Over the past fifteen years, sustainability risks have ignited the dialogue between management teams, boards of directors and special interest groups. From environmental catastrophes associated with oil drilling to the myriad recalls affecting auto manufacturers, governance responsibilities in the context of E&S principles have become directly correlated with upfront costs rather than value creation.
Are boards ready to take into consideration the next set of sustainability factors?
Strategic scenario planning in the context of sustainability matters requires boards and management teams to think of them in terms of foregone opportunities, and of the net effect on topline growth if a company chooses not to engage. For example: how would new business wins be affected if a company does not commit to environmental safety investments? Focusing on the remote likelihood of an event inherently justifies today’s widespread inaction. Scenario thinking changes perspectives and helps redefine the baseline.
The call to make sustainability a fiduciary duty
The call to make sustainability a fiduciary duty of leadership teams and their overseers – board members – has become stronger and stronger over the past decade. The establishment of the International Sustainability Standards Board (ISSB) has catalyzed efforts to increase companies’ disclosure of sustainability metrics building on SASB Standards to adopt materiality criteria in the selection of both qualitative and quantitative assessments. Thanks to these efforts, governments, stock exchanges and others are following suit and moving to identify mandatory disclosure requirements for companies. Depending on the economic sector in which a business operates, boards are increasingly addressing E&S commitments through the lens of materiality assessments. These are added as an annual review of the risks and opportunities affecting the business directly or through its ecosystem.
By the end of 2020, over 400 early stage businesses had come to market to offer some form of sustainability analytics. These included, in some cases, verification and attestation services to support the validity of the underlying analytics, most of which rely on a mix of artificial intelligence, big data and cloud services. Many organizations have commented on the lack of transparency and depth of some offerings, while others have pointed to the frustration of dealing with third-party sustainability ratings or ESG scores.
It’s no surprise that we have started the next decade with much more data at hand but fewer reliable insights. What is the procurement team of a company to do when seeking to provide transparency and add impact-oriented data to their efforts? It is understandable how some companies have chosen to disclose less, and focus on the quality of disclosures instead of inundating the marketplace with additional data points. While the world of sustainability data is likely to increase in complexity, it may continue to stay “time sensitive” given the potential latency of public data reporting.
For the purpose of this discussion, I refer to the challenge posed by data “latency” as the time elapsed between when observations are collected and when they are available for analysis, including verification and reporting. There are stark differences among metrics derived from the sustainability data universe. Some are derived from environmental factors; some have well-known unit measures and common terminology; others are emerging social impact metrics involving data privacy and employee wellbeing. Given this, latency is an important characteristic of the data that many users – from corporate decision makers to the general public – face in drawing causality insights or compiling sustainability dashboards. The risk of applying too narrow a definition to “real-time data” is that of low-latency of metrics. In this case, quicker operational routines to flag early warning events may ultimately lack quality and scientific support.
In order to make informed and strategic decisions, boards and management teams need to think in terms of foregone opportunities on a time horizon that aligns with the organization’s strategic plan. Sustainability data can help provide this lens for decision making by highlighting areas where a company might be able to improve its performance or mitigate risk. By using sustainability data in strategic planning, management teams can ensure that their businesses are taking into account all the potential impacts — both positive and negative — of any proposed course of action.
To read more about sustainability in strategic planning, visit The Impact Challenge on my publisher’s website, Taylor & Francis. Make sure you follow me on LinkedIn to get involved in the ESG dialogue with other experts and professionals.
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