Climate reporting pitfalls

The environmental, social and governance (ESG) backlash is having a moment. A recent Wall Street Journal article argued that it has become a ‘dirty word’. But companies cannot afford to ignore pressures on climate change, diversity and human rights, not least because employees and consumers are still demanding action. The way forward is to take a far more strategic and considered approach to the topic.

Strategy is the art of choosing what not to do. On environmental and social issues, choosing what not to do is difficult. Numerous factors, not least the breadth of stakeholder pressures and demands, weigh against taking a strategic approach. For example, you can make a huge investment in reducing carbon emissions, but it won’t protect your company from scrutiny over wages and benefits.

This perceived consistency challenge has left sustainability teams tasked with hustling to project neat, credible accounts of achievement instead of focusing on problems their companies could actually address.

Most organisations are reluctant to place clear limits on the scope of their efforts. For one thing, it would mean publicly acknowledging an unpalatable truth: you cannot act ambitiously on every relevant issue. The pressure to cover all bases is real and reflects genuine societal needs and demands. But it invites problems, not least that nothing you do will ever be deemed sufficient.

Here are some common pitfalls, and how to address them.

More than the score

I’ve performed materiality assessments in almost every sector. Many were motivated by interest from a board or CEO in getting a better ESG score, a lower cost of capital and an improved reputation.

ESG frameworks and ratings agencies can certainly help you identify relevant issues. But even the largest, best-staffed multinational will struggle to act on dozens of environmental and social initiatives simultaneously.

The cliché ‘you manage what you measure’ was originally a warning against pointless measurement for its own sake. Not everything that can be measured matters, and not everything that matters can be measured.

The message, not the issue

Until recently, the default approach was to aim financial reporting at shareholders, and sustainability reporting and disclosures at all other stakeholders, including the public, employees, activists and NGOs.

This didn’t reflect cynical intentions as much as a tendency to treat stakeholder perceptions as a messaging challenge, not a strategic one. Even with the best intentions, it’s hard to manage a cacophony of critiques. If you read a company’s sustainability report and then peruse its core risk and financial disclosures, they commonly feel like discussions of two different companies. This split-screen approach is ever less credible.

Safety in numbers?

Most big public companies issue sustainability reports, with the foremost realising that they can’t tell one story to shareholders and another to everyone else. Still, the need to appeal to multiple audiences results in an exhaustive list of metrics.

Sustainability reports and disclosures painfully illustrate the tension between requirements to disclose data and align with sectoral norms on a broad range of environmental and social issues, and the need to set forth a sharp, strategic focus for concrete action.

A review from Teneo in 2022 of more than 200 sustainability reports showed significant convergence, with most companies projecting breadth over depth, and herding together to avoid being called out. While that’s understandable given the quality of current expression in the field, it does little for your company or the world.

Don’t succumb to the most common pitfall: an assessment that ends up sounding as if almost everything is material. Adopting a strategic focus will help you concentrate on a small number of concerns that belong in your core corporate strategy. Your sustainability priorities should then be clear, even to a casual observer.

Elephant in the room

Corporate sustainability efforts often seek to distract from the negative externalities that companies exploit, and even rely on, to drive profitability. There’s a tendency to focus on the important at the expense of the existential.

Retailers address the environmental requirements they impose on their suppliers, not why they don’t pay employees a living wage. Junk-food manufacturers emphasise consumer choice rather than acknowledge that they design products to be addictive. No wonder so many ballyhooed sustainability efforts are written off as corporate responsibility theatre.

Ørsted, once one of the most coal-dependent companies in Europe’s energy sector, really stands out. Having pledged in 2009 to embrace renewable fuels, it now creates and operates wind farms offshore and onshore, as well as solar farms, bioenergy plants and facilities to store energy.

In an article I co-wrote in Harvard Business Review last year, we found that companies in controversial sectors often have advanced sustainability strategies because they seek to recover from historic mismanagement of their impacts on society.

Even if your business faces less controversy, there’s much to learn from those that have opted to aggressively refocus.

Beware misalignment

It’s challenging to embed environmental and social priorities into core business decisions. With their emphasis on reputational pressure rather than operational substance, companies tend to place environmental and social challenges, opportunities and risks into a big bucket of ‘sustainability stuff.’ And, although executive incentives for ESG goals have become popular, many simply give bonuses for activities leaders should be conducting anyway, ticking the box but missing the point.

Conducting a rigorous materiality assessment isn’t just about selecting and reporting on everything that might possibly be relevant, and nor is ESG disclosure more broadly.

These efforts will fail unless you know whether tackling the issue in question means you must incentivise innovation (which can be managed using existing business metrics); manage risks (in some cases, this means taking steps to reduce exposure and mitigate consequences, while other risks also provide strategic opportunity); or determine ethical imperatives (which need policies, prohibitions and oversight, and are best grounded in your impacts).

If you can’t distinguish among these imperatives, you’ll have no chance of designing coherent goals or incentives.