The ESG Forest: Start with Materiality to Avoid Getting Lost
The ESG world, while hoping to become simpler and more actionable and useful, is still on the far side of complexity for the next few years. It reminds me of Peter Attia’s world of nutrition, and what we did in fintech to give traders an edge by producing efficient, actionable data.
As ESG expands and matures, companies can’t wait to plan, prepare, benchmark and begin reporting. This is not an area where you can afford to be a laggard. As ESG expands into publicly listed and private companies standards, regulation, reporting and data will be in transformation out of ESG 1.0 into what comes next. The influencers at the moment in the broadest sense are Capital Market Investors and Regulation. The other big factor is the value and supply chain at the end of which are people that care about corporate practices. Reporting standards are expanding, cooperating and competing as are exchanges, regulators and ratings groups to define what’s next. The overhead to produce meaningful data is daunting. I’ve seen companies dedicate a team of people for a month or more full time just to fill out a disclosure form that, when finished, has little connection to the business reality of that company. There is data that matters; we are just in the early stages of understanding, and creating integrity to it. It reminds me of the days when we had people dedicated to taking bad ticks(prices) out of data feeds to ensure we had clean price data.
Companies cannot sit back and not participate or execute on an ESG strategy, disclosures and goals. To avoid getting lost in the current forest, or penalized for just jumping in, create a thoughtful long term corporate purpose, and materiality assessment. It will result in a practical understanding of ESG that helps the company make quality business decisions on what is important through the compliance and value enhancing lenses of your particular industry, and company. That is where I think real innovation will be possible as well as actions that will separate companies from the pack. Being precise about your specific materiality profile will allow you to benchmark properly and work through what and why you are disclosing. Most importantly a company will be able to set goals, with real targets that take them past compliance to real value enhancement initiatives.