The call for sustainability and corporate social responsibility is growing. For example, recent research by SurveyMonkey shows that only 12% of Dutch consumers think that companies should not contribute to society and the environment; an increasing number of investors would like to see companies become more sustainable; numerous organizations, both large and small – with Patagonia at the forefront – are committed to a better world; and even politicians are calling for action.
A widely used framework for this is ESG – environmental, social and governance criteria for a company’s activities that must be reported on. But ESG still has its drawbacks. For example, it is still voluntary, there is no standardization in reporting formats and there are various internal challenges that not only hinder transparency, but also the ability of organizations to actually take action on ESG data. Six experts address these challenges and share their insights into what is needed to further develop ESG into the framework for corporate responsibility.
A lack of laws and regulations thwarts
A common fear is that given its current voluntary nature, ESG reports only give lip service to what it is really about: taking responsibility for the environment and society. This is substantiated by research from Maastricht University, which shows that companies often fail to deliver on their voluntary sustainable promises. This leaves ESG little more than, in proper Dutch, “greenwashing” and “virtue signalling.
Not for nothing are more and more organizations advocating legal standards and enforcement from governments. “Laws and regulations that can be enforced are the only way to more standardization in reporting and leads to better comparability of data between companies or within a specific sector,” believes Niek Snel, Area Director Benelux at Workiva.
In this, he sees a shared responsibility for governments and organizations. “Governments should use proven standards such as TCFD or SASB. They should also ensure that reporting frameworks are also aligned internationally, such as CSRD for Europe and ISSB for the rest of the world. For their part, companies must ensure that data is traceable and verifiable so that it cannot be questioned in due diligence – a prerequisite for maintaining the trust of governments, investors and consumers alike.”
Looking outward, looking inward
To put it mildly, organizations also need to make some changes. Non-financial performance is central to ESG, which requires a fundamentally different view of corporate success. Business strategies of the past that mainly focused on the shareholder will have to change. The gaze must be turned inward as well as outward – in terms of the environment, but equally when it comes to social impact.
“It’s about creating visibility,” says Marijke Kasius, CEO of IT company PQR. “Think of people with a distance to the labor market. They should be seen and should be able to find a place within organizations.” There are also less visible but crucial factors when it comes to sustainability. “Organizations are embroiled in a race to the cloud, but of course all those data centers also consume huge amounts of raw materials. Understanding that part of the chain and making that infrastructure sustainable is also part of ESG. Then it turns out that things can often be more sustainable, for example by using a data center that runs on hydrogen.” Kasius believes companies must then also take responsibility and actively choose to have a positive impact on society and the environment. “Sustainability is a choice,” she concludes.
Business transformation for better ESG results means sticking to a long-term vision. “Companies may be tempted to move away from their ESG ambitions, for example due to rising material and energy costs. That is short-term thinking,” says Julie de Meyere, Consulting Analyst at PA Consulting Nederland. “After all, if sustainability allows you to use less material or switch to renewable energy sources, you are ultimately less susceptible to future disruptions. Research therefore shows that companies with high ESG scores are more risk-resistant and have a better chance of remaining successful in the long term. So companies need to use their time to innovate, especially when the market is working against them.”
Transparent and data-driven ESG
In addition to legislation and organizational change, technology is a crucial pillar in effective ESG policy. Not because it is a panacea that solves social and environmental issues, but because it helps people make the right choices based on accurate insights.
The key word is data, but data presents one of the biggest challenges for companies on ESG. For example, the SFDR already requires listed companies in the EU to report on nine environmental indicators, six social indicators and at least one voluntary indicator for both environment and society from lists of more than 20 options. Especially if the number of mandatory indicators is going to increase, and it is expected to, organizations need to have the right data streams in place.
“Executives need data to realize ESG ambitions,” says Hette Mollema, vice president Benelux at Workday. “Data availability, transparency and cost are all major stumbling blocks to overcome. The current lack of standardized and publicly available ESG data only leads to additional challenges around methodologies, data standards and identifying and preventing conflicts of interest. A first step to combat this problem may be for CIOs and CFOs to join forces. This leads to a very powerful partnership, leading to better access to data and organization-wide implementation of technology that can enhance ESG insights.”
“Larger organizations sometimes have to dive into dozens of systems to justify investments and retrieve information on carbon footprint, governance, activities of other supply chain partners and last-mile delivery,” says Max van Eeghen, Head of Business Development Benelux, Scandinavia & Israel at Boomi. “It is therefore crucial that all these data sources are connected and brought together into a single source of truth. Only then will ESG become manageable.”
Yet not every piece of data is equal. “Data must meet some conditions before it is usable,” says Lexy Kassan, data and AI strategist at Databricks. For example, data must be accurate, current and usable quickly. “Most importantly, data should tell the truth. You have to be able to verify that external data from suppliers and other sources are correct. This is a considerable challenge, because ESG data comes from diverse environments and in numerous formats. That makes it difficult to get accurate and high-quality data because you don’t have the ability to combine and verify the data against similarities between those external sources. This is where AI has a big role to play, which can support data verification with computational linguistics and network analysis, among other things.”