‘Board members must be accountable for ESG standards’

This year saw another great leap toward a more balanced and sustainable economy. Investors piled billions of dollars into funds with overt environmental, social and governance (ESG) criteria and businesses made greater efforts to cut their carbon emissions, weed out bad practice in supply chains and reconsider human capital policies to improve diversity, inclusion and belonging at work.

The UK government has heralded a “green industrial revolution” with ambitious promises to develop a world-leading clean energy sector in the country. The hope is that a green agenda will be the touchpaper to revive economic growth after the turmoil created by the pandemic.

In fact, consumer, business, investor and government behaviour has changed so much in favour of action that supports the UN’s Sustainable Development Goals – whether through conscious choice or external pressure – that it would be more difficult to find a company these days without an ESG policy or an investment firm that doesn’t claim to integrate ESG risk and opportunity into their portfolio construction.

Watch: Yoko Dochi, Managing Director and Global Head of Investment Relations at Softbank Group talks to Ioannis Ioannou, Associate Professor of Strategy and Entrepreneurship at London Business School and Susanne Katus, VP Brand and Business Development at software analytics firm Datamaran about the importance of data in integrating ESG principles into business-as-usual activities.

 

Being ESG aware – or at least being seen to be so – is imperative. But regulation has been slow to catch up to the exponential growth in demand for sustainable business. As a result, intentional and unintentional greenwashing is a growing problem, and a risk Board Directors can’t ignore. 

Yoko Dochi, Managing Director and Global Head of Investment Relations at Softbank Group, attended London Business School’s (LBS) Sustainability Leadership and Corporate Responsibility Executive Education programme earlier this year. She talked to Ioannis Ioannou, Associate Professor of Strategy and Entrepreneurship at LBS and lead faculty on the programme, about what business leaders must do to meet and manage today’s much higher expectations of operating conduct. The conversation was moderated by Susanne Katus, VP Brand and Business Development at software analytics firm Datamaran.

Susanne Katus (SK): Yoko, many CEOs and CFOs are starting to take a more public stance on how they are managing ESG risks. We are also starting to see an increasing amount of investor scrutiny on what businesses are saying in their annual reports – essentially wanting to better understand if companies are being authentic and integrating ESG issues into their core business strategy. What processes should companies have in place to meet expectations from investors and regulators?

 

Yoko Dochi (YD): It is really important for the company Board, that means the CEO, Chairman and whole leadership team, to own the integration of ESG into its strategy. This is key for long-term survival and success. An annual report should indicate that the company takes the initiative in defining its own material ESG risks and opportunities, that these are linked with the corporate vision and strategy and translated into business plans so investors and external stakeholders can monitor the company’s actions. Leaders must own the agenda; talk about it internally as well as externally and cascade it down across business units and functions.

SK: Ioannis, what role do you see technology playing in this?

Ioannis Ioannou (II): The foundation of integrating ESG into corporate strategy and business models is an intangible asset. It’s the relationships that you build with stakeholders and those don’t materialise out of thin air. They need time, effort and commitment and like every other asset, they need investment – in resource and in technology.

Technology – especially AI, machine learning and Big Data - is an important factor in integrating ESG for multiple reasons. There is a lot of waste in the system and technology can take the level of efficiencies companies can achieve, whether in water management, waste management, transportation systems, and remove a lot of slack. In addition, technology can allow us to do what the human mind cannot do on its own. For instance, when you talk about climate change, we are talking about complex systems. How do we translate climate change into weather patterns? An insurance company selling flood insurance will want to know about climate change over the long term, also what this means for changing weather patterns today.

Technology is also critical to allow for transparency and accountability and there are companies, like Datamaran, that allow us to more deeply analyse the data, reports and information that companies are putting out there. Datamaran, in particular, allows us to achieve a data-driven and dynamic materiality approach. Its technology enables companies to reflect the salience of these (ESG) issues within their business models, their core operations, and in terms of the value they are creating both in financial terms and in social terms. 

I’m very excited about the prospect of new technologies like Blockchain, for instance, which has the potential to bring a whole different level of accountability to these issues, especially when we talk about tracing issues throughout long, complex and deep supply chains.

Data key to cross-department ESG response

SK: We've been talking about technology, and during the course (the London Business School Sustainability Leadership and Corporate Responsibility programme), Yoko, you had access to Datamaran to support your learning and research. Curious - what do you see as the biggest benefit for companies here?

YD: Data can help support the processes at corporations quite extensively, in many ways. Within a company, the Sustainability department is often part of Business Planning, but it is actually Investor Relations which handles dialogue with investors, and it is the operational departments that implement ESG policies.  This can easily create gaps in understanding issues unless you are consciously building a robust circular process to refine the company’s policies, putting them into operations, communicating them and gaining feedback.  Data platforms enable all the internal parties involved to access information and stakeholder expectations on one single platform. This helps make internal process more effective and streamlined, putting everybody on the same page and also helps with articulating and sharing information externally with outside stakeholder committees and investors. A data-driven approach, like the one provided by Datamaran, also helps a company to process information in a resource-effective way, identifying the relevant information in a timely way. This really helps in monitoring what are the ongoing risks, potential opportunities, where we need to reach out in order to develop this foundation of trust, and then reflect that into our own company process.

SK: There are no common standards in sustainability reporting at the moment and a minefield of ESG ratings and ranking agencies with different agendas. This can create a disconnect between company definitions of materiality and investor definitions of materiality. How do you find common ground?

 

YD: Considering our internal process of defining materiality, we do lots of soul-searching: what are our industry dynamics, business model, opportunities and risks and how critical are they. To develop a meaningful set of materiality metrics, which serves as a common language for dialogue with investors, we also need to understand and incorporate an external perspective and stakeholders’ expectations. And for this, data can help us a lot. Often investors use certain third-party formula to evaluate corporate ESG performance – defined by industry or even by region - these however are not necessarily capturing corporate-specific materiality.

Where corporate resources are limited, responding to all diverse questionnaires is impossible.

Different methods of measuring CO2 reduction, for example, are confusing and potentially misleading as I experienced during my time at Toyota. Companies are all weary of this. Convergence of reporting standards would be certainly welcome, provided that it accommodates industry/business specifics.

II: In the space right now, there is an alphabet soup of different acronyms, reporting standards, guidelines. For investors, this can be extremely frustrating. How can you build a portfolio when making comparisons is almost impossible? But as muddy and messy as it seems, the space is moving in the right direction. I am optimistic that a global international standard in sustainability reporting will be with us soon.

Until then, a data-driven approach is essential. This is essential to embed internally to create accountability and the right incentives and compensation packages for your senior leaders and develop the intangible assets that I mentioned earlier. And then, for society at large. There has been an explosion in sustainability reports in recent years, but investors require data-driven comparable and accurate reporting.

Greenwashing is rampant. Companies want you to think they are next best thing to Greenpeace, but actually, they may not have changed much at all. The human mind cannot process all the data that must be analysed to surface ESG risks and long-term investors, like pension funds, are trying to pick out companies that will still be around in 20, 30, 50 years’ time. So, this is where algorithms can be helpful. 

SK: Final remarks Ioannis?

II: This is the challenge of our times. Organisations must either adapt or perish and be replaced. You can see what is happening with the growth of companies like Beyond Meat and Impossible Foods. It is not a luxury to be responsible – it is a necessity. It requires building trust. Business leaders must take charge. Many are. If you look at what is happening in the oil and gas majors – their investment in renewables and scaling down investment in fossil fuels. Joe Biden’s Green Plan is essentially a jobs plan. Everyone needs to be on this journey to a greener future – and technology will get us there faster.

 

 

London Business School is an Academic Partner to ESG data analysis firm Datamaran. LBS Executive Education participants who attend Ioannis Ioannou’s Sustainability Leadership and Corporate Responsibility EE programme can receive free access to Datamaran’s analytics platform and achieve a certificate on external ESG risk analysis and how it can be integrated into business strategy.