempt to breakdown some of the concepts mentioned here as a means for peering through the gray. The following five points have been central to my years of guiding organizations through this process. Navigating ESG

1: Navigating the myriad of standards and frameworks:

Not only are there the long-time warriors (the Global Reporting Initiative, CDP, and the Sustainability Accounting Standards Board now merged with the International Integrated Reporting Counsel labeled as the Value Reporting Foundation), there are also larger north star initiatives, like the United Nation’s Global Compact or Sustainable Development Goals, and even those that are industry specific, like the Global Real Estate Sustainability Benchmark. There are also the investor-driven ratings and rankings, supply chain initiatives, and mandates disclosure requirements that organizations must contend with. Not everyone is blessed with sustainability departments powered by specialists of all types. In fact, most are managed by 1-3 individuals who often juggle multiple roles until they can prove the importance of an integrated strategy and leverage additional support. In the end, standards alignment comes down to one person dropping all disclosure requirements into an excel spreadsheet to make sense of all that is needed. There is no harm in this. It is a recommended first step in trying to better understand the nuances between all that is asked and whether it is possible to pull data to meet various requirements. The goal eventually, of course, is to automate reporting against all applicable requirements. Usually companies start by developing a comprehensive list of all that they can disclose, either initially or in the future.  The key is not to exclude areas that the company is unable to immediately disclose on, but to press the “pause” button and keep those items in the horizon as areas that should be revisited in the future. Instead, stating where one is in the journey to retrieve information and manage inherent risks, while providing data for what is possible, is recommended. In that, clear “omissions” or “exclusions to the boundary” should be noted.

ESG | Qualitative vs Quantitative Data

2: Determining the qualitative vs. quantitative:

Be it labor standards, human rights, training and education, resource consumption or greenhouse gases, there are both qualitative and quantitative features to grasp and disclose an organizations’ impacts. Granularity is based on what the organization is trying to achieve by pursuing efforts in a certain area. Will the level of detail provide a sharper view of potential risks? Will the data enable decision-making? Will it demonstrate the level of transparency the organization is willing to provide to match disclosure among its peer group? Will it result in greater recognition or even, leadership status? By asking these questions, organizations can determine their priorities and narrow in on data tracking mechanisms to pull, house, and analyze detail. Keep in mind, however, taking inventory always presents surprises. Try not to go down a rabbit hole searching for data that doesn’t exist or isn’t relevant considering the larger footprint. Report on what is available and explain what is being accounted for, what is missing, and why. Navigating ESG

3: Pull others along:

Frameworks, data, and the endless requests for disclosure are enough to make anyone question their sanity—let alone the ongoing education that is needed to bring others along the path towards greater sustainability. Up until about five years ago, the role of the sustainability champion was often a lone wolf in the organization who felt committed to the charge. Boards were not involved, and it was because few companies saw sustainability as a strategic imperative. Today, it’s no longer effective to go at this alone. Markets have begun to regulate this space: the fear of shareholder resolutions, and the inability to access capital due to a lack of demonstrated ESG commitments, risk management, and performance disclosure has catapulted the need to activate players across functions. Regardless of standard, framework, or reporting platform, governance is critical to ensuring that sustainability sticks. It’s not enough to simply describe the organizational and leadership structure, but to describe how and where sustainability or ESG risk management sits within and what the role of the Board is. The sustainability coordinator, or Chief Sustainability Officer’s structure the group to facilitate action. Constant education and hand holding is necessary to inform the working group on the rapidly changing landscape and what is needed to maintain a license to operate from the stakeholder perspective. ESG Report

4: Minimize the reporting burden:

If it’s not clear by this point, all that matters when it comes to reporting is 1) performance data, 2) an explanation of management approach, and 3) a description of your processes undertaken to identify material matters and manage risks. Stories and imagery provide color but not an overview of what the organization is doing to manage impacts. Begin by structuring your website to highlight data. Embedd data from  GRI, the SDGs, and/or SASB indexes as companies such as Ball Corporation, BlackRock, and Coca-Cola. All have focused more efforts on tangible reduction and reuse, rather than creating beautiful communication pieces. This allows them to focus time and resources on doing the work that matters. ESG Data Collection

5: Data collection:

As the saying goes, “what doesn’t get measured doesn’t get managed.” Pulling data from the ESG pillars and across functions often means that the data collection process tends to take shape like a patch work quilt. Utilizing an integrated, configurable system that can extract and consolidate data into a single source of truth allows companies to focus on results, rather than begging for data from sources internal and external to their organization. Where possible, automate the data collection process, and provide decision-making analytics that can be transferred to various disclosure platforms to streamline the process and further minimize the reporting burden.


Hopefully, these points will help reassure you that you’re on the right path. The reality is, there is no easy way. Many of the front movers know this all too well. Their approach has taken years to solidify. In addition to the 5 points listed above, try to remember that it is important to just get started. Improvements can be made over time and lessons aren’t typically learned through perfection.


[sc_image width=”150″ height=”150″ src=”23979″ style=”11″ position=”centered” disable_lightbox=”1″ alt=”Nancy Mancilla, ISOS Group”]

About the Author—Nancy Mancilla, ISOS Group

Ms. Mancilla is the CEO and Co-Founder of ISOS Group, a full services sustainability consultancy firm also recognized for its leadership as a GRI and CDP Certified Training Partner in the U.S. Since establishing the company, Nancy has orchestrated 300+ Certified Trainings, co-taught MBA programs, regularly serves as a conference guest speaker and thought leader on the non-financial reporting process. In addition to educational services, ISOS Group provides organizations of all types with sustainability assessments, reporting guidance and external assurance.


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ESG Reporting has Become a Business Requirement

In today’s world, organizations must measure and report their environmental performance and adherence to corporate social responsibility (CSR) and environmental, social, and governance (ESG) principles. Stakeholders, including regulators, investors, customers, rating agencies, research analysts, NGOs, and the public, are all starting to evaluate non-financial criteria in addition to companies’ financial health and performance. Companies also must comply with EHS regulations in the jurisdictions in which they operate. While most environmental regulations have been around for half a century, the gathering and reporting of sustainability, CSR, and ESG data is relatively new and is becoming an essential part of corporate annual reports.

Companies are increasingly discovering that data-driven ESG reporting has gone from a “nice to have” to a business requirement. But it’s challenging to keep up with such reporting when a company’s data is in spreadsheets or numerous unconnected silo applications. Companies suffer when their domain experts and others rely on manual and outdated processes to accomplish ever-increasing reporting requirements.Locus ESG Reporting Software

It appears imminent that the U.S. Securities and Exchange Commission (SEC) will in near future regulate ESG disclosure as a requirement by using some kind of universal reporting framework.

Wouldn’t it be nice to have a single enterprise and cloud-based software system to perform all EHS, ESG, and CSR reporting from a single software platform? That is what this article is about.

Sustainability vs ESG

Until recently, it was common to refer to sustainability and ESG interchangeably. But over time, their meanings have grown apart. Sustainability can mean many different things, depending on the discussion context, whereas ESG has become the preferred term for capital markets and has frequently appeared in the headlines. The transition from sustainability to ESG performance indicates a maturation of business practices leading to more precise measurements of a company’s performance, its impact on the environment, and the risk it carries for investors when there is a low environmental performance or spotty compliance with EHS regulations. As a result, companies need to improve the way they collect and track metrics for ESG reporting.

Holistic Approach

To compare companies relative to their impacts on the planet’s climate or well-being, one must take a holistic approach that includes many factors. Among those to consider when assigning a score to a company are:

  • The magnitude and quality of its overall and coupled emissions to natural media
  • The efficiency of its operations in water and energy usage
  • Carbon footprint
  • Recycling, waste management, treatment, and disposal operations
  • The transparency and impacts of its supply chains

This holistic approach requires new, integrated, and interactive software tools. Such software, equivalent to the ERP (Enterprise Resource Planning) software that made its appearance in the early nineties, should provide complex tracking of all kinds of emissions linked to company-owned assets and services in real-time (Scope 1 emissions). It should also include emissions attributable to its supply chain, known as Scope 2 and Scope 3 emissions. Old ERP software applications integrate the processes needed to run a company in a single system: planning, purchasing inventory, sales, marketing, finance, and human resources. However, they do not typically integrate any technical information or activity related to emissions, waste, climate, environmental compliance, etc. Never mind that much of the ERP software in the market today is obsolete, running on the outdated technology of the seventies and eighties, and hard to integrate with anything.

The traditional approach of bolting-on another application to an existing software infrastructure is not the road to go down concerning ESG data collection and to report. Emissions tracking, sustainability, and other environmentally related verticals are typically “heavier” and more resource-intensive than antiquated ERP systems can handle without significant investment. Many legacy ERP systems, caving in under their weight, are hugely and unnecessarily complicated and are slowly being deprecated. New, cloud-based Software as a Service (SaaS) technologies hold more promise as they allow for the fast deployment and easy integration and sharing with third-party applications, suppliers, consultants, and even regulators. One such example is the Locus Platform or only LP. It is a SaaS that automates data collection, management, and reporting. It is of financial-grade, auditable, available, and actionable 24/7 from anywhere. This platform integrates EHS compliance and ESG reporting applications under a single system of record, giving users all necessary tools to optimize their compliance, sustainability management, and reporting.

All-in-one solution for Sustainability, EHS Compliance, and ESG Reporting

To kill two birds with one stone! Or perhaps a friendlier version for bird-lovers is a German version, “mit einer Klappe zwei Fliegen schlagen” – which means to kill two flies with one swat. Or kill two mosquitoes with one slap! This English language idiom is not to be taken literally but instead refers to a single activity or action that accomplishes two (or more) goals or tasks. And that is precisely what any advanced EHS/ESG software should do.

Over the last twenty or so years, companies have spent considerable resources (in both time and money) buying and installing such EHS compliance-related verticals as permit management, waste, incident reporting, water quality, air emissions, greenhouse gases (GHG), sustainability, and so on.

More than one acquisition is often needed to cover their reporting needs, resulting in an assortment of tools that may or may not be compatible with one another.

Locus Platform Sustainability

As I mentioned at the beginning of this blog, a new acronym, ESG, has recently shot to prominence. C-level executives are asking their EHS managers a question “Do we need more software to manage our ESG reporting? Smart companies should not rush and start searching Google for “ESG Software.” Instead, they should take a hard look at what they have on EHS compliance and sustainability management and augment it with ESG reporting. After all, everything that needs reporting or is worth reporting under the ESG acronym probably already exists and is hidden in their EHS compliance software, provided they selected the right one. Companies that have implemented integrated EHS compliance and sustainability management systems may already have most of the ESG data they need to report within their existing applications. If they do not, or if they have a “mutual fund” portfolio of EHS software already installed in unconnected silo applications, this is the time to clean house and switch to a unified reporting platform that integrates EHS and ESG into a single system of record and reporting. Companies that head down this path would not just be “killing two birds” but more: they would lower their costs, meet their new reporting needs, gain a better understanding of their environmental impacts, and potentially enhance their ESG reputation.

Locus Platform

Locus specifically built its configurable Locus Platform to unify many current and future applications on a single SaaS platform. The LP offers a wide range of features and functionality to power sustainability measurement, management, and reporting across the entire corporation. But it also provides a launching pad for EHS-related and unrelated apps that are interoperable and share relevant information, thus avoiding any double input. Among its features are the following:

  • It offers Integrated IoT streaming of data from sensors, smart meters, mobile phones, or any physical device with an IP address.
  • It is AI-ready and Blockchain-ready to help with data analyses.
  • It offers built-in workflows and rules.
  • It has robust business analytics tools and powerful reporting engines.
  • It has a fully integrated GIS system.
  • It has a pre-built library of entities and modules that allows users to quickly assemble all new applications without software developers’ help.

While EHS compliance applications are more comprehensive and dive deeper into the root causes of contamination and emissions, ESG reporting is much less complicated and requires fewer data to report and less scrutiny of such data. For example, federal and state standards such as Discharge Monitoring Reports (DMRs) require detailed water quality reporting, requiring companies to prove that their releases fall within allowable quantities (flow volume) and that chemicals in discharge samples do not exceed regulatory limits for the chemicals of concern. Consequently, the software to manage water quality for EHS reporting needs to provide automated tools to prove that: samples were collected correctly, sample holding time was not exceeded, the receiving laboratory tested samples using proper protocols, lab equipment, etc. Labs also must maintain calibration logs for equipment used in testing, testing details, and so forth.

None of these QC results and associated metadata are necessary for ESG reporting under voluntary reporting protocols such as the Carbon Disclosure Project (CDP), the Global Reporting Initiative (GRI), The Climate Registry (TCR), or GRESB, the leading ESG benchmark for real estate and infrastructure investments. Those protocols mainly require information to be assembled on volumes (quantities) of clean water used, water sources, and contaminated water discharge volumes. They may also include some identification of chemicals in releases but with no details and no testing protocols required. The GRI 303 standard on water and effluents, for example, requires companies to collect information on water use from withdrawal to consumption and discharge and to report on associated impacts on people and ecosystems, including at a local level. This standard enables investors to assess a company’s overall exposure to water risk, as it addresses the whole supply chain.

Locus GHG Exports

There are plenty of overlaps in this undertaking. Smart software like the Locus Platform can help avoid any double input between EHS compliance data and ESG reporting. For example, once inputted, facility information is instantly available to all apps, whether the final output of the app is for EHS or ESG reporting. If a spill incident is created and recorded in the EHS Incident App, another app for waste or groundwater contamination can track and manage that spill’s consequential emissions. Even a small spill could become costly if the spill creates long-lasting contamination of soil and groundwater below it. Reporting for spill under EHS compliance regulations is very different from reporting for ESG, yet the two can use the same database. Examples like this are numerous.

Locus continuously adds new features to its Locus Platform to expand EHS, Sustainability, and ESG interoperability and avoid and minimize data’s double input. Companies need a single system of record to house their sustainability data, EHS Compliance, and ultimately report ESG information across multiple reporting standards. Locus’ ESG SaaS delivers in this regard. Moreover, it can grow with customers’ needs thanks to its off-the-shelf configurability.

In short, the Locus Platform is an all-in-one sustainability management software tool that helps companies streamline data collection, improve data quality, benchmark performance, and communicate more effectively with internal and external stakeholders. Locus’s software automates collecting, reducing, and managing data to monitor and track critical metrics around EHS, CSR, and ESG performance. Once the data is in the Locus Platform, the software creates ESG, sustainability, and other reports adhering to multiple reporting standards to improve communications with stakeholders and show greater transparency.

Software Tools for Reporting to Multiple Regulatory or Voluntary Bodies

Many large companies must report to various regulatory or voluntary bodies. A company’s software of choice should support all the major reporting requirements to avoid double input or separate calculations for some jurisdictions. This is particularly true for GHG reporting.

When selecting its software system of record for EHS and ESG reporting, a company should strive to “enter once, report many times.” The gold standard is to have a system configured to report to multiple agencies from a single dataset. Before selecting software, companies should review their reporting requirements to see if their software handles them. Essential reporting requirements include state or federal regulations, internal CSR, and ESG based on whatever standard their organization adheres to, such as CDP, GRI, or more recent World Economic Forum (WEF) attempt to standardize many voluntary standards.

Companies also must consider export formats. For example, when selecting a GHG management software, the company must ensure their software of choice includes exports to XML, a standard format for Environmental Protection Agency (EPA) and California Air Resources Board (CARB) reporting, and an option for reporting to other agencies. Having such outputs easily generated from the software will save time and money during the reporting season. The XML report generation capability allows facilities to directly upload their GHG data instead of completing the complex web forms found in the EPA Electronic Greenhouse Gas Reporting Tool (e-GGRT) and CARB reporting worksheets (Cal e-GGRT).

Locus provides direct XML exports to the GHG application in its Locus Platform software. Locus is the only software vendor that is an approved GHG verifier by the California Air Resources Board (CARB) under AB 32, the California Global Warming Solutions Act of 2006. Since the program’s inception, Locus has performed more GHG verifications than any other company and learned much by observing GHG reporting practices at many companies. As a result, Locus has prioritized enhancing its GHG software to make it easier for customers to manage GHG emission inventory tracking and reporting requirements. Locus’ GHG application is fully integrated with compliance tracking, asset management, and IoT automation (including remote sensing). This ability to generate XML reports further streamlines customers’ report submission process to the EPA and CARB.

Locus Platform XML export

For example, data entry for EPA and CARB is consolidated in the GHG application, eliminating the need to maintain separate agency spreadsheets and software. This supports robust trend tracking and reporting, reducing data entry, reporting time, and error opportunities. For many greenhouse gas subparts, including Subparts C, D, W, and NN, the software automatically generates XML reports. These can be easily configured for any greenhouse gas industry segment.

From our experience, many of our customers have experienced frustration with the speed and difficulty of entering their data into the state and federal GHG reporting tools. The Locus Platform XML reporting tool lets customers bypass those clumsy interfaces completely. This saves time, helps companies avoid transcription errors, and ensures consistency with GHG data submitted to multiple reporting programs. As more and more regulatory and voluntary programs embrace automated report submittal through the XML format, Locus continues to expand this functionality to simplify reporting for our customers.

Conclusions

ESG reporting and EHS compliance are inherently cross-functional and coupled activities. Managing them together rather than separately is better. Locus built its platform on a highly secure, scalable, configurable, and efficient multi-tenant software platform. The traditional approaches to using a separate app or a spreadsheet for EHS compliance, sustainability management, or ESG reporting were ripe for digital transformation to a single platform of record. This is the main reason that we built the Locus Platform from scratch to take advantage of the latest cloud technologies and flexible and domain-driven reporting requirements.

Quality of data and standard protocols remain one of the biggest challenges to evaluating companies’ ESG performance. Such data are only credible if they come from the existing sources of EHS compliance data that are much more scrutinized and verified by regulators. Any potential conflict between two sets of the same data can spell disaster for the reporting entity. The perceived value of sustainable investments and practices is inevitably linked to data accuracy, consistency, and reproducibility.

The Locus Platform empowers companies to gain a holistic view of their sustainability performance by providing the means for them to assemble and report their EHS and ESG data from within a single system. Sustainability managers need comprehensive digital tools and real-time, AI-driven insights to keep up with the latest ESG disclosure requirements, trends, and stakeholder requests for information. Whether an organization is just getting started with sustainability initiatives or doing it for a while, Locus Technologies combined EHS and ESG software, explicitly tailored for multi-jurisdictional and multi-media reporting, can help companies make better and faster decisions and reduce the reporting cycle time. By quickly transforming corporate EHS compliance to ESG reporting, companies can improve their ESG score while lowering operational risks and costs. Locus software breaks down silos and provides a stable platform to work collaboratively with diverse teams of experts across the customer organization, its consultants, and its suppliers.

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    Climate change is about to upend the corporate world. Companies that fail to address their impacts on the environment are likely to face a backlash as their lack of effort will not sit well with the public, particularly as climatic changes become ever more severe and prominent. Firms need to react quickly if they want to be “on the right side of history.” The reinstatement and enforcement of canceled or ignored regulations and new standards in many countries will force more firms to report their emissions. But what reporting standards should they use? And how will they compile and aggregate their emissions data to provide credible and verifiable accounts of their activities?

    Locus ESG Reporting

    Figure 1: Companies brace themselves for new ESG regulations

    These are timely questions to address with the expected renewed focus on the Paris Agreement accords as the United States re-engages with the rest of the world. One place to start is with better carbon-emissions data. Today, few companies even know how much greenhouse gas they or their suppliers emit, making it difficult for them to assess their products or operations’ full environmental impact. Where data does exist, it is often self-reported, inconsistent, or too out of date to be useful. Efforts are underway to fix this, mostly coming from an unexpected source–the push to incorporate environmental, social, and governance (ESG) reporting in evaluating companies’ creditworthiness by financial institutions. Many shareholders and professional investors now believe that investors who are not considering possible impacts related to climate change could be exposing themselves to serious risk.

    While climate-related issues are a key component of the E in ESG reporting, it encompasses much more and is measured by various means. Some examples are GHG emissions, water use, generated waste, land usage, and so forth, both in a firm’s direct operations and along its supply chain. In this paper, I intend to focus on the problems and issues associated with such measurements.

     

    Post Covid-19 Economy

    In the post-Covid economy, many investors will want to align their investment strategy with accepted science. Many companies, countries, cities, and politicians have pledged to have net zero emissions before 2050 or some other year in the distant future (when those making the proclamation most likely will not be alive). However, to better manage and account for climate change risk and help keep global warming from rising to dangerous levels, investors are increasingly asking whether their portfolios are climate-change friendly in the short term. Pledges where a company hopes to be in 2030, 2040, or 2050 mean little to them.

    Far from turning investors away from ESG investing, the pandemic has heightened interest in sustainable portfolios. I expect ESG scores will become as important to investors as financial performance indicators in the coming decade. According to several research analysts, at least $3 trillion of institutional assets now track ESG scores, and the share is rising quickly.

    To stay relevant and attractive to investors, companies will urgently need to step up their efforts to minimize their impacts on the climate. Climate change is already causing both severe physical damage and harmful effects on the biosphere. Pushed by mainly younger voters, governments around the world are introducing ever-tougher regulations. Many expect the U.S. to do the same now that Biden has taken office.

     

    ESG Scores as Important as Financial Performance

    In the developed economies of North America, Asia, and Europe, there is a movement among some politicians, corporate executives, and investors to shift away from measuring corporations based solely on their financial performance. They want to incorporate climate change as another catalyst — a shift that would involve assessing which firms are “dirtier” than others. This effort’s success will depend on firms providing accurate and verifiable data on their emissions and related discharges.

    Data from Morningstar, a research investment firm, show that in the first nine months of 2020, climate-aware funds attracted almost 30 percent of all investments in sustainable fund inflows.

    In 2019, this proportion was just 15 percent. Climate change has never been so prominent in the minds of the financial community. But while awareness of climate change issues is rising within financial institutions, interest and concern in the U.S. have been suppressed in recent years by the very regulatory agencies that are supposed to be managing it. But more on that subject later.

    Locus Climate Change

    Figure 2: Climate change risks are real.

    To attract capital, many companies will have to adjust their reporting to this new reality. Voluntary reporting of relevant key performance indicators (KPIs) will not be enough as governments develop more and better standards. “Markets need high-quality, comparable information from companies to enable informed capital-allocation decisions in the face of climate-related risk,” said Mary Schapiro, a former U.S. Securities and Exchange Commission (SEC) chairwoman. we can predict where we will be 20 or so years from now, we need to know where we are today. Only reliable, verifiable, and normalized data across industries can tell us that.

     

    How To Measure Companies’ Sustainability Performance?

    Measuring companies’ performance relative to climate change or sustainability is a challenge even with a set of agreed-upon standards. However, no such meaningful and accepted standards exist, let alone reporting rules or data interchange specifications. Some measures are slowly emerging, such as carbon emissions equivalents, energy consumption per something, water consumption, and type and quality of discharges. More effort is needed to standardize reporting and compare climate risk for companies in different industries. Besides the lack of standards, there is also a lack of unified enterprise software tools to make the reporting job easier.

    Locus Energy Reading

    Figure 3: Energy consumption reading, real-time upload and reporting to Locus Platform

    In the absence of such standards and guidance, I expect some investors to place their bets on the least polluting steel manufacturing company or the traditional car manufacturer that has invested the most in electric vehicles. Or they may invest in companies that have set ambitious (future years) emissions targets, i.e., committing to become carbon neutral by some year in the distant future. While an improvement, all of these do not provide a clear picture of the risk associated with an investment. Who will be around 20 to 30 years from now to hold companies, individuals, or politicians accountable for “future-looking statements and predictions” that they are making today? Certainly not the people making those announcements. Moreover, at that time, a new generation will be focused on solving their own unimaginable or unpredictable problems today.

    Since President Nixon’s 1974 State of the Union — where he made energy independence a national goal — a bipartisan procession of presidents has regularly made similar declaration calls to reduce America’s dependence on foreign oil. None of them was correct when or how the country would reach that noble goal, and nobody ever held them accountable for their failures. I expect the same will happen with today’s predictions on carbon neutrality by so many CEOs.

     

    ESG Standards

    One of the most problematic ESG reporting issues is that there are no globally enforced reporting and compliance standards for ESG and other sustainability information. For financial reporting, at least, there are standards in the form of Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

    Nowhere is corporate “book-cooking” more on show than in firms’ sustainability reports. Today, 58 percent of companies in America’s S&P 500 index publish one, up from 37 percent in 2011, according to Datamaran, a software provider. Among the photos of pollution-free blue skies, blooming red flowers, and smiling children of all races, firms sneak in such ESG data as their carbon footprint, waste generation, and water usage. As expected, all charts showing these data trend downwards, like an inverse hockey stick. But the information in the sustainability reports differs wildly from firm to firm, making it impossible to draw comparisons based on their ESG data. Unlike financial data that are audited and include the familiar balance sheet, income statements, and cash flows, there is nothing similar on the ESG side. This situation arises from the absence of widely adopted standards for ESG reporting. The most obvious sign of this mess is that, unlike financial statements, ESG scores assigned by different rating firms poorly correlate with each other, rendering their ratings useless for smart investors.

    With the U.S. EPA missing in action over the last four years, five voluntary ESG standards have come to dominate the scene. The Global Reporting Initiative (GRI) focuses on metrics that show firms’ impact on society and the planet. The Dow Jones Sustainability Indices (DJSI), launched in 1999, are a family of indices evaluating the sustainability performance of thousands of companies trading publicly. By contrast, the Sustainability Accounting Standards Board (SASB) includes only ESG factors that have a material effect on a firm’s performance. The Task Force on Climate-related Financial Disclosures (TCFD) and the Carbon Disclosure Project (CDP) is chiefly concerned with climate change. They specifically focus on companies’ exposure to climate change’s physical effects and potential regulations to curb carbon emissions. There are still other regulatory standards worth mentioning: AB32, the California Global Warming Solutions Act of 2006, and the EU emissions trading system (EU ETS) that is a cornerstone of the EU’s policy to combat climate change and is its essential tool for cost-effectively reducing greenhouse gas emissions.

    GRI is the most popular of the voluntary standards, in part because it is the oldest, founded in 1997. It has been embraced by about 6,000 firms worldwide. However, all these standards are based on voluntary reporting and have no teeth. Absent real climate change regulations and standards, many financial institutions promote one of these standards.

    To further complicate matters, the number of ESG standards in the world has grown from around 700 in 2009 to more than 1,700 in 2019. That includes more than 360 different ESG accounting standards set primarily by various financial institutions or rating agencies. To say the situation is chaotic is an understatement. Last September, the World Economic Forum (WEF) announced a new set of ESG metrics for firms to report, making the current state of affairs even more confusing. These new metrics have received the backing of four large accounting firms. The Davos agenda for 2021 is: “How corporate leaders can apply ESG tools to help overcome global challenges.” Let’s hope they make some progress between their martinis and skiing.

    The WEF stressed that this is not yet another new standard but a collection of useful measures picked from other standards. The intention, they claim, is to simplify ESG reporting, not to add to the confusion. But that is exactly what this mixture of standards does.

    The IFRS Foundation, a global financial-accounting standard-setter, is considering its ESG standard. Moreover, the EU is planning rules that will force big companies to disclose more ESG information; as of the beginning of 2021, it is still thinking about which measures to use.

    These efforts fuel demand for normalized ESG ratings and a uniform set of reporting standards. The goal is to create a single score from disparate non-financial indicators, such as a firm’s carbon emissions. The proliferation of standards hinders comparability. Simplification is needed. Many complain that voluntary reporting lets companies cherry-pick positive results by taking reporting numbers out of context.

    Some have pushed for an ESG equivalent to the GAAP used in financial reporting. But these took years to agree on, and there are still sizable differences between the U.S. and the EU in applying them. Before regulators can establish any accounting-like standards, they must first base them on pure science and scientific calculations. Many such standards already exist in various U.S. EPA environmental compliance reporting requirements such as the Clean Water Act, Clean Air Act, or California AB32 for greenhouse gas emissions.

    Instead of aggregating many voluntary reporting standards developed by non-scientists, lawmakers should aggregate the existing reporting requirements that have been developed by federal and state agencies under existing programs over the last 50+ years. A unified reporting schema and associated enterprise, cloud-based software to aggregate it should be the ultimate objective. We do not need to create yet more regulations to institute climate change regulations. What we need to do instead is synchronize, unify, and coordinate existing rules. Almost every current environmental law already has built-in components that relate to climate change. For example, many voluntary reporting programs like GRI or CDP require companies to track waste or water consumption and discharges or air emissions. And all of these are already regulated by EPA.

    Locus Discharge Monitoring Reports

    Figure 4: Water discharge reporting. Under President Biden, companies may face new water discharges, carbon emissions, and other sustainability measures.

    Voluntary standards reporting requirements lack the rigor and comprehensiveness of waste management requirements developed under the EPA RCRA program, water quality management under the EPA Clean Water Act, or air emissions management under the Clean Air Act. Why duplicate efforts if they do not bring added value? The EPA’s cradle-to-grave hazardous waste management system, for example, provides the critical foundation needed to keep America’s land and people safe from hazardous materials. Added reporting on waste under GRI or CDP brings no additional value. The Resource Conservation and Recovery Act (RCRA) passed in 1976 to set up a framework for properly managing hazardous waste is far superior to any voluntary reporting programs of recent years.

    Likewise, Title V of the 1990 Clean Air Act Amendments requires all major sources and some minor air pollution sources to obtain an operating permit. A Title V permit grants a source permission to operate. The permit includes all air pollution requirements that apply to the source, including emissions limits and monitoring, record keeping, and reporting requirements. It also requires that the source report its compliance status concerning permit conditions to the permitting authority. None of the voluntary programs has similar requirements.

     

    How are Firms Rated on their Climate Change by Financial Analysts?

    Many would-be investors are confused because there is no standard terminology for describing and defining sustainability and other ESG reporting components. The resulting variability in the quality, quantity, and relevance of disclosures prevents investors and stakeholders from getting the information they need. Rating firms use teams of analysts, AI-driven software algorithms, and scattered data from companies to collect and massage ESG information. They then convert this information into a single score. And how is this score used? Some customers of these rating firms seek to gain an investment edge; others want their money to benefit society and themselves. But the ratings are not yet ready for the critical role they are being asked to play.

    A recent report by the Governmental Accountability Office (GAO) in July 2020 emphasized that ESG disclosures and reporting are not always clear or helpful for decision making. If reported information is not useful for decision making, we must ask, what purpose does it serve in its current state?
    As government regulations on heavy polluters and heavy emissions emitters get stricter and companies see their business models under threat, it only makes good financial sense to implement a system that aggregates all their emissions data (to air, water, or soil) and present it to regulators and investors in an organized, transparent, credible, and defensible way.

    Just as the Sarbanes-Oxley (SOX) Act of 2002 provided unexpected drivers for reporting the environmental liability on the balance sheet of publicly traded companies, ESG reporting drivers may help standardize EHS reporting.

     

    U.S. EPA: Missing in Action

    The U.S. conversation about protecting the environment began in the 1960s. Rachel Carson had published her attack on the indiscriminate use of pesticides, Silent Spring, in 1962. Concern about air and water pollution had spread in the wake of disasters. An offshore oil rig in California fouled beaches with millions of gallons of spilled oil. Near Cleveland, Ohio, the Cuyahoga River, choking with chemical contaminants, had spontaneously burst into flames. Astronauts had begun photographing the Earth from space, heightening awareness that the Earth’s resources are finite.

    In early 1970, due to heightened public concerns about deteriorating city air, natural areas littered with debris, and water supplies, and navigating bodies of water and beaches contaminated with dangerous chemicals, President Richard Nixon sent Congress a plan to consolidate many environmental responsibilities of the federal government under one agency. A new Environmental Protection Agency (EPA) was born. For most of its existence, the EPA fulfilled its mission to deal with environmental problems in a manner beyond the previous capability of government pollution control programs.

    The EPA is best positioned to lead the development of reporting standards for climate change that financial institutions can incorporate in their reporting. The SEC regulates the securities markets and facilitates capital formation, helping entrepreneurs start businesses and companies grow. The EPA should do the same to activities that have harmful effects on the climate. The current trend of using voluntary reporting programs gets it all wrong, letting financial institutions determine how best to assess a firm’s environmental impacts. What does the financial sector know about the setting limits for the concentration of toxic chemicals in discharge water or the potential effects of specific air emissions?

    Unfortunately, in the last several years, the U.S. EPA has drifted away from regulating climate change. Just last week (January 12, 2021), the agency set higher barriers for controlling the emissions that contribute to climate change, setting new rules that effectively block the federal government from imposing new restrictions on several heavy industries. The regulations establish new criteria for entities that are significant contributors to greenhouse gas emissions. The agency claimed that the law requires determination of who these entities are. With unmatched chutzpah and antipathy toward environmental controls, the agency declared that oil and gas producers, refiners, steelmakers, and other heavy industries don’t meet the criteria. As such, the hamstrung EPA is ostensibly prohibited from regulating these industries’ emissions under the Clean Air Act.

    This abrogation of EPA’s role in protecting the environment has never been seen in any other administration. Programs and agencies elsewhere in the federal government have had their missions bent to serve polluters’ sole interests or had their scientific research halted, and their reporting suppressed. Please make no mistake about it. The Trump administration has been quite successful in some of its efforts. Fortunately, though there are anomalies, as is the case with Trump, the overall direction of our attitudes toward the environment in the last 60 years is one in which reduced emissions and sustainability have taken on ever greater importance. In future years, the EPA will hopefully once again assume its leadership role in promoting best practices and the promulgation of meaningful ESG reporting.

    As of the writing of this paper, there is already some good news: A federal appeals court today, the last full day of Trump presidency, vacated the Trump administration’s rules that eased restrictions on greenhouse-gas emissions from power plants, potentially making it easier for the incoming Biden administration to reset the nation’s signature rules addressing climate change.

    Until the EPA reenters the climate change business, expect that the SEC will follow the European lead and impose enhanced ESG disclosure requirements on public companies.

     

    Software to Organize and Report ESG

    To compare companies relative to their impacts on the climate, one must take a holistic approach that includes many factors. Among those to consider when assigning a score to a company are:

    • The magnitude of its overall and coupled emissions to natural media
    • The efficiency of its operations in water and energy usage
    • Its carbon footprint
    • Waste treatment operations
    • The transparency and impacts of members of its supply chains

    This holistic approach requires new, integrated, and interactive software tools. Such ESG software, equivalent to the ERP (Enterprise Resource Planning) software that made its appearance in the early nineties, would provide complex tracking of all kinds of emissions linked to assets in real-time. We need an equivalent of the balance sheet, income statement, and cash flow (emissions flow) across all aspects of companies’ assets and activities.

    Ironically, although the term ERP includes “Resource,” it has little to do with real natural resources being affected by its operation. Instead, ERP refers to companies’ software that is used to manage and integrate the critical parts of their businesses but mainly focuses on financial, human resources, and physical asset management to satisfy financial reporting, not asset emissions. ERP software applications integrate the processes needed to run a company with a single system: planning, purchasing inventory, sales, marketing, finance, and human resources. However, they do not typically integrate any technical information or activity related to emissions, waste, climate, environmental compliance, etc. Never mind that much of the ERP software in the market today is obsolete, running on the outdated technology of the seventies and eighties, and hard to integrate with anything.

    ERP software is siloed and applications are pigeon-holed.

    Figure 5: Traditional ERP software is siloed and applications are pigeon-holed. ESG requires an all-new approach.

    The traditional approach of bolting-on another application to an existing software infrastructure will not work to integrate emissions tracking, sustainability, and other environmental and sustainability-related verticals. Many ERP systems are caving in under their weight and are hugely and unnecessarily complicated. New, cloud-based Software as a Service (SaaS) technologies such as the Locus Platform are promising as they allow for the fast deployment and sharing of input, storage, and reporting tools among all key players: companies, investors, and regulators in a single system of record. One new software technology, Blockchain, is up-and-coming.

     

    Blockchain for ESG

    Though created as the digital ledger underpinning bitcoin, Blockchain has since been adopted by various industries for applications outside the realm of finance and cryptocurrency. But the potential for this technology far eclipses its current uses. Alongside the growing expectation for better ESG reporting, blockchain technology has the opportunity to enable ESG reporting to become more transparent, secure, consistent, standardized, and useful.

    At first glance, the convergence of Blockchain with ESG reporting might seem to be contradictory, but a more in-depth analysis of trends shows its value. Blockchain has rapidly transformed into a financial reporting and attestation tool that has caught the attention of many key decision-makers and technology drivers. At the same time, the importance of ESG has never been more pronounced. Combining the two could be the key to making ESG reporting more straightforward and more meaningful. The broader trends of both are alike: each has been steadily making inroads into organizational management and the reporting landscape. The difference is that now, with accelerated digital transformation and automation, both broader trends have moved into a much sharper focus.

    Blockchain technology is ideally suited for the complexities of tracking a global supply chain. Improving the traceability of supply chains is old news in terms of goods, but supply chains are much bigger than that. Securing the information that drives business decision making is where Blockchain can deliver significant value. Blockchain for ESG purposes is gaining traction already, with many pilot platforms being launched and tested in the last year. For example, two hospitals in the U.K. are actively using blockchain technology to help maintain the temperature of coronavirus vaccines before administering them to patients. Several off-the-shelf blockchain ledgers can provide authentication and corporate oversight systems. You can read more here: Blockchain Technology for Emissions Management.

    Blockchain technology will allow companies to track resources from the first appearance in their supply chain, certifying their products’ compliance with regulations and their quality. Blockchain technology would enable government agencies to effectively aggregate emissions quantities and origins across geographies, industries, and other criteria. More importantly, all parties would need only one software system of record to avoid constant synchronization, submittals, and reporting requirements. The open question remains: Who will run it, and who will pay for it?

    Though their data may be more transparent, corporations stand to benefit considerably from adopting a technology in which all their emissions and other data reside in a single system of record. Star performers, as well as laggards in their factories and supply chains, could more easily be identified.

    Along the way, companies would undoubtedly lower their operating cost and, at the same time, reduce the dizzying number of unconnected, heavily supported, siloed software applications they currently operate to keep in compliance with existing environmental regulations.

    Blockchain technology

    Figure 6: Blockchain and ESG, a powerful combination to tackle climate change.

     

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      A recent hot topic in the arena of corporate sustainability is the new Global Reporting Initiative (GRI) G4 guidelines that were just released. GRI is a network-based organization that provides all companies from around the world with a comprehensive and voluntary sustainability reporting framework. It’s no surprise this new G4 milestone is receiving such publicity, given how popular sustainability reporting has become today, and the fact that this is the first major overhaul to the GRI guidelines since the G3 version in 2006.

      One main difference is that the new guidelines place a strong focus on materiality- more explicitly requiring that organizations reporting efforts be centered on impacts, risks, and opportunities. While this idea is not entirely new, the G3/G3.1 framework did not have this as such a specific and strong focus.

      The new GRI framework also attempts to quell the problem of companies feeling overwhelmed by the number of options provided. G4 draws a line between requirements and guidance; so companies understand the differences and do not feel compelled to report on every single metric described. The G4 framework offers many other updates and changes, a few of which include up-to-date disclosures on governance, ethics and integrity, supply chain, anti-corruption and GHG emissions.

      While the G4 framework is an important milestone for sustainability reporting, there are various other guidelines being implemented around the world as well; for voluntary, as well as financial and mandatory reporting. It is clear that corporate sustainability has become a much more recognized business approach as of late, and that including it as part of a company’s identity can both ensure environmental responsibility and enforce a positive public image. However, while some organizations fully embrace the benefits of being transparent about their ‘green’ strategy, some others may be just starting to dip their toes into the water, and quite a lot remain stagnant and unwilling, or perhaps ignorant on how to take the plunge.

      No matter what category a company falls in, it’s important to remember that employing the help of a sustainability management software application, such as Locus’ ePortal Resource Management Module (RMM), can be a great advantage in reaching your sustainable goals. Having the necessary tools to create powerful reports and track KPIs such as resource consumption, greenhouse gas emissions, and water and wastewater usage across the enterprise can ensure reporting success. Also, the information you collect and organize during the reporting process will help to lower your operating costs by reducing resource consumption.

      Whatever you do, don’t wait much longer- the time to reap the benefits of the sustainability reporting competitive advantage is now.