Why It’s So Hard For Companies To Get ESG Right (2024)

FAQs

Why It’s So Hard For Companies To Get ESG Right? ›

Environmental, social and governance (ESG) factors in business management are complex, multi-dimensional and continuously evolving. So, it is not surprising that companies face challenges in understanding ESG, its potential impact on their businesses, and how best to integrate ESG with existing business needs.

But current ESG measurement is dangerously narrow as it fails to capture the complexity in environmental, social, and business systems. These measures lack insight into messy underlying processes — it's important to look behind the numbers and ask: how, why, and under what conditions an outcome came about.

You cannot manage your risk if you don't know what your risk is. It's the risks that you don't know about that will be the problem, and you cannot do that without a data-driven and tech-enabled risk management approach.” ESG risks are especially challenging to monitor because many aren't quantifiable.

Environmental, social, and governance issues are becoming increasingly relevant for a variety of stakeholders. Investing with ESG goals in mind has become a big focus of asset managers in recent years, and executive compensation is tied to ESG performance in a majority of S&P 500 companies.

One of the most vocal criticisms regarding ESG is its perceived vagueness and inconsistency. The lack of a universal framework or standardized guidelines has led to companies interpreting and reporting ESG metrics in varied ways.

Some opponents also believe that ESG investing is politically motivated and could lead to biased investment decisions.” In a line used by proponents, those in opposition to the ESG movement also believe there is substantial support behind them.

Environmental and societal issues, such as climate change, biodiversity loss, modern slavery, inequalities, food security and others are interconnected and lead to risks and opportunities for both, businesses, and society.

Tracking and collecting data across these diverse dimensions can be complex and resource-intensive. In addition, relevant ESG data might be hard to come by: it may be proprietary, confidential, or difficult to access, particularly when it comes to supply chain information or indirect environmental and social impacts.

ESG ratings are not predictive

ESG ratings don't always accurately predict the ESG risks faced by a company. Many ESG rating agencies imply that their reports can provide an indication of a company's future ESG risk, however, recent studies show that they're not reliably predictive.

Who decides if a company is ESG? ›

How Do I Know Which Investments Are ESG? Several financial firms have ESG ratings and scoring systems. For instance, MSCI has a rating scheme covering over 8,500 companies, giving them scores and letter grades based on their compliance with ESG standards and initiatives.

Gen Z is a highly eco-conscious generation that values sustainability in their purchasing decisions and expects brands to take the lead on environmental issues.

Other top barriers mentioned were lack of reporting standards and regulations/complexity, lack of attention or support from leadership, and volatility of regulatory requirements.

The Key Pain Points

Developing Coherent Sustainability Strategies: The lack of a structured approach to sustainability often leads to fragmented efforts and ineffective communication. Demonstrating Commitment to Sustainability: Stakeholders are increasingly demanding concrete evidence of genuine sustainability efforts.

Manufacturing is one of the industries with the greatest impact on the environment, society, and governance. Significant ESG concerns threaten its long-term viability and competitiveness.

Tracking and collecting data across these diverse dimensions can be complex and resource-intensive. In addition, relevant ESG data might be hard to come by: it may be proprietary, confidential, or difficult to access, particularly when it comes to supply chain information or indirect environmental and social impacts.

ESG data is compromised by interdependence

The weaknesses of primary ESG data feeds through the value chain and are magnified in the process. Data collectors and providers depend on self-assessed disclosures and interpret this data according to their own varying practices.

ESG performance can be tracked and measured using company-reported data.

If management and board members can't see plain, simple figures that track progress, their instinct is to worry. ESG progress can be measured, though.