Chasing ESG Ratings

Every programme will have its own characteristics. The approach taken to deliver the transformation is therefore dependent on the dominant characteristics. For example, the approach for most regulatory transformations would be quite similar because the core outcomes are guided by the regulation itself. In this case, the regulator dictates the rules or principles which must be used to achieve a certain standard. Therefore, project outputs in a regulatory transformation are generally more predictable, whether at a political or corporate level. In another example, if the client is looking to make adjustments to their supply chains then the dominant characteristics change hence a different framework will be used and of course, predictability of outcomes will reduce somewhat.

So what then for ESG programmes and long term shareholder value?

In an ESG transformation things become a more complicated in that, not only is ESG hard wired into regulatory transformation, but it is essentially hard wired into every aspect of enterprise, people and planet. ESG programmes will require the influencing of social change, the implementation of pioneering or unproven technologies, a diversification in new markets as well as the compliance and reporting against evolving standards and protocols. This means that project outputs for ESG programmes will be far less predictable and volatile, which is why we find that desk/pet projects start to emerge across the organisation. This is just one of the reasons why your vision coordination and governance needs to be established early in your ESG initiatives and quickly absorb those disparate desk/pet projects. Doing this has a very real and direct impact on shareholder value given the multi-decade aspect of ESG initiatives.

In their attempt to solve for this obvious challenge, it seems that a subtle strain of greenwashing is starting to emerge through the use of ESG ratings. This is where a client plans to ride on the back of key performance measurements monitored by external raters. Is that a bad thing? In one particular example we worked with a Real Estate Investment Trust. (*scores have been adjusted with a consistent multiple across client and competitors)


Greenwashing by chasing ratings:

Using a consistent ESG data set, we found that our client had performed quite well when compared to industry competitors. Our conversations started to move in the direction where the client asked “how can we increase our scores to lead against competitors?”. There is indeed a process to achieve this by broadly decomposing the risk exposures, profiling the coverage gaps, liaising with raters, policy setting and so forth until the outcomes are reached. Unfortunately however, this could eventually be seen as greenwashing, regardless of well intended ESG strategy.

Improving ratings does not necessarily equate to organisational sustainability. Whilst chasing ratings may help steer ailing programmes, it is arguably not a sustainable means to achieve sustainability. Increasing ratings by superficial means and patching up those gaps with arbitrary policies is (again arguably) at best a future reputation risk; or at worst expose you to physical risks that may have been missed from a raters data or not even considered.

Having said all this, and to the contrary on my argument above; there is a valid case for chasing ratings as a proxy for the current gap in ESG talent. Therefore my objective as an ESG Consultant is to help businesses with an effective balance of both ESG Maturity through design and also utilising the guidance from raters as a starter for policy setting.

 

Industry ESG Scores

Market cap of $4bn, $1bn and $500mm respectively

Sustainability by design:

Sustainability shouldn’t be about what you do, but about who you are! There is no such one single framework or methodology that can be applied across sectors or industries, let alone between businesses. Despite for example, the precision achieved from SASB standards for example, ESG Maturity is achieved through organisational design rather than solely focusing on aggregation into reporting. I would therefore need to create a bespoke framework and assess behaviours, assets, processes, standards, knowledge and several other key measures that are wired into your ESG exposures. Once we understand your level of maturity, we can then get to work and bring the necessary raters on board and set policies that react to your risk dimensions.

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