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Distant Horizon for Maturity of ESG Reporting

At the CDO and Data Leaders Global Summit, ESG reporting practitioners affirmed our assertion that there are too many standards with continued uncertainty anticipated. Significant changes in reporting requirements obviates a simple solution, whether vendor led or homegrown. We advise organizations to treat ESG reporting as any other data analytics initiative with unclear and emerging stakeholder needs.

Horizon for ESG Reporting Framework Maturity

As noted in previous posts, ESG is now a prominent investment criterion and reputational factor. Global executives attribute 63% of their corporation’s market value to reputation, so active management of ESG reporting is a growing imperative. Waiting for standards to emerge is not an option.

In a poll, 92% of CDO and data leaders believed that standards will not mature to the level of financial reporting until 5 or more years and 36% of these leaders expect reporting standards to take 15 years or more to mature. Currently, there are multiple efforts underway to converge standards which will only elongate the timeline.

Fortunately, technology tools enable organizations to build curated and governed ESG repositories supported by many automated data quality processes. Creating this foundation will allow for timely and less costly adaptive responses as reporting requirements continue to evolve.

ESG and Transformation

Reflecting on Earth Day, it is notable that ESG issues have become prominent after years of inconsequence. At a global conference, the UN Development Program’s Achim Steiner said “vision, optimism and direction and not despair” will lead to advances.  However, these advances will be limited since transformative change cannot yet reverse the damage done.

“Economies provide information and tools but are not wiser than any individual.”  Mr. Steiner stated that our choices are as important as economics and technology. While personal responsibility is absolutely essential, we are convinced that market and structural issues must be addressed.

Global financial resources for ESG initiatives exist but inertia keeps focus on 20th century economics, according to Mr. Steiner. Forward-thinking investors recognize pollution, loss of natural resources, and environmental damage all impact the economy. Many have embraced the UN’s SDGs.  Actionable Strategies has applied the SDGs in our work in recent years with very positive acceptance from clients.

Capital flow is important to enable environmentally focused projects and socially responsible investments.  However, we also strongly advocate for better policy and planning. There are numerous large-scale changes that must be planned and managed by many stakeholders in both the public and private sectors.

  • Energy generation will require fossil fuels for many years which necessitates better practices during the transition of the generation mix.
  • EVs, renewables and distributed generation pressure the power transmission and distribution grid infrastructures which means that attention must be paid to this overlooked and highly regulated sector.
  • Lifecycle impact must be examined because in reality there are never very simple solutions to highly complex problems. For example, batteries require environmentally destructive mining which often uses exploited workers.  Recycling of batteries is not currently efficient and proper disposal practices are far from universal.
  • Excessive bureaucracy impedes innovation and implementation in the energy and other sectors.

Mr. Steiner said the private sector, dominated by small to mid-sized companies, must be involved. Good policy advocates understand the reality of markets in the majority of countries.  The world needs more intelligent and comprehensive policies and less political rhetoric.

Aspen Institute on ESG Reporting and Human Capital, EmployeesEmployees and ESG Reporting

At a Penn Club discussion of her book, Judy Samuelson of the Aspen Institute postulated that businesses themselves are an amoral operating structure and that people determine the morality of behavior.

With 80 percent of a company’s value being intangible, she stated that employees have great influence as allies and are not just a cost. Contributing factors include transparency from social media, physical plant and financial capital declining in importance vis-à-vis human capital, supply chain complexity and environmental considerations.

Highlighting the difficulties with ESG measurement given the numerous and often conflicting “standards”, we asked Judy how she thought management of ESG concerns would evolve. She replied that organizations cannot possibly expect to measure environmental or social progress in simplistic measurements. Judy sees companies being pressured and stepping up to commitments like net zero carbon.

We have written about managing reputation as an asset, establishing an aspirational ESG strategy and executing for the benefit of all stakeholders. This posture to ESG is becoming increasingly more mainstream.

Gamestop Price Chart, Speculation and Market StructureGamestop Speculation and Market Structure

Trading in Gamestop highlighted weaknesses impacting market participants. Grandstanding politicians from all sides appear misinformed (e.g., confusing gamification with gaming the system). The issues are more complex than mere headlines.

Robinhood suspended trading because they lacked liquidity required by regulation, forcing them to raise over $1B. They were NOT protecting hedge funds or individual investors.

Speculation differs from investment. Trading highly shorted stocks via margin and options with inflated IVs is risky and unsuitable for most individuals.

Lack of understanding about trading abounds. Brokers are not obligated to execute orders. Margin is an interest-bearing loan. Different trading platforms can provide better execution if they do not sell order flow.

Individuals have the right to speculate but there is personal responsibility. Hedge funds with concentrated positions or excessive leverage felt this pain.

Regulators need to refine rules such as short interest exceeding float and circuit breakers. Rumors and trading ideas on social media are not market manipulation under SEC regulations. Notably, crowds fueled by social media can and do move markets, a fact that cannot be ignored. FINRA’s suitability standards must still be applied.

ESG Investment OpportunitiesESG Investment and Product Opportunities

Despite gaming and greenwashing, ESG is a significant, visible private sector concern. World Bank President David Malpass urged private lenders to be socially responsible and support debt restructuring.  Poor countries pay 6-7% interest, crowding out spending on COVID-19 vaccinations. WB lending opens emerging markets for private investment so they have gravitas.

At the same conference, National Economic Council Director Brian Deese emphasized the need for private sector participation in President Biden’s environmental objectives. He identified benefits including growing exports for EVs and other technologies. The belief is that by “unleashing private capital” the US can “create products that consumers will choose to purchase”.  Acknowledging that the government cannot succeed alone, Deese stated that “private capital is required to accelerate the transitions to zero emissions”.

While there is downside to ignoring ESG concerns, there are concrete opportunities that continue to emerge. We are enthusiastic at the prospect of doing good while doing well. Leaders from both ends of the political spectrum are actively engaged.  Our experience with public-private partnerships in Smart Grid and Smart City initiatives is convincing evidence that the model works.

ESG Pushback and Controlling Reporting

Greenwashing“ESG is nonsense!”, according to some investors.   At a recent investment conference, a number of institutional asset managers pointed out the fallacies surrounding ESG. They cited greenwashing of fundamentally destructive environmental practices, the lack of clear definition of ESG and use of the ESG moniker for pure marketing purposes. While they are correct, this does not belie the fact that environmental, social and governance issues will receive increasing focus.

“You can’t put the smoke back in the stack” and other metaphors describe the fact that many investors, business leaders and most importantly customers consider ESG practices important for organizations. While companies should adhere to their (hopefully) virtuous principles, they must also ensure that stakeholders understand the true strides they are making. Actively controlling the flow of messaging, statistics and third-party reporting will be critical to ensuring that organizations are viewed in the proper light without duplicity.

Actionable Strategies has performed analysis of ESG reporting for a number of publicly traded companies.  Our findings for these organizations are consistent with a longitudinal study by MIT that included 641 indicators.  One major conclusion that “a significant portion of the measurement divergence is rater-specific and not category specific, suggesting the presence of a Rater Effect.”  This is a clear indication that companies need to both control the qualitative aspects of ESG reporting as well as quantitative reporting of metrics in categories relevant to the rating agencies.  

Because of the large number of ESG Reporting frameworks and the lack of standards, companies cannot simply report using one framework in a Website post.  Our approach is to gather all information relevant to ESG stakeholders into a repository such as a data warehouse.  Stakeholders are very broad and some are not part of traditional value chains.  Information can also include unstructured data especially with social media being an important publishing medium.

Mapping the data to multiple frameworks then allows the organization to control the ESG Reporting “message”.  This increases the likelihood that rating agencies will appropriately assess the positive actions of the company.  It also decreases the chance that negative ratings are inappropriate assigned.  It isn’t greenwashing if it is true, consistent and contextually accurate.

Reputational Risk and Market ValueReputational Risk and Market Value

A company’s reputation is a precious intangible asset that is directly affected by ESG activity. Investors, customers and employees are growing more aware and concerned with environmental, social and governance considerations. ESG actions can enhance or diminish the reputation of a company.

Organizations should extend reputational risk management to encompass reputational asset management.  A 2012 World Economic Forum study attributed 25% of a company’s market value to reputation. By 2019, a survey of global executives attributed reputation to 63% of market value. Financial stakeholders are paying attention to ESG risks and economic value.

Neil Roberts discussed “A Sustainable Future” at the Reuters NEXT conference and the topic is top of the executive agenda. Aon’s 2019 Global Risk Management Survey identified Damage to Reputation / Brand as the #2 risk to businesses. The only higher risk was economic slowdown / slow recovery. 

Leaders face personal risks as well. A Harvard Business Review study found that executives from scandal tainted firms earned 6% less on average. In financial services, executives from companies with scandals were paid 10% less than peers. 

We are applying asset management approaches to ESG processes and analytics but this concept is admittedly in the nascent stages. As leaders continue to embrace ESG, whether driven by principles or self-interest, proactive and strategic management of ESG will develop as part of managing the overall value of companies.

Economic Recovery Underway

Despite economic hardship still impacting many, it appears the start of the recovery is well underway.  While there are risks, history suggests that the recovery should become robust.  The generally bullish Ed Yardeni spoke about factors affecting the recovery.  Charts on his Website make it apparent that the pandemic hit our economy more deeply and quickly than other recessions, but GDP is already rebounding.

Recovery Underway

Recovery will be uneven and potentially unfair to some, but that necessitates thought and action to participate fully in the re-expansion of the economy. Some strategies and operating models may no longer be viable with their downfall accelerated by the almost immediate shift in workplaces and homebound consumers. Different skills and abilities will be required creating disruption as well as opportunity for workers.

For organizations, leaders and individual contributors, the real post-vaccine new normal is upon us in developed markets. Stock market corrections (10% drops) will still occur but taking a longer term view allows us to see the recovery in progress.

Aligning ESG to Strategy

Myanmar Smart Grid and Clean Energy

Ensuring strategy aligns to ESG goals is a growing part of our work. In Myanmar, we are involved in a power infrastructure project which will reduce existing emissions and integrate renewable energy sources. This aligns directly to country-wide commitments made by Aung San Suu Kyi, Myanmar’s State Counsellor, at the recent UN Climate Ambition Summit.

Among other targets, Myanmar aims to reduce over 243 million tons of CO2 by increasing the share of renewable energy to 39%.  The UN Secretary-General and 75 Heads of State and other high-level officials also delivered video statements at the Summit. They made new commitments to tackle climate change and deliver on the Paris Agreement.

Our project aligns with Myanmar’s Sustainable Development Plan, the UN SDP and Paris Climate accord. Given the societal benefits we have identified, we are hopeful that the appropriate ministries will grant the necessary approvals so we can take down the investments and proceed to deliver on our strategy.

[Update: After other ministerial approvals, our final hurdle was a presentation to the Ministry Of Electricity And Energy on February 3, 2021.  The coup occurred two days before our meeting.]

Future of Renewables and Emerging Markets

Environmental Social and Governace in Emerging Markets - Dirty FuelsAt the Future of Renewables Global Event, a World Bank speaker illustrated the positive impact of Actionable Strategies’ energy projects in emerging markets. 

Developed countries take for granted that we will quickly gain access to COVID-19 vaccines once they are available.  However, approximately 1 in 8 people in the world lack electricity.  This means that the cold chain to supply vaccines will be very difficult or nearly impossible to maintain in some parts of the world. 

 

One of our current projects seeks to promote electrification which has a positive impact on public health and education.  Almost 40% of the world cannot use clean cooking sources and two-thirds of these people burn animal waste for fuel.  This household air pollution results in 4.3 million deaths annually which is more than HIV/AIDS, malaria, and tuberculosis combined.

Environmental and social objectives overlap when it comes to electrification.  Educational benefits ensue as power enables children to read by electric lighting instead of candles.  Any digital divide cannot be closed without the ability to power devices and networks. 

Actionable Strategies is fortunate to be able to work at the juncture of strategy, sustainability, social responsibility, and technology. 

Return to Prominence of Environmental, Social and Governance

Environmental Social and Governance Investment ReemergenceEnvironmental, Social and Governance initiatives will return to prominence as the pandemic is projected to recede next year.  

In a post this summer, we advocated for inclusion of ESG initiatives as part of the strategic planning process.  

There are numerous signs of the reemergence of ESG as a key strategic consideration.

Mandatory Diversity

At the end of 2020, the NASDAQ sought to mandate disclosure of board diversity.  Subsequently, listed firms must have at least one or two diverse board members or face de-listing.  Goldman Sachs and Blackrock have similar rules controlling who they will engage. 

Increasing Investment

Funds are flowing into ESG-focused “sustainable funds” across asset classes.  At the end of Q2, inflows into ESG investing funds were $20.9 billion which was close to the full-year record of $21.4 billion in 2019.  In the debt markets, green bonds saw record issuances in Q3 despite the pandemic.

Corporate Pledges

Nestle pledged to reduce greenhouse gas emissions to net zero by 2050 supported by a detailed 27-page plan.  They join other major companies making similarly ambitious pledges including Amazon, Verizon and Reckitt Benckiser who pledged to be meet the Paris Climate Accord targets by 2040 which is 10 years early.  At the vanguard, Microsoft pledged to be carbon negative by 2030 and eliminate all emissions it has produced since it was founded by 2050. 

Organizations that ignore ESG considerations do so at their peril.  However, like all complex issues there are many implications and potential unintended consequences. 

Smart Grid Strategic Objectives for Myanmar

As an emerging market poised for growth, Myanmar will benefit as it builds out Smart Grids as part of its critical national infrastructure.  Grid unreliability, outages, power shortages and an extremely low electrification rate have prevented Myanmar from realizing its potential while other ASEAN nations have enjoyed great success.  In addition to direct improvements for citizens and businesses, Myanmar will realize a range of benefits from economic, environmental and developmental.  Our work in other emerging markets has demonstrated these benefits and prove they apply to regions around the globe.

Economic Benefits

Economic growth and prosperity are directly linked with electricity consumption.  Myanmar has the lowest electrification rate in South East Asia.  With only 50 percent of households connected to the public grid, this is a major constraint to the economy especially when combined with  the power quality issues that impact businesses across the country.  Greater electrification will drive logarithmic increases in output as experienced in other emerging markets.

  • Per capita GDP increases with final energy consumption which is currently impacted by loss of electrical service
  • Grid modernization will increase investor confidence and attract greater FDI flow into Yangon
  • Grid modernization will improve access to electricity and yield direct economic benefits through poverty reduction
  • Rural development will accelerate with electrification
  • Modern technologies such as mobile communications can accelerate economic development but are dependent upon reliable and ubiquitous power

Social Benefits

Universal access to electricity will dramatically impact education.  Education has direct social benefits and also translates to economic benefits.  Access to proper lighting is critical to enable students in primary and secondary education.  Digital access will continue to play a more important part of education at all levels which is not possible without reliable access to power.

Environmental Benefits

Environmental benefits range from incorporation of clean generation to reducing environmental impact at the point of consumption.

  • Greenhouse Gas reduction will occur by reducing distribution system losses which are currently 15%
  • Clean and Renewable Energy sources can be integrated into the grid once modernized
  • Pollution will be reduced by reducing system losses as generation requirements are reduced
  • Pollution will be eliminated when electrification replacing dirty cooking which 79% of the country uses and dirty lighting sources

Citizen/Customer Benefits

The citizens and businesses of Yangon are not frustrated with the current state of the Grid and dissatisfaction is universal.  Outages, power cuts, safety, service times and installation costs are all major issues. 

  • Grid Reliability is the major issue impacting business and citizens who lack a basic level of safe and reliable service
  • Safety is a significant concern with injuries and deaths occurring due to grid-related accidents

In the future, a Smart Grid will enable utilities to proactively drive other areas of customer satisfaction. 

  • Proactive communication about power outages and restoration improves customer satisfaction
  • Maintaining the grid dramatically increases business satisfaction, especially for businesses
  • Environmental responsibility is appealing to customers

Critical Infrastructure Benefits

The power grid is part of any modern country’s critical infrastructure.  Grid modernization ensures businesses and citizens have the greatest opportunities and quality of life. 

  • Universal Energy Access by 2030 will be supported which is stipulated in the country’s National Electrification Plan (NEP)
  • Power Quality will improve for mission critical use cases such as hospitals and businesses that require uninterrupted power
  • Resilient Infrastructure including Distributed Energy Resources and Microgrids will be supported which is also a NEP goal
  • Power Losses and Power Shortages will be reduced which is a major issue for the country

Human Capacity Building

Myanmar will build human capital skills and capabilities learned while working with Smart Grid technologies. 

Leaders and workers will accumulate knowledge, experience, and proven approaches

These skill sets are in demand globally with project management and IT skills applicable across industries

 

Strategic Planning during Heightened Uncertainty

The global pandemic has created hardship and strain on people around the globe.  This pressure impacts the organizations where people work and companies who provide goods and services in virtually every market.  Since we are still learning about the characteristics of this novel virus, the level of uncertainty remains extremely high.

We will examine some of the more prominent planning considerations in this tumultuous environment.  

Recovery Uncertainty

While recovery is in progress, the path could take many shapes and varying trajectories.  Variance in recovery scenarios also includes the time horizon.  Strategic planning under these circumstances is difficult but not impossible.  Leaders should learn from past situations and adapt working models to suit their specific situation.  This includes the potential for recurring outbreaks as changes in weather and behavior reintroduce risk. 

Transformed Business Models

Shutting down large swaths of the economy will have lasting impacts across industries. 

Digital channels: Accelerated movement of customers to digital channels may abate, but many businesses will see Internet touchpoints remain the preferred channels. 

Human capital: Human capital management will change as some portion of the workforce will continue to work from home either permanently or more frequently than prior to the pandemic. 

Supply chains: Shifts in supply chains take longer to enact but are already underway. 

Evolutionary disruption: Many of the changes being witnessed will not be permanent.  Evolution of channel mix, reversion to a more hybrid workplace model, increased customer and visitor density in public places, and other inevitable changes will occur as the responses to the virus eventually take effect.

Political Uncertainty

Given the number of factors that might impact strategic initiatives, waiting until the annual planning cycle this year might be too late for many organizations.  In addition to the pandemic, companies may be subjected to change related to the U.S. presidential elections.  A Biden presidency will definitely introduce change, but another Trump term will also alter the posture of the administration as it no longer has to worry about another election.  However, any lame duck moves may be curtailed by change of control in the Senate. 

Regional and local politics may also impact some businesses.  For companies with operations in many jurisdictions, the myriad of localized regulations dwarf national ones.  Navigating conflicting regulations can be a daunting task.  Compounding this complexity is the self-regulation related to ESG initiatives and progress reporting.

Return of ESG

Environmental, social and governance agendas have momentarily lost prominence due to the global pandemic.  However, the underlying concerns remain and will not relent.  Calls for social justice are already helping re-elevate ESG as a strategic consideration.  Without clear frameworks for reporting, ESG initiatives require strategic direction and organizational alignment to ensure that companies are regarded as responsible and proactive. 

Strategic Planning Imperative

A well formulated and achievable strategic plan is an immediate imperative as most companies approach a new calendar and fiscal year.  Subsequently, execution must continue to monitor and adapt to market forces to be effective.  A Harvard Business Review article noted that many “executives fail to execute strategy because they’re too internally focused”.  For example, they may “lack depth in their competitive context” and fail to adapt as their competitors execute their strategies.  Starting with a broad view of the market landscape is essential to enable execution to succeed.

Business Recovery Lessons

In discussions with Actionable Strategies, Chinese business leaders provided a number of lessons they have learned as they recovered their businesses from lockdown. 

Omnichannel

Omnichannel is now imperative for any business that sells to consumers.  During lockdown, online touchpoints were essential for survival.  Consumer behavior will be permanently altered for some percentage of customers.  Comfort and familiarity with an online, low-touch model will require continued focus on this model.  This is not a new phenomenon.  For example, financial services has experienced a number of revolutionary disruptions such as the original disintermediation from the ATM, online banking and electronic trading.  The solution has always been to adjust the channel mix and continue to engage customers as they choose.

Relationships

Chinese have historically placed great value on relationships and this remains true today.  Relationships are often built over social interactions such as dining, drinking, golf and high-touch other activities.  These have now become more important as social distancing and the risks associated with COVID-19 make face-to-face meetings less compelling.  Chinese business leaders stated that actively maintaining networks through in-person contact is key to future success when dealing with other companies.

Direct-to-Consumer

As with omnichannel, direct-to-consumer is a reality.  With disruptions in distribution, some sellers sought to bypass intermediaries and sell directly to consumers.  A striking example is “farm to table” where 13 million farmers now sell produce directly to consumers.  These sales were facilitated by e-commerce platforms such as Alibaba’ Taobao, JD.com and Pinduoduo which fulfilled over 1 billions orders in the first quarter alone.

Virtual Work

Working from home will continue to be an important aspect of the human capital management landscape.  Not every worker will return to their office space every day.  While this is part of the gradual return-to-work model, some portion of the workforce will continue to work from home for part of the work day or potentially in perpetuity.  Again, this is nothing new.  For consulting organizations and other knowledge workers, it has been common to gather in person for critical face-to-face meetings and work remotely at other times.

Transmission Avoidance

The damage caused by lockdown was serious on many levels but did reduce the mortality and infection rates.  Aside from personal consequences, there were severe business impacts felt across almost all industries.  Business leaders in China have universally advised following practices that avoid the spread and resurgence of COVID-19.

New Normal

The new normal has not been realized yet.  Behaviors and practices will continue to evolve as societies and the medical community move forward to address the issues posed by a novel virus.  One thing is certain: the virus accelerated trends that were already in place with digital transformation, virtual engagement of teams and customers, and global risk management.

Lessons From Financial Services About Mitigating Supply Chain Risks

During discussions with supply chain executives, CEO Jeffrey Wu proposed applying a model from financial services.  It was viewed as a viable and appropriate approach for a number of industries.

After sharing ideas about protection of supply chains with some manufacturing executives, I received feedback that it was valuable. Hopefully you will, too. We can apply a lesson learned in the financial crisis to manage supply chain risk. Firms had used a prime broker which concentrated counterparty risk to a single entity. The crisis forced them to transition to multi-prime to minimize risk.

With the current crisis, supply chain executives are considering moving out of China and possibly homeshoring, but this still concentrates risk. Given the disruption involved, it is timely to consider adopting a multi-source supply chain, even with the great complexity involved. The foundation includes distributed Lean processes in multiple countries, possibly using safety stocks, and a robust technology infrastructure supporting situational awareness. Correlated risks should be avoided in selecting potential partner sites.

This approach applies even more naturally to BPO, software development, support and other services. Incremental costs can be minimized if processes are harmonized and managed globally. Management should include tight governance as exercised over other critical infrastructure vendors. Some forward thinking leaders I spoke with agree and are already pursuing this approach.

Virtual Work Environments – Panel Appearance

Creating a virtual work environment is a leadership challenge that should be managed.  Being productive at home involves controlling yourself as well as your environment.

Through the SIM Community Outreach Committee, I am coaching for NPower who helps “launch digital careers for military veterans and young adults from underserved communities”. Last week, I was on a panel about virtual work. Having first worked remotely in the 1980s, I wanted to share what helped me achieve the most.

1. Control yourself – maintain a work schedule and consistent habits, avoid personal distractions and tasks during work, seek an appropriate work/life balance

2. Control your environment – create a productive workspace, limit distractions from household members during calls/focused times (create a schedule of independent activities for children)

3. Stay connected – telepresence technology makes it easy to reach customers, colleagues and suppliers

4. Improve yourself – take control of improving what you do and how you do it

It is easy to grow unproductive if you are unmotivated and disconnected. Work hard when you are at work. Then, disconnect and enjoy your downtime and those you connect with, at home or virtually!

Leaders: inspire your teams to drive outcomes and measure what is delivered, not “inputs” like hours worked. I wish everyone success as they adjust to new work models.

https://npower.org/

Jeffrey Wu