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Getting data in order key to navigate complexity of ESG issues

Natalie Runyon  Director / ESG content & Advisory Services / Thomson Reuters Institute

· 5 minute read

Natalie Runyon  Director / ESG content & Advisory Services / Thomson Reuters Institute

· 5 minute read

Now, is the time more than ever to ensure data sources for climate and social matters are robust across an expanding regulatory environment

The S or social aspect of environmental, social & governance (ESG) issues examines how a company treats and values people — such as its workforce, consumers, clients, vendors and community. Indeed, social issues are increasing in importance for companies across an expansive list of stakeholders.

For example, social issues are in a top-five list among respondents citing ESG issues as a factor in M&A dispute activity over the past year, according to Berkeley Research Group’s 5th annual M&A Disputes Report. Indeed, the increase in prioritization of social issues is expected to increase with current and pending legislation and regulation that targets implementing mechanisms for tracking and reporting modern slavery and other human rights issues within supply chains.

Likewise, an analysis of the 2024 proxy season, which features emerging issues on the minds of investors, indicates the rise of several social issues. For example, these issues encompass the responsibility of corporations in the political arena, the variety of leadership composition, and the strategies that businesses will implement regarding the use of generative artificial intelligence (GenAI) in relation to the workforce, according to Heidi Welsh, the founding executive director of the Sustainable Investments Institute (SII) and co-author of the analysis. In addition, her analysis highlights an increasing focus on the congruency between stated corporate values and to what groups and individuals that companies are directing their political spending.

Invest in continuous stakeholder engagement

As the result of a growing list of issues that companies and their stakeholders care about, companies need to be altering their stakeholder engagement strategies around sustainability. Stakeholder engagement should be a continuous loop rather than a one-way message delivery from a company to its stakeholders. Rather, companies should be listening and incorporating stakeholder feedback into their corporate strategy as an essential component of their commitment, says Miriam Wrobel, senior managing director for ESG and sustainability at FTI Consulting.

For example, engagement with shareholders is extremely important to understand their ESG-related priorities. In fact, proxy season is an important in this regard because identifying those top-of-mind issues for investors is critical to understanding what shareholder proposals go to a vote and what do not. “The introduction of a shareholder proposal is a failure of dialogue,” SII’s Welsh adds.

In addition, customers and government officials are becoming increasingly important stakeholders as well, in that both are demanding sustainability data in more detail and at greater levels than before, explains Wrobel. Compliance with regulation is non-negotiable, and many clients see compliance with customer goals the same way, she adds. If a major retailer signals to its suppliers that it has a commitment to reduce packing or emissions or its use of plastics, its suppliers or vendors will want to follow suit to remain in good standing and be a preferred provider.

Guidance for companies

It is important for companies to set up and begin execution of their ESG strategy and governance now, experts say. This will require taking several key steps, including:

Getting data in order — Sustainability-related data is rarely handled with the same care as financial data, so companies may require a mapping of data and a gap analysis to understand where improvements are needed and to be able to report reliable numbers. Once a gap analysis is completed, the work of upgrading systems, evolving the company’s culture, and collecting and analyzing data will begin. Many companies are well on their way, but undertaking this process correctly takes time and needs input from many stakeholders. Rushing the process would be a mistake.

Checking the accuracy of messaging — Now is also the time for companies to review all their sustainability-related communications (including sustainability reports) for accuracy and to better develop a single source of truth. Different stakeholders require different types of communication, which “should be tailored according to what works for the stakeholder. For example, investors may expect a TCFD [Task Force on Climate-related Financial Disclosures] table in your sustainability report, while employees want to hear how various initiatives are being rolled out across the organization,” Wrobel says. Both methods convey the same fundamental truth, yet the way the information is communicated varies significantly between the two audiences. The corporation’s general counsel and CFO can both be helpful in not only providing the data but in creating a culture that requires input of their departments in sustainability communications.

Choosing data over external messaging for now — While there is a great fear of green-hushing right now, “I always suggest that a company say less now and focus on getting data sorted,” Wrobel explains. “That’s a much better option than possibly saying the wrong thing, especially if on a material topic.” Using the analogy of building a house, data should be seen as the foundation, she adds. “If we don’t get it right, the house won’t stand. It may not be immediate, but when we get our first earthquake (or challenge), a good foundation will hold up the rest of the structure.”

Balancing those ESG issues that are most important to stakeholders is a natural tension that has grown over the last few years. Validating the achievability of these goals and communicating progress on these matters are also increasingly a challenge. It is easy to get distracted with multiple stakeholders’ requests and complying with current and future regulations. Staying focused, while difficult, on the aspects that matter the most — especially, the data — cannot be ignored.

Preparing the data and the governance and processes that support it is the foundation for sharing information with stakeholders and should remain companies’ number one priority.

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