- The focus ESG frameworks place on climate change runs the risk that we fail to solve the problem of ensuring access to water and sanitation for all.
- We need to change the way ESG frameworks are structured – beginning with their consolidation.
- Here are the three most urgent changes we need to make.
Environmental, social and governance (ESG) reporting dominates corporate sustainability strategies today. While increased investor interest in ESG issues is welcomed, there are several issues that need to be addressed around current approaches if we want to come anywhere near achieving the Sustainable Development Goal (SDG) for water. Notably:
- The need for consolidation in reporting frameworks is essential to align reporting metrics (such as gallons of water reused, for example), dramatically reduce the reporting burden on companies and facilitate adoption of reporting in investment risk evaluations.
- There must be universal recognition that an ESG reporting strategy is not merely a sustainability strategy, in order to reduce the potential for greenwashing.
- The existing ESG reporting frameworks, in general, under-represent water as a critical risk and opportunity at a time when water is increasingly being recognized as a material risk to businesses.
A closer look at the challenges
The most apparent challenge with current ESG reporting is the number of reporting frameworks that exist, in addition to an array of reporting metrics. Further, with a few exceptions, the frameworks are voluntary.
Fortunately, there is a commitment to align several of the leading international reporting frameworks: CDP, the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC), and the Sustainability Accounting Standards Board (SASB). While this process will take time, for now, companies continue to spend resources reporting to several frameworks – resources that could be better spent addressing critical environmental and social issues.
It’s also important to emphasize that an ESG strategy is not an environmental and social sustainability strategy. ESG reporting is built for rating and ranking performance and should not be confused with corporate social and environmental impact strategies (reducing business risks but also delivering new products and services to address these issues). Reporting frameworks typically focus on the footprint of a corporation across its value chain with regard to water, energy, and carbon. This footprint framework doesn’t capture the full value of a company’s core business (such as information and communication technologies) in addressing environmental and social issues and accelerating the adoption of innovative technology solutions.
Finally, these reporting frameworks, at best, under-represent the critical importance of water as a business risk and as an opportunity. The exception is the CDP Water framework, which was specifically designed to address water as a risk. Moreover, the focus on climate change, at the exclusion of water as a risk and opportunity, runs the risk that we won’t solve the environmental and social issues tied to water even if we solve climate change.
What needs to change now
Here are the most pertinent changes that must take effect right away:
1. ESG reporting must be mandatory. Voluntary reporting can only take us so far in increasing the transparency of corporate environmental and social sustainability performance and supporting investors in quantifying these risks and opportunities in investment decisions. Peter Bakker, President and CEO of the World Business Council for Sustainable Development, was spot on during his speech at the United Nations Conference on Sustainable Development in Rio (aka Rio+20) that ‘accountants would save the world’. This speech was the basis for his 2013 Harvard Business Review on the topic Accountants Will Save the World. He is right: if you want to get all businesses engaged in solving wicked problems such as water, change the accounting rules.
2. We need to expand thinking, strategy, and reporting beyond footprint. A focus on the footprint of a company across their value chain is limiting at best and irrelevant at worse. For example, net-zero works for carbon but not water. Water is not fungible and has attributes such as social and spiritual attributes in addition to its time, spatial and quality dimensions. Carbon has none of these; a ton of carbon is the same anywhere in the world. Current reporting frameworks ignore or minimize the importance of this difference. As a result, corporations have embraced ‘water neutral, net positive and replenish’. These tag lines and strategies take little of the unique attributes of water into account, if at all. Water footprint and ‘net positive’ strategies have been challenged for years (is net positive feasible when it comes to water?) and they are increasingly being questioned by companies leading on water strategies.
Additionally, part of the problem with footprint-reporting strategies is that they underrepresent the positive impact some industry sectors and companies have in addressing environmental and social issues through the nature of their products and services. For example: the information, communication technology (ICT) sector leads the way in developing and deploying ‘smart’ technologies such as AI or IoT, which improve energy and water efficiency and can deliver real-time data for vastly improved water management and access. Two examples of ICT sector initiatives that acknowledge this value from their ‘handprint‘ are GeSi and the Digital Climate Alliance. A complete quantification of the value from a corporation in addressing environmental and social issues is needed.
3. Water risks must be viewed as equally important to climate risks. The adage ‘If climate change is the shark, then water is its teeth,’ attributed to many and adopted by many, is not helpful in addressing water challenges. The saying implies that if we solve climate change, we solve water. That could not be further from the truth. Water management was broken well before we understood or felt the impacts of climate change. Water is undervalued, over-allocated, lacks equitable access, and is grossly polluted on a global scale. Climate change is a force multiplier, making wicked water problems worse.
The ESG wave needs to quickly address the alignment of reporting frameworks, acknowledge the shortcomings of a footprint-focused reporting mindset and place water on the same level of importance as climate change. It is only through this new lens and a requirement that ESG reporting becomes mandatory that we can envision making true progress toward the SDGs over the next nine years. If we don’t improve ESG reporting, we run the risk of reporting without having a real impact – and thus, the ability to solve our most pressing environmental and social problems will move out of reach.
Originally published on World Economic Forum.