ABC, as easy as 123, so goes the song. That is not true for this acronym.
The International Federation of Accountants reports that “93% of firms use a mix of ESG standards, thwarting uniformity efforts.” This figure has grown from 60% in 2019. Why is that a problem?
🚦 Without consistent standards, we can’t compare data reliably (some want this).
🚦 This inconsistency creates space for creative reporting on ESG.
🚦 Some measurement tools focus on financial materiality (e.g., ISSB), others on societal impact.
That last point is very problematic. ESG is an unholy lumping together of issues where organisations create impact and are themselves impacted.
Let’s use an example from just one topic—worker welfare. A retailer may squeeze a wholesaler on price. That wholesaler pushes the lower costs down to the local manufacturer, and they then decrease the price they’ll pay for raw materials. In this pervasive pattern, many possible materiality and impact issues exist. For starters:
SOCIETAL IMPACT 👉 Child labour (cheaper) 👉 Child labour (parents cannot afford school/childcare) 👉 Longer hours, leading to an increase in safety and health issues 👉 Move workers from permanent to temporary contracts (less benefits/costs) leading to strikes 👉 All of the above exacerbates poverty and income disparity, culminating in civil unrest
FINANCIAL MATERIALITY 👉 Inferior products (overworked/underqualified workers) leading to higher returns 👉 Inferior products leading to liability issues (dangerous) 👉 Inferior products leading to brand damage 👉 NGO or media reporting of exploitation, leading to boycotts, share price dips, etc. 👉 Suppliers fail to deliver or go out of business (business interruption, lost sales, etc.) 👉 Regulatory investigations (e.g., Modern Slavery Act)
Most ESG reports and analyses don’t go to these levels, but you see the problem. What are we trying to ascertain? By fixating on different measurement methods, we’re (potentially) missing the supposed point (improving environmental, social, and governance issues). While we wait for a consensus on how to measure (which will likely be imperfect, contested, and unevenly applied), might we ask better questions?
So what are better questions? Read on 👇.
U.S. companies report on sustainability using several standards and frameworks, with 75% deploying Global Reporting Initiative guidelines and 72% following the Sustainable Development Goals, according to IFAC.
ISSB has “taken a financial materiality approach”, while creators of GRI and European rules “have taken a societal impact approach,” he said. “Because of this, companies have been incentivised to use different standards and frameworks to address different audiences.”
International Sustainability Standards Board
Where to start
As the ESG commentary above suggests, we’re getting into a mess. To make a more sensible go of it, we need to prioritise the area that overlaps these questions:
💡 What matters to you (as an organisation)? Strategy, brand, reputation, values, etc.
💡 What creates (risk or sustainability) impact (+/-) within and to your organisation?
💡 What do (relevant) stakeholders need?
💡 Where do (and don’t) you have the capacity and skills to meet the two points above?
Only when we understand this can we focus on risk and sustainability strategically. Will there still be compliance and boxes to tick outside of those areas? Yes. We need to start drawing the line - as with ESG - between areas we (currently) comply with and topics we actively engage in.