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By Archana Morrow, Senior Solution Designer, Design Lab at Hitachi America, Ltd. R&D
After a recent Supreme Court decision1 on affirmative action, some legal observers warned of a potential spillover effect resulting in challenges to environmental, social, and governance (ESG) strategies.2
But if we’ve learned anything about ESG over the years, it’s this: ESG is not political — it’s just good for business.
Research points to a positive correlation between ESG performance and financial performance or value creation.3 In a perfect world, ESG would become an integrated part of how companies make their decisions.
At Hitachi America, Ltd. R&D, we co-create sustainable digital solutions with our ecosystem of forward-thinking customers and partners. In addition, we've committed to decarbonizing our own operations by 2030 as well as achieving carbon neutrality in our value chain globally by 2050.
But if more businesses are going to apply a sustainability lens to their investments, they’ll need accurate visibility into their data to guide their decision-making while trying to capture ESG performance.
The Design Lab at Hitachi America, Ltd. R&D recently convened a forum where six organizations, both public and private, shared their views on ESG. While differences in capability and philosophy abounded, they all noted how the poor quality or availability of ESG data and analytics blocks greater adoption of sustainable investment.
As James Andrus, Interim Managing Investment Director of CalPERS, put it: “The biggest challenge that banks and investors face in conducting ESG evaluations is accurate data. Companies have been reluctant to provide the information that investors need to make decisions.”
Others expressed concern that incorporating ESG concerns could limit the options of businesses to best serve their customers.
Joe Pigg, Senior Vice President and Senior Counsel of the American Bankers Association (ABA), said government regulation linked to ESG may limit the ability of banks to optimize their portfolios and suppress potential opportunities.
“Banks should be free to lend to and invest in, or not lend to or not invest in, any legal business, so long as they’re not discriminating under the law,” Pigg said.
And even as investors push boards of directors to make ESG compliance part of their fiduciary responsibilities, smaller, newer, or minority-owned firms without a lot of financial wherewithal often struggle – despite having the willingness – to incorporate ESG into their business.
“It is important for financial institutions to think about how to access Black communities and to create a level playing field,” according to Aimee Griffin, a board member of the U.S. Black Chambers and General Counsel of the Black Owners Women Collective.
Taking a more holistic approach toward ESG with societal impacts in mind expands the list of items investors use to guide their decisions with the goal of balancing their pursuit of KPI goals with an equal focus on community impacts. Maybe it involves the creation of a child labor index or the addition of a sea level rise indicator into a corporate matrix of KPIs. By ensuring the “S” in ESG doesn’t become a second-class citizen, banks and other institutions will have important non-financial information at their disposal to base their investment decisions.
Economics will clearly remain an important consideration. But now, this is more than a question of investing in a company only to gain financially. There are also reputational considerations – for instance, can I help reduce carbon emissions or improve society by investing in this organization? – that enter the conversation.
A key part of improving outcomes in ESG involves the fundamentals of data management, data modeling, and data validation – in other words, a complete audit trail around data so organizations can make measurable ESG decisions up and down their supply chains.
After companies collect the appropriate data, they can deploy tools to ensure that ESG metrics flow into organizational decision-making processes so that ESG solutions get integrated directly into how firms are managed.
David Rimmer, Technology Strategist for Banking and Capital Markets of DXC, believes firms should take the initiative to share ESG data with their suppliers and customers.
“Improving outcomes in ESG comes down to the fundamentals of data management, data modeling, data validation, and providing an audit trail around data,” Rimmer said. “Without these tools, a company cannot have accurate and consolidated data.”
Consistent, globally coordinated disclosure standards for ESG are also essential. If each industry operates with different ESG priorities and practices, it means more steps to the process, forcing investors and other stakeholders to put more time into understanding the ESG considerations that apply across industries as well as those that are specific to certain industries.
There’s encouraging news on that front: both government and the private sector are embracing sophisticated guidelines, methods, and tools for measuring ESG compliance. For example, the Securities and Exchange Commission has proposed requirements requiring companies to report their scope 1, 2, and 3 emissions4, as well as additional processes and checks, such as conducting a climate scenario analysis, understanding their emissions’ footprint, and understanding risk management processes.
Tom Caponiti, Sustainability Consultant Manager of Agendi, advised firms to take the initiative and address impending regulations, as they are part of a growing trend.
“These changes are not only being pushed by SEC and other government entities,” Caponiti pointed out, “but [also by] investors, who are asking for this ESG information and data as a condition for providing capital.”
Once companies have collected appropriate data, they also need tools to ensure that ESG metrics flow into organizational decision-making processes. This requires not only technology initiatives, such as the implementation of data visualization tools, but also corporate governance and management policies that prioritize ESG goals.
Mary Adams, co-founder and Chief Marketing Officer of Insights7, stressed that in the future, ESG will need to be incorporated directly into how firms are managed. Instead of producing separate ESG performance statements, ESG will be an integral part of strategy formulation and decision-making.
“The biggest challenge is how to integrate all these [emerging ESG] solutions into a company’s operations,” Adams said. “If you can build for that [connectivity] from the beginning, then you can create a centralized data structure that can map controls, data, and policies, to make sense of a complex new reality for companies.”
While we may be tempted to believe that ESG is going mainstream, the ability to practice ESG still varies widely across businesses.
Bob Hirth, Senior Managing Director of Protiviti and former Board Member on the Sustainability Accounting Standards Board, put it this way:
“There are mature companies that have reported for years, have good internal software applications, have good rating and ranking scores for data collection, and have goals and targets that they have met. On the other end of the spectrum, there are companies that haven’t even started and have no third-party assurance. Many companies are somewhere in between.”
Now, it’s up to all of us to accelerate the momentum. Data relevance – a matrix with a broader understanding of KPIs – that more fully measures performance is going to be key. Because as we all know, if you can't measure something, you can't improve.
At Hitachi, we’re working to help companies make it easier to adopt and integrate ESG practices into their businesses. This is part of our broader belief system – the company has been at the forefront of ESG and sustainability issues for years – but we also believe that we’re on the right side of history.
Despite economic headwinds and geopolitical instability, ESG-focused institutional investment is still expected to soar 84 percent to $33.9 trillion by 2026, making up 21.5% of assets under management, according to an October 2022 report by PwC5. Another telling harbinger: surveys show that younger investors are willing to underperform the S&P 500′s 10-year average6 to ensure that companies they’ve invested in align with their belief systems.
In this fast-changing world, societal and technological changes will require organizations to rethink their business directions. Actionable ESG is going to help smooth that inevitable transition.
Hitachi can help
Senior Solution Designer, Design Lab at Hitachi America, Ltd. R&D
As Senior Solutions Designer at Hitachi America, Ltd. R&D Design Lab, Archana leads strategic solution design and development for Hitachi customers and business units. She is passionate about addressing systemic challenges and applying mixed methods, such as systems thinking, design thinking, and futures thinking methodologies, to transition societies towards more sustainable futures. Archana holds an MA in Design from the Institute of Design and an MBA from the Stuart Business School at the Illinois Institute of Technology.