There are many direct factors that impact the bottom line of a business – but what about those that indirectly impact it?
ESG (environment, social, governance) data is an indirect factor that has greater financial relevance for companies today. Forbes explains that ESG factors are being considered in investment processes, as well as decision-making, to promote what is now known as “responsible investing”.
These factors are not a part of financial analysis and reporting (for now), yet they hold value in examining how a corporation may or may not have effective health and safety policies for employees, how their supply chains are managed, and how they respond to climate change. All of these inputs remain indirect to financial results, but instead of being viewed as a separate factor, should be considered a non-traditional source of risk for a corporation.
Where there is risk in considering ESG as a relevant financial factor, there is also opportunity.
Opportunities of ESG Engagement
The financial benefits of having good ESG data are growing with the increasing trend of sustainable investing.
Let’s look at how Lyft has leveraged its ESG efforts to gain a competitive advantage. From its efforts to promote carbon-neutrality, to its diversity & inclusion branch, to the Round Up & Donate program, Lyft has positioned itself as the socially conscious option for ridesharing in North America. And its users are buying into the cause: Lyft reported a 35% market capture in 2018, up from 20% just 18 months prior. Meanwhile, top competitor Uber suffered a number of losses, including the #DeleteUber campaign and a very public CEO transition.
By integrating ESG factors with the direct impacts of financial reporting, Lyft has continued to develop its expansion across the North American ridesharing market and invest in larger ESG initiatives to keep users and investors coming back.
Investors believe that intangible assets, including ESG data, compose 80% of a company’s market value.
Deloitte Insights insists that for stakeholders, transparency is beneficial and demonstrates a company’s ability to create future value. How? Investors believe that intangible assets, including ESG data, compose 80% of a company’s market value. Since investors want a better picture of a company’s long-term future, they started considering these non-financial metrics. This includes a company’s ability to develop long-term organizational strategies, sustainability risk management, customer loyalty, and response to changing market trends. These are all outcomes that cannot be measured by traditional, short-term financial data.
The next ingredient to the recipe, then, is determining how companies can collect and leverage high-quality data it in order to achieve the benefits of measuring ESG progress.
Importance of High Data Quality
It’s one thing to collect ESG data and file it away in folders on your desktop – you checked the box, and that’s all you needed to do.
It’s another to purposefully gather consistent data over time and quantify it with context for your stakeholders. Stakeholders of an organization need a practical way to determine a company’s ability to connect the dots between ESG factors and corporate strategy.
Today, sustainability reporting is a developing schema that connects all stakeholders, from internal employees to external investors. These reports help reveal what was once-unfocused information as true KPIs and industry standards for evaluating a company’s value proposition.
By collecting high-quality qualitative and quantitative data, businesses put themselves one step ahead of those that don’t follow these practices, making them the most attractive to investors and clients alike.