‘ESG’ as a term and ‘ESG’ ratings are hugely problematic. Here’s why.
Incomparable Data: Even within the term ‘CO2 equivalent’, GHG impact conversion rates from CO2 to CH4 have evolved significantly over time. Try comparing CO2e to Water Intensity in terms of its impact on the planet. Now let’s leap from the ‘E’ to the ‘S’ and compare Water Scarcity to Fair Wages. How does this make sense?
Lack of context makes for huge error margins: Data collection and processing often relies on a back office team in a remote location to scrape the internet for data (which is itself mostly self-reported at best). This data is combined into a larger dataset with limited context (e.g., company size, sector; but not how the company creates and delivers its products and services). The data is then brought to market in an aggregated form with even less context.
Benchmarks are built of aggregated, incomplete data: Benchmarks, ratings, and credentials are created using this superficial, incomplete, and flawed data. These benchmarks and credentials then underpin ‘ESG friendly’ products and financial instruments.
In a few years, you could have a large volume of money betting on something that originated with a handful of people scraping the internet for flawed data. That's a really dangerous position for us to be in.
So what’s next?
For business: Unbundle the Pandora’s Box of ESG to define the topics you care about, considering the ethics of your organisation and stakeholders. Create better scrutiny and transparency around data sourcing and methodologies, and assume that most benchmarks today aren’t worth much.
For Investors: View the business holistically. Understand the context, structure, and organisation of a business. Assessing if a company is ethically ‘good’ or ‘bad’ is more nuanced than a simple scorecard. You wouldn’t use a single number to assess its financial viability - don’t do this for impact.
Watch the full video and find more sustainability related insights here.
Industry Insight: Where are sustainability professionals wasting time?
Most of us working in corporate sustainability come with a wide-eyed innocence and a conviction that our work will improve the world. But most of us working in corporate sustainability actually spend far too much time trying to generate reports, and far too little time directly driving impact.
There are a few reasons why our time isn’t used more effectively:
Unclear expectations from senior leadership. Many senior executives see the main purpose of the sustainability team as linked to reporting and compliance. This will change. Targets that are being set today will need to be met (or failed at with dignity). Planning will give way to implementation. If companies don’t want to lose their best talent, they need to appreciate that sustainability professionals are not in sustainability for reporting.
Misplaced resource allocation. There are two ways in which this happens. Most frequently, sustainability is under-invested in and left to a small team to effectively transform the business - starting with poor data capabilities that are now expected to provide a full cross-sectional view of the business. Less frequently, the business decides to build its own sustainability technology stack. While this can work, hidden costs make this expensive. Those resources could probably go further elsewhere.
Poor integration with the rest of the business. Getting teams to work well cross-functionally is hard in any situation (ask anyone who’s been involved in a digital transformation). Too often, sustainability is viewed vertically through the lens of reporting, whereas it should actually be deployed horizontally through the lens of products. That is, sustainability is a combination of layers of distribution, marketing, manufacturing, and procurement. Sustainability professionals should not sit in silos but rather should be a capability within each of these parts of the business.
Policy Pulse | The Latest Sustainability Developments
A breakdown of the key policy updates that you and your company need to know about from the last fortnight.
EU Nature Restoration Law narrowly passes through European Parliament
What is it?
The EU Nature Restoration Law aims to protect and restore degraded eco-systems across the EU, where more than 80% of habitats are designated as in a ‘poor condition’. The core of the proposal puts 20% of EU land and sea areas under restoration plans, where binding targets are set to improve the biodiversity of covered species and habitats.
Opposition in European Parliament from the centre-right bloc of lawmakers meant that the proposals were watered down. This removed requirements for restoring agricultural land, and means the entire law is now conditional on a study to prove no long-term harm to food security.
The law includes further targets to:
plant three billion additional trees by 2030
improve pollinator diversity and reverse decline in their populations
achieve no net loss in urban green areas
So what does this all mean?
The Nature Restoration law is the key pillar for the EU’s wider 2030 Biodiversity strategy. This aims to recover Europe’s nature to the benefit of people and climate, particularly for the positive impact nature has in creating resilience to the physical impacts of climate change.
This ties directly with the Global Biodiversity Framework (GBF) agreed at the COP15 for biodiversity last year. The headline outcome in the GBF was 30x30, or the agreement to protect 30% of land and marine areas by 2030. This law actually goes further than 30x30 with the 20% coverage for ecosystems to be actively restored rather than earmarked for protection.
The EU has been a key proponent for pushing the high ambition of 30x30 at COP, so not passing this law and delivering on nature themselves would leave a global gap for leadership on nature.
Leadership on the nature restoration targets may lead to similar developments on the wider GBF targets, posing significant implications for the food industry e.g., GBF’s targets include a 50% reduction in food waste and for harmful agri-chemical usage.
What do we think?
The Nature Restoration Law sits between being an incredible positive step for nature, and a missed opportunity for more action.
Two points stick out in particular:
The need for better biodiversity data - The drive to restore nature and attract funding requires progress tracking. Countries are asked to make use of novel data, such as direct monitoring, remote satellite sending and citizen updates in measuring biodiversity. This will lead to far richer and broader data coverage on nature where there is currently a massive data gap.
Missed opportunity for agricultural reform - Farmland makes up to 40% of the land mass of the EU, and industrialised agricultural practices are a key driver for nature loss. So excluding agricultural land from binding targets represents a massive lost opportunity for nature. This is especially since regenerative practices have a host of wider benefits across nutrition, soil health and carbon storage.
Tackle the biggest industry issue head-on: for vertical farming, this is powering the farms. By localising a bioenergy facility on site, GrowUp Farms has access to 100% renewable heat & energy 24/7, reducing dependence on non-renewable resources. This level of circularity provides a valuable competitive edge. Another key issue in farming land use and optimising yield. To address this they took a brownfield site and built the equivalent of 1000 acres of Grade 1 farmland on it - meaning biodiversity loss was also limited.
Focus on creating an iconic product: GrowUp Farms adopted a focused approach by concentrating on a single product type: lettuce. By channelling their efforts into perfecting this offering, they have been able to maximise the quality and affordability of their lettuce products, which prioritise both health and sustainability. Other companies can take note of this approach and explore ways to redesign products with similar principles in mind.
Design for resilience: GrowUp Farms has engineered its operations to withstand fluctuations and unpredictable factors e.g., changing weather patterns. By controlling light and water, GrowUp Farms achieves year-round cultivation, offering a predictable and high-quality yield. This resilience is crucial in the face of changing weather patterns. Accurate supply forecasting strengthens their position as a reliable and sustainable supplier.