Are you delivering your ESG agenda or at risk of Greenwashing?

If you had attended a Digital Transformation in Insurance event with me in London last month, I wonder what would have been more of a surprise, the amount of ESG sessions that were on the agenda or the novelty of attending an in-person event and having to shake hands for the first time in years. While our advisory practice has been tracking this theme for some time (sustainability not handshakes) there was a real sense that ESG is starting to be perceived by management as both an opportunity and a real risk their business.

While it is positive to see that sustainability has become firmly embedded in organisations strategies the question from one Chief Risk Officer (CRO) highlights the challenge of the moment, ‘How do I know I can trust the data behind our dashboards and if we aren’t delivering does that mean we are Greenwashing?’. We expect this question to become more and more common, and thought it would be beneficial to address it here – starting by breaking it into two parts:

1. How do I know if we can trust the data behind our dashboard?

For most firms, this is complex and is best approached by data set. Given the breadth of data fields relevant to ESG agendas (if you are following the UN Social Development Goals you can be well into the hundreds) the problem as with all dashboards is a question of the data fields themselves. For ESG purposes these can be categorised as follows:

Internal: This is data that originates inside your organisation, that you can trace to source and are able to manipulate and where possible modify collection to address quality issues. A good example in ESG is found in Social data fields such as gender diversity, disparity in pay or benefits, social mobility measures & community activity.

From a ‘trust’ point of view these data fields are usually more impacted by presentation, they typically come from various HCM (Human Capital Management) areas that lack a unified front end and manipulation and presentation capability. While not always obvious some data is subject to Unconscious bias, which must be accounted for e.g. employees who prefer not to disclose certain information.

Level of Trust: Medium – High

External: Perhaps the most common, as least by volume, area of data that companies need to use for reporting, service design and planning purposes. The most obvious type of external data is in the E of ESG and emissions reporting. As an example, when reporting facility operations and emissions impact data is provided by utility & energy suppliers.

While some calculations require combination with an internal data set, for example business travel to produce CO2e, businesses must trust that data provided to them is accurate and relevant collection and quality controls are in place. The key difference with this category and Partner / Network & Customer is that your organisation is the data generating entity.

Level of Trust: Medium

Partner / Customer / Network: The broadest are most difficult area to profile and where the largest area of risk and quality concern exists. One of the most common examples of concern in this area can be found in the carbon offset market. A key means for companies to achieve net zero is to use carbon offset projects. While the input data (that external emission data mentioned above) is seen as reliable the ability to measure the net effective of many offset programme’s is at best limited and in other cases deeply flawed (Fortune).

An even sharper example, and one with a direct financial impact, can be seen in Tesla’s removal from the S7P 500 ESG index. Failings were found in Social & Governance measures that are contributed to by customers & partner network. The extra issue here is obvious, organisations have limited ability to access to or review source data despite the potentially damaging impact conclusion from such data may have.

Level of Trust: Low – Medium

Where possible our experience is that a less is more approach is the best place to start with regards to reporting. Having fewer data fields that are of higher quality makes both analysis more meaningful and reduces reporting risks. Equally important, it becomes easier to test underlying data quality and remedy where problems are identified.

2. What is ‘Greenwashing’ and why it is a Risk?

Greenwashing is not a new concept. It is defined simply as a scenario through which a company spends more time and effort advertising itself as sustainable relative to its action to minimize environment and social impact. The definition has not changed but the consequences of being identified as undertaking such activity is increasing substantially.

In the last few weeks alone the very real threats (and consequences) of Greenwashing are not hard to spot; 12 large UK companies signed up to a 24/7 tracking platform (Bloomberg), a Tier 1 UK financial services firm had to suspend a senior executive for comments contrary to the groups sustainability strategy (Independent) and Germany’s largest lender was raided by police after an accusation of fraudulent advertising (Fortune).

What is relevant in seeking to answer our CRO’s question here is the range of risks that these headlines highlight. These can be defined as:

The data problem: The lack of it and the ability of the firms to demonstrate validity under regulatory scrutiny.

The strategy problem: In many cases organisations do not have a single Head of Sustainability or ESG lead. While this is not always essential the consequence is that ‘strategy’ is less a single cohesive approach and a collection of fragmented initiatives. Progress is possible but lacks executive alignment and sponsorship.

The new offering problem: There is little doubt ESG is a growth area (McKinsey). The problem is with what happens when new opportunity areas come into content with flawed reporting and underlying data quality. New offerings are hamstrung by legitimacy or once live fail to withstand scrutiny.

These are but a few examples, but they demonstrate the very real risks companies’ face in the near future. Our advice? Make sure you are very confident in your ESG capability and conduct a strategic risk assessment if you find yourself wanting. Until then avoid overstating your progress too publicly.

Where does Kainos come in?

Kainos is first, and foremost, a technology company and one which is heavily invested in our own ESG responsibilities. We are proud to have achieved Carbon Neutrality in 2021 and started to expand ways he can help customers with their own ESG objectives. Focusing on tactical & tangible ways to make progress we can help with:

• Materially reducing carbon emission from your cloud estate: Using a newly developed Cloud Carbon Reduction calculator we are helping reduce their emission footprint by up to 92%
• Data quality testing & dashboard design: Our analytics and AI team are helping customers to test and vet new market offerings, provide guidance on pitfalls in aggregate reporting (Why Kainos is hiring a Data Ethicist, Medium)
• Using Workday to drive the S in ESG: Not everything in ESG needs new products & services. We are helping customers use existing Workday capabilities to help screen job listing for gender bias, identify organisational trends & areas for improvement in mobility and discrimination.

In conclusion, ESG presents both a great opportunity for businesses to differentiate themselves (with the added benefit of saving the planet) but also a higher risk area that was just a year ago.