Devil in the Details: Data Quality and Sustainability Reporting
Has sustainability reporting tipped from a phenomena to celebrate to a counter productive exercise in self-interest?
There's now literally hundreds of ESG accounting methodologies ranging from industry-specific standards like AASHE Stars and GRESB, to international regimes like CDP. But as the number of standards and reporters explodes, the quality of disclosure has deteriorated from debatable to dubious. This undermines the integrity of reporting regimes worldwide - the scores and benchmarks coming out are only as good as the data going in - as much as it impugns the sustainability claims of participating companies. How important is sustainability data quality?
Michelle Edkins, head of Blackrock's Corporate Governance and Responsible Investment team, offered this blunt assessment of the current state of reporting at Facebook's second [email protected] event:
"The quality of data is abysmal." - Michelle Edkins, Managing Director, Blackrock
When the world's largest asset manager finds the work product of the ESG industry wanting to this extent the question must be asked - have we, the reporting standards, reporters, and service providers who make up the industry - turned the disclosure processes into another format for greenwashing?
Stated Income Loans Don't Pay
So long as reporting boundaries are self-selected, raw data un-validated, and qualitative claims accepted merely because they're printed on corporate letterhead, our beloved mechanisms for transparency will be co-opted as yet another means of greenwashing - a way to say "yes, we disclose" while also saying not much of anything at all. So instead of generating more ways to report, how about we start focusing on improving the quality of reported data?
Right now we award green bona fides to companies merely for disclosing, or for being great at the theater of disclosure.
The analog is the regime of stated income loans that contributed to the global financial crisis. Here, self-declared testaments of good financial health were exchanged for cold hard cash. In this re-run, self declared testaments of good non-financial health are exchanged for green accolades and the patina of "brand shine". While the global economy won't collapse because of bad sustainability reports, the basic tenant of trust upon which license to operate are granted will be eroded, right along with the value prop underpinning sustainability reporting - that sunlight will disabuse the economy of its adverse social and environmental impacts.
A Prescription for Better Reporting
So instead of saying more, more loudly across more platforms, how about we say something that matters? Here's how:
- Companies Make sure aggregated information reported to the world via CDP, GRI etc actually reflects the underlying (non aggregated) information. Stop hiding bumps and bruises by burying them within the larger, rosier picture you'd prefer to paint, or by excising them from your report entirely by setting self-serving reporting boundaries.
- Investors Hold reporting standards accountable. Right now standards are adrift and conflicted - they're taking money-for-service from both the investors they serve and the reporters they survey. Not only is this position inherently compromised, it has left standards in limbo about what their role truly is. The result is regimes that expand disclosure simply by lowering requirements or that actively curate a narrative of financial outperformance among their respondents in order to demonstrate the merits of their reporting methodology relative to others. Investors should stop this by fully funding quality standards and divesting from those that fail to provide credible results year over year.
- Standards Do not let trite internecine political battles detract from your mission to cast sunlight upon the material social and environmental impacts of organizations around the world. Abandon profit-for-performance service models that conflict with your values. Stop punting the role of quality assurance to third party validators or expecting respondents to self-police. Finally, stop scoring performance - it only incentivizes mischievous behavior. Investors will punish poor performance when the disclosure of such performance is readily digestible and accurate.
Onwards: Saying Less, More Transparently
The sum result of these prescriptions is a restoration of sanity for both consumers and producers of ESG data. Fewer, more meaningful KPIs will make it harder for reporters to "bury the facts" beneath hundreds of non-impactful KPIs and glossy photos of smiling employees. With fewer KPIs to report the pantheon of reporting standards will be reduced, translating to less competition among arbiters of performance and therefore less incentive to court respondents by "playing nice": permitting bad data, monetizing reporting pain, or issuing broken benchmarks.
Investors, reporters and reporting standards: acknowledge that less is more when it comes to saying something that matters in our sustainability reports. If you do, we'll all listen a lot more carefully.
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