Mukund is CEO of Benchmark Digital Partners, LLC.
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For many companies, regulatory compliance feels like an obligation — and an expensive one at that. Take the finance industry, where large firms spend roughly $10,000 per employee on compliance. Or take the manufacturing sector, where compliance costs nearly $20,000 per employee. The trend line is moving in the wrong direction, as Deloitte estimates compliance costs have gone up more than 60% since the financial crisis of 2008.
None of this should be surprising, of course, given that the Code of Federal Regulations has 50 volumes and clocked in at over 175,000 pages ... six years ago.
Yet compliance, particularly in the environmental, social and governance (ESG) space, should lead to positive business outcomes (beyond avoiding federal lawsuits, of course). Proper ESG compliance — backed by “investment grade” ESG data — can identify places where companies can make easy gains or where they are investing in projects that aren’t yielding adequate results. Compliance, then, could make companies more profitable.
As the Securities and Exchange Commission closes in on new rules governing how companies report their ESG outcomes, hundreds of billions of dollars of company investments ride on whether companies learn how to make ESG compliance an asset rather than an obligation. C-suites should see this as an opportunity.
Right now, companies are flying blind. They lack ways to compare apples to apples and to understand when they are getting a desirable ESG outcome from the dollars they invest in developing and implementing ostensibly sustainable corporate policies, practices and strategies. Inadequate or substandard data does not suffice.
This dynamic is true across the spectrum, from quantifying the carbon emissions reduction per dollar invested in a corporate decarbonization plan to measuring the improvements in lost time injury rates attributable to dollars invested in the company’s environmental, health and safety policy.
ESG compliance, then, could demand companies collect, collate and use data to make better investments and, ultimately, greater profits. Using compliance processes to drive business improvements will require the collection and analysis of investment-grade data (complete, reliable and verifiable) for measuring the success of ESG initiatives.
A results-oriented approach to regulatory compliance will force companies to be rigorous about the types and amounts of data they collect, how they package it and, critically, what they learn from it.
Take the case of the Taiwan Semiconductor Manufacturing Co., where the water management component of its ESG strategy, developed in tandem with a weather-related financial risk assessment, is credited with helping to steel the company against drought-induced water shortages within the last 18 months, according to the Wall Street Journal.
Micron, a U.S.-based semiconductor manufacturer, is another clear example. It is engaged in ongoing, transparent efforts to reduce operational energy intensity, water consumption and waste against a 2018 benchmark — and is already being rewarded in the market. In the last year alone, the company was added to the Dow Jones Sustainability North America Index and was ranked in the top 10% of the semiconductor industry by ESG rating agency Sustainalytics. Notably, Micron’s verifiable success facilitated the closing of nearly $3.7 billion in sustainability-linked loans earlier this year, putting it among the top five sustainable credit facility issuers in the U.S., per a press release.
Better data empowers a better case for more investment, too. Take Avangrid, Inc. It was able to join the S&P 500's Global Clean Energy Index, even as "renewable" giants such as NextEra Energy were dropped from the same list. Why? It could point to concrete gains in the ESG+F efforts, like a 30% reduction in carbon intensity from owned generation in 2020 versus 2019. The company also met strong demand for its $625 million green bond issuance, allowing it to expand.
Investment-grade data, then, should drive a host of positive business outcomes: leaner operations, qualifying for more carbon-reduction incentives, more investment, greater workplace safety, more productive employees, fewer lawsuits and a shared sense of mission across a company’s stakeholders.
The dynamic should only accelerate. As the price of carbon skyrockets in Europe and regulators clamp down on “greenwashing,” the demand for companies to squeeze every last bit of carbon emissions out of their operations will intensify. That is impossible without companies understanding where and how their operations emit carbon. And with Bloomberg Intelligence forecasting ESG assets to grow to $53 trillion by 2025, and EY finding that 91% of institutional investors consider firms’ nonfinancial performance an essential criterion, companies will need to “show their work” on ESG initiatives to get the investment capital they need.
Regardless of the use of a cloud-supported data collection and analytics platform to aid ESG compliance, the fundamentals of this process remain the same. Broadly, this begins with company leadership determining the “materiality” of ESG factors on financial performance. From here, ideally, a dedicated team that combines nonfinancial and financial reporting competencies can determine what gets measured, establish necessary benchmarks and execute measurement. Lastly, subsequent reporting processes should satisfy the ESG criteria of priority investors and be presented in a manner that aligns with overlaps between voluntary disclosure frameworks, thus guaranteeing accessibility and usability by multiple stakeholders.
A free-market economist might argue that if companies could stand to make greater profits, they’d collect this data of their own volition. Yet that is not the dynamic we have seen in the relatively young ESG marketplace. Rather, it has only been as the EU, U.K. and various stock exchanges have started demanding investment-grade ESG data that companies have put data collection systems in place — and, in the process, found low-hanging fruit where they could squeeze extra emissions savings and profits.
The new era of ESG compliance should be a breath of fresh air for companies. This sort of compliance need not, indeed should not, be a headache. Rather, the companies that thrive in this new dynamic will be the ones that view ESG compliance as a forcing function to do what is best for their own investments and their own bottom line.
There is an opportunity to grab for those that can see it.
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