A small group of practitioners have been working on the concept of green accounting for decades, arguing that only by placing a tangible, financial value on the environment can we properly manage and protect it. Critics argue that we need to value intangible assets in their own right, and reducing the human experience of nature to a dollar value is reductionist, simplistic, and probably impossible. How much is the view from Mt Everest worth? Or a swim in a clean ocean on a hot day?
Nonetheless, the environmental economics movement took a big step forward with the creation of the European Union Emission Trading Scheme, which allocated a price to GHG emissions, and codified industry’s right to emit GHGs into costed and tradable allowances. Similar trading schemes sprang up around the world, and extended to “assets” such as biodiversity and renewable energy. Suddenly the tree huggers were rubbing shoulders with the pin stripe set from Wall Street and London City. The cost of pollution had been made explicit, and the environment had become a business.
The intense focus on ESG is accelerating this trend, as financial professionals find themselves needing to disclose the sustainability performance of their portfolios. This is sending shock waves through the sector, as practitioners more accustomed to comparing EBITDA are now having to understand how companies interact with nature and communities, and what impact that has on their businesses. There are a range of reporting standards, and the recently released EU Taxonomy is another important step in setting an industry standard for evaluation. This highlights the need that sustainability managers have been grappling with for decades; the need for integrated approaches and systems.
Companies are being required by their Boards, Investors and regulators to provide this new ESG data. With the worlds of environmental management and finance colliding, a new language is being developed that both parties can understand, but only with education on both sides. Professionals who have become adept at GRI reporting standards now need to provide financial grade data, and this brings a new set of challenges.
Many companies are finding their current data collection and reporting processes are not able to provide the rigour required. Typical flaws that result in inadequate ESG reporting quality can include:
By carefully deploying appropriate processes and technology, companies will be able to overcome these hurdles, and present a clear and fair picture of their performance. This will allow them to build their own narrative, tell their own story, and to effectively manage their own performance.