Achieving Consistent and Comparable Sustainable Reporting and ESG Metrics – Can it be done?

Driving the ‘energy transition’ are the beliefs that to stop the atmosphere from heating above 1.5⁰C, society needs to implement more sustainable practices in our individual lives, our businesses and our national endeavours. Yet, the emergence of Environmental, Social and Governance (ESG) policy has hit a roadblock with the inability to create comparable and standardised measurements across jurisdictions, or even within a particular industry.

And while the Paris Climate Agreement has gone a long way to influence states toward developing their own policies, the discrepancy between ESG models leaves the decarbonisation project in flux – balanced between genuine action and greenwashing PR. European states have positioned themselves as the moral flagbearers for the transition; embedding policies, roadmaps and regulation across the continent to make the necessary changes that will achieve their goals. Their ESG standards can be considered an ambition for some, but out-of-reach for most, especially among underdeveloped and developing nations.

In order to create a baseline for consistent and comparable reporting of ESG metrics, there needs to be a fair and just system that considers the capabilities and barriers that would allow all nations to engage in the costly transition equitably.  What defines the “E”, “S” and “G” aspects, and what affects can they bring about.

The “E” – Environmental

The “E” is likely the aspect of ESG that garners that greatest attention, and for obvious reasons, without the immediate action for environmental protection, the earth itself may become uninhabitable for life.

The Paris Agreement outlines the basic principle that the earth’s heating should be limited to 1.5⁰C, or we face catastrophic climate breakdown. The main concern herein are the levels of carbon, methane and sulphur oxide emissions that are released into the atmosphere and create the greenhouse warming affect. Erstwhile there is a vast array of non-emissions based actions that can benefit the environment; reforestation and rewilding, ocean and river clean-ups,

Emissions measurements is a sticky subject with little consistency across sectors or countries. Organisations such as Project Canary or MiQ (among many others) each have their own baselines and frameworks for emissions measurements – and while market competition can improve innovation, in this instance it may hinder progress. However, coalitions of actors, such Climate TRACE, could begin to solve this particular issue.

The “S” – Social

While the environmental side of operations can be tackled through integrating technologies and developing new processes, the social side is a little more delicate. The “S” seeks to encourage companies to consider a far wider range of stakeholders than just shareholders, rather it implores a business to create a more inclusive and diverse work environment, whose actions consider the impact to; the communities in which they operate, their employees, their management and who can access their products or services.

Within the energy industry, creating a more diverse and inclusive labour force is the best and most direct route for improvement. Women are deeply underrepresented in the energy industry, and merely by seeking a more gender-inclusive workforce – company’s become more profitable. The truth is that homogenous and insular environments cannot understand what they do not know.

The “G” – Governance

Sustainability has been embedded within business practices for many eons. Sustainability, at least in a business, constitutes the fiscal discipline and growth prospects of the company. Yet within certain sectors and in pursuit of profits, sustainability can fall to the wayside in favour of lucrative short-term gains. This is the motive behind many an investor, financier or energy producer – who seeks their individual benefit over another’s. It is the classic zero-sum principle of capitalism.

This approach has come under fire in recent times, with more consideration asked of corporations to what their wider impact is on society. It is a positive step, a trait that most people carry and that is now being placed onto big business.

Strategies & Standardising Across Regions

The sheer quantity of reporting metrics creates an environment whereby companies can pick and choose a metric suitable to their needs and one that will present them in the most favourable light. While there are more well-known frameworks such as the UNPRI or Climate 100+ benchmark, they are often too progressive outside of Europe and the coastal United States. Project Canary is an independent data-driven tool for emissions, however self-assessed data has its own flaws. Many of the major institutional financiers and investors, along with major auditors, have integrated their own ESG requirements, but the lack of conformity undermines genuine successes.

Each with their own approach to assessing the value and impact of ESG policy on business practices. Which reveals a distinct problem, that the guidance for ESG integration does not conform to a singular framework by which a genuine assessment of success can be obtained.

For the energy sector, environmental metrics should be the dominant focus and where the greatest improvements can be made. The reporting metrics that can act as baseline data for standardisation need to be set at the supranational level; however, the agreements that made the PCA possible did not extend to measurable methods for mitigating the 1.5⁰C rise. But aligning these methods with objectives of the more influential states seems unlikely, and yet – without a concerted globally holistic approach, the damage cannot be countered.

One potential approach could be to consider more specific goals and objectives for underdeveloped states who cannot and should not be expected to forgo development in light of Western directives. Have better targeted mandates for lower income to high income states, and dependent on their capacity to change.

By permitting these states to develop their resources (particularly oil and gas) in order to gain crucial development funds and attract capital, they must have exceptionally strong “S” and “G” structures in place. A lack of corporate governance structures restricts FDI, and the lack of diversity across workforces inhibits growth.

The converse is true for the most developed states, where there is greater diversity on the workforce and greater discipline in the boardroom (covering the “S” and “G”) – these companies must ensure they make their inroads along the “E” metric. And carry the weight for the under-industrialised states who must focus on affordability more than a clean energy.

Conclusion

Disappointingly, it would appear that globally consistent and comparable sustainable reporting and ESG metrics cannot be done. The difference in ideology, economy and approach by the major international forces leaves little room for agreement. However, that does not mean nothing can be done.

Regionally specific metrics for reporting would be far easier to achieve, with regions often aligned far closer than their far-off peers.

Alternatively, an African bloc may develop a mandate for oil and gas resources that regulates a percentage of profits be used exclusively for the development of African energy infrastructure. The trade-off being governments would need to act to develop more inviting economies. Or an Australasian mandate that considers the forced climate migration of Pacific Islanders. The EU is the best example of cooperative success in this field but it has the advantage of being highly developed.

If a regional approach is taken and agreements can be found, there is a much smaller leap to find agreement between six to ten actors than several hundred. Beyond that, find the balance between environmental, social and governance goals and to not let the “E” disproportionately outweigh the “S” and the “G”.