“I hope it looks similar to financial reporting today – standardized, mandatory, automated reporting in some markets (XBRL or similar technology), fully linked to and translated in financial terms…”
In this interview with Elena Philipova, Global Head of ESG at Refinitiv, we see a vision for what Environmental, Social & Governance (ESG) data on companies could become. We have a long way to go, but the potential is enormous to help identify companies who are leading towards a more sustainable planet as expressed in the UN Sustainable Development Goals (SDGs). Tim Nixon, Managing Editor, Thomson Reuters Sustainability.
Tim: What does ESG data measure?
Elena: This is a vastly complex question and you will never hear the exact same answer. ESG means different things to different people and the meaning is also not static – it changes over time, it evolved and adapts to challenges presented in front of societies around the world at any point in time. I would classify this question to be similar to “What is the meaning of life?”
But if you force me to answer, right now I will say (but cannot guarantee I will have the same answer tomorrow because the space is rapidly evolvling) that ESG company data measures relative or absolute performance across a wide spectrum of topics that are not traditional financial KPIs to better quantify the intangible value of companies and understand the links between ESG and financial performance. This is a very complicated task because it is as if you are trying to understand the quality of an athlete by looking at part of the DNA composition of that individual. ESG data also measures, in part, how companies are contributing to the societies and environments in which they operate directly and indirectly through their operations, products and services, suppliers and value chains.
Tim: What doesn’t it measure?
Elena: ESG data can be linked to and measure almost anything, in theory. In practice though, it is not suitable to measure many things due to the complexity of ensuring comprehensive and comparable data across companies. So there is a difference between possible and intended use of the data. For instance, right now ESG data is sometimes used to measure companies’ impact against the SDGs and assess the net impact (both positive or negative) of corporations against these goals. However such conclusions are very difficult to reach using ESG data. In reality, it is currently impractical to measure company SDG impact in a scalable and comparable fashion.
Tim: Is it possible that a company could achieve a high ESG ranking, but not be helping to achieve a 1.5 degree world, for example?
Elena: Yes, it is absolutely possible and many companies fall in such a category. Firstly it is important to start with what an ESG score measures. Is it an absolute or relative score? How are different ESG themes aggregated into an overall score? The answers to these questions, and more, explain why scenario alignment is not necessarily related to how good or bad a company scores on ESG.
For example, you can have company that is in a low climate impact sector like Financials, which is scoring really high on ESG because it is a leader on other ESG topics in the peer group.
You can also have a large Oil&Gas company having a high ESG score and at the same time clearly not helping the transition to a low carbon economy.
Tim: What is needed in addition to ESG data for a user to decide on the contribution in the real world to SDGs?
Elena: Users require reliable and comparable impact data. To provide this data, companies need guidance on how to track and report impact – not only positive impact but also negative so understand the net corporate impact across the SDGs. Similar to ESG data, the lack of standardization and mandatory reporting requirements are hampering the reliability and usability of such information in the investment decision making process and increases the risk of “SDG washing”.
Tim: How should we interpret CR reports which have a lot of SDG labeling?
Elena: The labeling we see today in CR reports is the first step in the right direction. It introduces a common language and framework for communication across different stakeholders. But as mentioned above, quantitative and comparable data is simply not yet available.
Tim: Are new sources of information becoming important for ESG rating performance?
Elena: Yes, digitalization is having a huge impact on ESG, with an ever increasing abundance of information. However the challenges around it are also very significant – filtering out the noise, ensuring relevance, comparability, connecting different data, etc. For example, EPA data is at a facility level only for US facilities. How does one aggregate it at a company level to compare two companies with operations globally?
We need reporting standards similar to the accounting standards for ESG data to progress forward.
Tim: What will ESG data look like 10 years from now?
Elena: This is my favorite question because it allows me to dump my wish list and dream!
In ten years, I hope ESG data looks similar to financial reporting today – standardized, mandatory, automated reporting in some markets (XBRL or similar technology), fully linked to and translated in financial terms (performance, returns, risk, costs, revenues, etc.) Every E risk and opportunity has a value associated to it which we cannot translate today. I hope in 10 years time to see the cost and the revenue benefit of ESG performance and corporate behavior. I also hope that we will be well on track to a 1.5 C world!
Note: Refinitiv provides ESG data and solutions designed to help investment professionals make sound, sustainable investment decision covering 70% of global market cap.