How data can help you get started with ESG

Emily Khan:

Hi everyone and welcome to this episode of our Business in Focus Podcast. I am Emily Khan, a director at PwC, and I am your host for this episode. Now for many organisations, ESG, that’s environmental social and corporate governance is becoming increasingly important. Our annual CEO survey shows just how much focus on this area is changing. Two years ago, just 44% of CEOs listed climate change as a key concern, and that figure has soared to 70% this year, and that's just one aspect of ESG, but committing to ESG targets is challenging. Many organisations that we are talking to are telling us they just don't know where to start. In the first instance, it can be tricky to define your ambitions, which might be different across the E, the S and the G. Even if those are clear, it can be hard to create a clear strategy that everyone in the organisation can get behind. Once you've got that sorted, it can be difficult to accurately measure your progress.

In this episode, we will be discussing how you can use the power of data to set and measure ESG targets that are ambitious, yet also achievable and aligned to your purpose. I am delighted to be joined in our virtual studio today by Isabelle Jenkins and Tom Beagent. Isabelle is our leader of industry for financial services, and Tom is an advisor in our sustainability and climate change team. I am joining today excitingly from our More London offices, back in the office for the first time. Hi to you, Isabelle and Tom where are you joining from today, Isabel?

Isabelle Jenkins:

Hi, Emily, great to be here. I’m up in Harpenden in Hertfordshire at the moment.

Emily:

Very good. How about you Tom?

Tom Beagent:

I am also in the same place, Harpenden in Hertfordshire.

Emily:

I grew up just down the road, it's a very small world, indeed. Let's get into this complex and wide-ranging topic of ESG. Tom, I am going to come to you first, if I can, with the million-dollar question that we are here to talk about today. If setting ESG targets and making progress against them is this big challenge that I've just set out, and part of that being to do with the breadth of the issue and the complexity of it. Just give us a sense to get us going, of the role that data can play in making informed decisions about where to start and where to focus?

Tom:

I absolutely agree Emily. The topic is quite broad and can be quite daunting. Many organisations have been working for long periods of time, whether it's in language such as corporate social responsibility or sustainability and now the en vogue language around ESG. Setting targets and ambitions means doing something differently, doing something differently as a business, to what you would have done otherwise around the environmental, social, and governance matters. If we take, as an example, a topic that is at the forefront of people's minds at the moment around climate change. Organisations have been setting targets over the years, steady reduction in the amount of emissions that they have. Whereas now, we see a real need for urgency and a better source of data to help with that. There is a lot of talk around things like science-based targets. What this really means is that scientists have worked out how much carbon we are able to admit as a society, and how you chunk that down for different organisations to work out what their share of that carbon budget is. What data is enabling us to do is to actually workout, well how significant a change do we need to make in our business to deliver our share of that contribution to reducing carbon emissions.

Emily:

You are painting quite a picture there of a sophisticated use of data to make some quite complicated and important decisions by the sounds of things, bring that to life a little bit from the conversations that you are having with organisations who are trying to do that. What are some of the challenges and opportunities that organisations are coming across when they set their targets in those areas?

Tom:

Where this really becomes tricky for many organisations is just the pure scope. If we look at financial reporting, we are focused on the four walls of an organisation, it's a legal boundary. When we are looking at things like ESG factors, it takes a full value chain view. All the way down the supply chain and all the way through to customers as well. What that means is that data is required to help understand things, which normally businesses see as outside of their control, whereas there is an expectation that organisations will be dealing with some of those factors when it comes to ESG. If we take on the social side, you take something like modern slavery, as an example. There was an expectation that organisations understand where there is a risk of occurrence of modern slavery, all the way deep down in their supply chain. If you take a food retailer, you might be looking at some of the agricultural supply chains that are in place in various quarters of the regions and understand what that actually means in terms of that risk, so data is required to help actually begin to unpick that challenge.

Emily:

I'd like to bring you in here Isabelle, I've noticed a lot of the narrative around the climate change agenda, in particular, refers to change only really happening when financial institutions get behind it. I am really interested in your thoughts on what this means for the financial services sector and the clients that you are working with and the role that financial services companies can play in establishing the infrastructure, not only for sustainable finance investment, but more broadly to support other organisations in this agenda, and of course worth delivering for their customers, what do you think?

Isabelle:

Yeah thanks Emily. I agree, it's really interesting, because what you need to think about is really that financial services, there are two roles here that financial services organisations need to play. Now the first is, obviously, they have their own ESG targets that will have made their own net zero commitments, and they need to get their own house in order, and they need to make sure that their internal front to back operations, as they look at customer journeys, and then out into their supply chains, they need to make sure that they are meeting their own commitments, and that they are reporting on those. The second part which actually is even more important, is the role in financial services in helping to facilitate the sustainable finance industry, because what we are already seeing is that you have, large institutional investors have investment targets that they have to meet where a certain proportion of those investments need to be into what is considered ESG and green type investments. Then, it's not just targets, there are number of investors now, who are choosing that this is what they want to be doing, but you have to be able to have the data and the reporting that allows them to understand which of those assets really do have the criteria that they are looking to invest in and do have those green credentials. At the moment that infrastructure and that consistency of data and reporting isn't in place.

Now, there's a huge amount that's going on across the industry, and there is a lot of work that's being done looking at standards, but it's going to take some time. Now, interestingly in the UK it was announced back in early first quarter of this year, 2021, that January 2022 all premium listed companies will need to disclose under TCFD, which is the taskforce for climate financial disclosures. It's likely that the FCA will require a broader set of listed companies, which will include the largest asset managers and the pension providers that they will have to also have to disclose against TCFD, but the TCFD guidelines that have implementation guidance, but we really need to have some clarity on what compliance means. Then of course the industry, we have the IFRS Foundation, looking at reporting standards. We have the Basel Committee looking at their framework, and whether it should incorporate climate risks. It's interesting because this is, maybe, an area globally that the EU is ahead in. We have the EU with their sustainable finance action plan, and the EU taxonomy. Then, we have the UK looking at these standards being developed in Europe and we need to make decisions, which of those we are going to take and in which format. There's a lot of work being done on standards, but one of the concerns that I have and people have across the industry is, it is going to take time for those standards to be finalised and really be working, and be recognised in the industry.

Emily:

Thanks Isabelle. It's a fascinating challenge as you say, and clearly that's just looking at one sector. Tom, maybe, what are your reflections? We've had a couple of illustrations that are looking at financial services, looking at food production. Clearly, this challenge is persistent across all sectors, and the standards aren’t there as Isabelle has just been saying. What would you say is really realistic when it comes to reporting in this space and what would good look like today?

Tom:

It's a real challenge at the moment, because we've been living in a world of voluntary disclosure. The result of voluntary disclosure is that you get such variety. We are really struggling at the moment with consistency and comparability of ESG data and reporting between organisations. That's a real challenge for investors, because it's very hard for them to really see the wood for the trees when it comes to ESG performance. There is though, as Isabelle has alluded to, there is a lot of momentum at the moment around reporting standards, evolution. That's not coming at this from a blank sheet of paper, that's building on existing frameworks and standards that are already out there from a voluntary perspective. That’s things like coming out of the US, is the Sustainability Accounting Standards Board, and what originated from the European side to the Global Reporting Initiative. We've already mentioned things like the task force on climate related financial disclosure. All those different approaches have got all of the building blocks of what is required. The really important thing is to then work out, what is it that every organisation needs to be reporting on.

A paper that was published last year in 2020 by the World Economic Forum, looking at common ESG metrics, provides a view on what common metrics for all organisations should be reporting on ESG, so that's a really great starting point. Then there is a view of, well you’ve got to determine what it is for my organisation or my sector in particular that is significant material in the language of the reporting standards, to work out what you should be reporting, that's perhaps broader than just those common set of metrics. But I would advise organisations to think not just about reporting what it is that is expected reporting as required by interested stakeholders, but also to focus on what it is that you think you can really make a difference on. When it comes to things like climate changes, as we've already talked about, is that something that your business can really make a big difference on, what should the scale of ambition be for your organisation and how do you do that. It's not just about reporting for reporting sake, you've got to be able to be delivering the change within the organisation, so the performance that's actually being reported stands out.

Emily:

That really interests me the point about it being not only what's expected of you, but where you can really have an impact. We talk a lot about purpose playing a role in the ESG agenda as well. I am struck that since, maybe, the turn of the year the concept that we've heard talked about perhaps most frequently is net zero. That's very much in common parlance as a target that people are talking openly about. You've mentioned another couple of other terms in this conversation, I know I've heard carbon neutrality being talked about as well in common parlance, maybe just for the novice here on this agenda, can you give me a feel for the differences between some of these concepts that are being talked about very frequently, so what's the difference between net zero and carbon neutrality for instance?

Tom:

It's a good question that's one that we get asked quite a lot. Carbon neutrality is a term that's been around for a number of years, and essentially what that is saying is that you can use mechanisms like carbon offsets. Investing in projects outside of your business, which can reduce carbon emissions that can then net off against the carbon emissions that you as an organisation are creating. In essence, from that perspective, nothing changes within your business. Net zero on the other hand is recognising that overall we as a society need to reach net zero emissions by 2050 at the very latest. Means that you as an organisation need to work out how you get your organisation to net zero without using things like offsetting. How do you actually reduce those emissions within the business, within your supply chain, looking downstream.

Emily:

Thanks, that’s a very clear, clearest explanation I've heard. Isabelle I am interested in your response, Tom talked a few moments ago about needing to communicate to investors, and that being one of the key drivers of organisations looking at their data and reporting in the ESG space. What are you seeing from the financial services sector in terms of expectations of what businesses need to be communicating with stakeholders in that sector role, or more widely when it comes to ESG.

Isabelle:

There really are a number of aspects to it, and one is about this point about sustainable finances in industry, and actually understanding if you have an investment target, what you are investing, and how green that is. One of the concerns we see in the marketplace at the moment, it is that actually maybe those people are on the front foot, are actually being disadvantaged in a way, because the people who are trying to report, and they might be reporting and therefore they may well be disclosing some of the issues that they have in terms of, wherein their supply chain, that they are going to need to move to net zero or carbon neutrality or there might be areas in the supply chain they want to improve. That actually when they compare it against people who aren't reporting at all, they look worse, which is a problem and you need to have consistency in the marketplace. It is about having a business about having some consistency in reporting, having some standards that people have agreed. We've talked a bit about, really, you're not just looking at one organisation in isolation, you are looking at supply chains. Most businesses are quite complex and have a lot of third-party vendors. They need to be asking for data from their supply chain. There needs to be some consistency to reduce the reporting complexities for people in the supply chain. You need to really start having some kind of consistency across the industry, where it is very clear on what businesses do need to report on and what you've got at the moment where actually there's almost a disadvantage for those people who are really trying to do it.

Tom:

There's an increasing body of evidence that shows that companies that outperform around ESG, outperformed financially as well, but the real challenge that investors have is getting hold of information to judge which companies are outperforming on ESG. There are a number of rating agencies out there who provide a lot of that information, but they are working off inconsistent and incomparable information that's being reported by companies at the moment. Often the same company could end up with a very different rating on ESG from one provider to another. There is a real need to start to level that playing field. Rather than those who are being transparent and reporting on their performance, being shot down for the transparency that they're sharing, we really need to level that playing field. That will require us to also enable the rating agencies to, therefore, have much greater consistency in the way that they are judging companies.

Emily:

I can't believe how fast time is flying by, and it feels like we've already just kind of scratched the surface of this conversation, but it's almost time for us to wrap up and draw things to close. What I like to do in closing out these episodes is ask for something really actionable from each of you for people listening to think about, they could apply in their own organisations. Can I ask you each for a top tip to help businesses of any kind using data to measure their performance against ESG targets? Isabelle, I am going to come to you first, if I may, what would your top tip be?

Isabelle:

One is you need to get quite specific. One of the problems, and we are all suffering from it, is that it can almost feel overwhelming. You said right at the beginning, Emily, ESG is a really big topic. You are talking about climate change, you are talking about labour laws, you are talking about purpose. We can see that people get a bit overwhelmed and therefore don't make a start. To take one category that is achievable and to start gathering data and start reporting on that, it's important to think about this is a very big challenge, it will take a long time, but you need to break it down into chunks that you can action.

Emily:

Great. Tom, what would you add to that?

Tom:

That actually using lack of availability of data as an excuse is no longer acceptable. We are in this decade of action that is required to turn around some of the impacts that organisations are having on society and the environment, and speed of action is what is required. When it comes to data, I was thinking of it in two ways. You've got one which is looking at a businesses impact on society and the environment, so the scale of the impacts that it's having. It's really important to get data to help shed a light on where those impacts are, because once you've got that strong understanding, then it's much clearer about the types of actions that are going to be needed to take to reduce it. It’s one type of information on the impacts of businesses on society and the environment. The other side of it is the impact of the changing environment, changing expectations of society on business, and on business value. The example around the task force on climate related financial disclosures is as much looking at the systemic risk that is being posed to our economic system from climate change. That's really thinking about not the amount of carbon emissions you emit, but actually much more about what is going to be the consequences of climate change, both the physical effects, but also what's referred to in the TCFD language is transition effects, that's things like carbon pricing. What's that going to have as an impact on the bottom line of your business, and you need to get data that covers off both of those areas, to really get a strong understanding to enable you to move forward in terms of what actions do I need to take to both protect and enhance the value of the business, but also to think about what role am I playing as a business in society.

Emily:

Well that draws us to a close of another episode of business in focus, thank you so much Isabelle and Tom for a fascinating discussion and that feels very much like a chapter one of a conversation that we will continue over time. Of course, thank you to everyone for listening. If you'd like to find out more about the work we do to help companies achieve their ESG goals, visit our website, pwc.co.uk and look for the sustainability and climate change section under services. Finally, don't forget to subscribe to keep up to date with future episodes. Thanks everyone and stay safe.

Participants

• Emily Khan, Director, PwC
  
• Isabelle Jenkins, PwC UK's Leader of Industry for Financial Services
  
• Tom Beagant, an advisor in PwC's Sustainability and Climate Change team