Category: Socially Responsible Investing (SRI)

Corporate Social Responsibility (CSR) as we knew it pre-pandemic is gone if not in rapid decline. 

In many cases, CSR has now been replaced with Environmental, Social, and Governance (ESG) criteria that analyze and reward more strategic corporate performance on a range of sustainability issues. The ESG frenzy is upon us and ramping up. The reasons for stronger market and stakeholder interest in ESG reporting and performance are compelling but challenges have emerged along with opportunities for issuers, investors, and raters.

However, the ESG frenzy is also placing demands on quantifying the impact of investments. Fortunately, the emergence of digital technologies, such as satellite data and analytics, IoT devices, and artificial intelligence (AI) solutions, provides the opportunity to measure impact on a real-time basis. These technology solutions when coupled with credible, transparent sustainability-related practice improvements will lead to best-in-class ESG performance.

First the good news.

The pandemic and glaring social inequity issues have, in general, caused companies and their brands to step up to address ESG issues. Consumers and investors are now more or less keeping score on which brands are investing in ESG performance. Increasingly consumers are making buying choices based upon ESG performance, and investors are showing a preference for high-performing ESG companies.  Recent research indicates that companies with strong ESG performance have improved financial and brand performance.

As the Dow Jones Industrial Average shed some 34 percent during Q1 of this year with the Covid-19 pandemic spreading, Morningstar reported that 51 out of 57 of its sustainable indices outperformed its broad market counterparts. At the same time, MSCI reported 15 of 17 of its sustainable indices outperformed broad market counterparts.

For example, a recent report by Blackrock, ESG Resilience During Coronavirus Downturn, probed how ESG-focused investment funds have fared versus their peers. According to Blackrock, “In the first quarter of 2020, we have observed better risk-adjusted performance across sustainable products globally, with 94 percent of a globally representative selection of widely-analyzed sustainable indices outperforming their parent benchmarks. In particular, we believe companies managed with a focus on sustainability should be better positioned versus their less sustainable peers to weather adverse conditions while still benefiting from positive market environments.”

And while Blackrock’s commitment to ESG investments has dominated the news cycle in this space, even The Carlyle Group, famous for defense industry investments, is reshaping its broader portfolio to account for ESG and sees the way to high rates of return through impact investing.

The challenge.

The challenges to the demands of ESG performance and reporting are  the absence of a common lens to review corporate claims verification and the need for quantitative performance data and information. The lack of a common framework or proxy “standards” for filtering through corporate ESG reporting is a concern for transparency and comparability of performance. The need for quantitative performance data and information has now become critical as investors and consumers want proof of performance claims. 

Let’s focus on the challenges and opportunities for quantitative performance and use water risk as an example. The process of collecting, aggregating, and reporting ESG data remains largely a labor-intensive and analog process. Analog tools can’t meet the needs of current and projected ESG reporting. Despite the adoption of digital technologies in many aspects of our lives (e.g., entertainment, mobility, healthcare, and education), environmental and social data has lagged behind in adopting digital technology solutions. 

However, this is changing. For example, the intersection of increasing awareness of water as a critical environmental and social issue for businesses illustrates the opportunity of digital technologies to meet the needs of companies, investors, NGOs, and consumers in ESG performance. 

The opportunity.

One of the most significant trends with respect to water as a critical resource is the adoption of digital technologies. Digital solutions are being applied to water resource applications to determine real-time water quality within a watershed using satellite data and analytics, AI solutions to more effectively manage water, energy, and carbon emissions in manufacturing operations and to vastly improve agricultural productivity and resource use.

The ability to collect and analyze data on a real-time, or near real-time, basis greatly enhances the quantity and quality of environmental data for improved operational performance, tracking progress against goals, and external reporting. The increased value placed on ESG performance is driving demand for improved data collection tools to seamlessly link internal and external reporting. We also believe digital tools can unveil gaps between perceived ESG performance and actual quantifiable performance. The ability to increase transparency, in addition to rationalized ESG reporting, will benefit corporations, investors, and other stakeholders. The emergence of digital tools coupled with proven corporate sustainability best practices ensures that the right actions are implemented at the right places to achieve locally meaningful environmental improvements (in other words, context-based targets informed by science).

Many ESG investors, asset managers, and rating agencies struggle to understand what constitutes “good” corporate water stewardship performance and thirst for better, more credible data upon which to refine their comparability analyses of issuers. Water stewardship happens in local contexts and plays out on a watershed-by-watershed basis. Yet, most corporate ESG reports that address water-related risks and performance aggregate local water-related data across regions (such that it even exists) and asset classes thereby losing a nuanced, accurate picture of local water stewardship performance. Even worse, most reporting frameworks inadvertently tell an incomplete story on water stewardship often focusing on corporate efforts on water efficiency and general issues of water security in the value chain.

Compounding the generally ineffectual nature of corporate reporting on water stewardship performance is the fact that many corporates are new to water stewardship. Many corporate sustainability practitioners bring a “carbon” mindset to developing a water strategy and setting meaningful goals and targets. The problem is that water is not fungible in the same way a ton of carbon is across a global value chain. It requires a combination of art and science in determining overall water-related risk and setting an enterprise-wide strategy for water stewardship that is executed across a portfolio of sites.

The solution.

Real-time, credible water data from a portfolio of sites is critical to bridging the gap between corporate water stewardship reporting and transparent, meaningful site-level water stewardship performance. This digital transformation in the water profession will improve overall corporate water stewardship performance, improve the credibility and transparency of water-related ESG reporting, and most importantly, via better ESG water-related rating methodologies, reassure stakeholders that “rated” and “actual” water-related performance are aligned. The digital water transformation will optimize understanding of water-related risks and site-level performance thereby leading to real-time feedback loops that improve “actual” corporate water stewardship performance.

Several digital water technology companies understand that they are not only providing real-time data for improved resource and asset management performance but also improved reporting capabilities. These digital water technology companies range from satellite data acquisition and analytics (www.gybe.eco), to AI for operational excellence (www.plutoshift.com) and AI for water quality predictions (www.trueelements.com). The data and insights provided by these companies are essential for Sustainable and Resilient Corporate Water Strategies. 

This is the future of water management and stewardship – real-time data and “frictionless” internal and external reporting. 

Conclusion

ESG reporting is gaining momentum, but the need to transparently and uniformly quantify impact remains a challenge. Standardization, regulatory and certification requirements, and seamless integration with real-time data and analytics are not where they should be just yet. The convergence of digital water technologies, credible water related-data generation from the use of the site-level Alliance for Water Stewardship Standard, and rigor in ESG reporting provide a path to vastly improved transparency and accountability. 

This article was co-authored by Matt Howard and Will Sarni.

Matt Howard is Vice President of Stewardship at The Water Council. He also serves as the Director for the Alliance for Water Stewardship – North America. 

Will Sarni is the founder and CEO of water strategy consultancy, Water Foundry, and is the founder and a general partner of the Colorado River Basin Fund.