If you are a social enterprise or non-profit organization, your asset managers have worked hard to incorporate environmental, social, and governance (ESG) practices in recent years. An ESG survey provides a top-down view of the human and environmental impact of business practices. Though helpful, it doesn’t dig deep enough. For sustainability goals, we must also address the barriers that stakeholders face. Here is why ESG surveys miss the mark, and what we can do to get the full picture.
- ESG surveys
- How ESG surveys fall short
- Impact measurement of supply chain partners
- A real-world example
- Corporate support
Environmental, social. and corporate governance(ESG) is a great way for companies to demonstrate the alignment of business practices and corporate values.
Environmental, social, and corporate governance (ESG) is a way to demonstrate the alignment of business practices and corporate values. ESG is big business. According to the OECD, the level of ESG investment in 2020 was over $11 trillion USD in the US and $17 trillion USD in Europe.
Companies evaluate investments on ESG criteria. An ESG survey is used to gather evidence and track progress:
- Environmental - natural resource use, carbon emissions, pollution, energy efficiency
- Social - workforce, human rights, diversity
- Governance - board diversity, board independence, shareholder rights
How ESG surveys fall short?
ESG data gathering provides a surface-level understanding of how a business runs. It is also susceptible to “greenwashing”. MIT’s Richard Dahl defines greenwashing as “the practice of making unwarranted or overblown claims of sustainability and environmental friendliness to gain market share”.
Imagine a company is looking for a sustainable supplier. The ESG survey questions to the supplier could include:
- What are your carbon emissions?
- How many women do you employ?
- How many people of color (POC) are on your board?
The ESG survey responses capture information for reporting purposes only. The data fails to provide a deeper understanding or remove barriers that prevent a sustainable supply chain in the first place.
Impact measurement of supply chain partners
The most effective way for businesses to ensure sustainability is by including impact measurement and management (IMM). Building a sustainable supply chain requires stakeholder input. For social enterprises and nonprofits, who are quite far down the supply chain, IMM incorporates those stakeholders.
By identifying the effects that a business has on people and the environment, IMM goes beyond the ESG survey and seeks to minimize the negative and maximize positive effects. This kind of evaluation is about learning, rather than simply reporting.
With a robust IMM, social enterprises can address the causes of environmental and social problems. Let’s look at an example.
A real-world example
You are a large hotel chain. To achieve your ESG goals, you find a new, more sustainable supplier of fish for your hotel restaurants. It’s a social enterprise that focuses on improving ocean sustainability and providing consistent wage growth to low-income fishers. The social enterprise provides a mobile application that allows fishers to track their catch, find local restaurants and hotel buyers, get better prices, and track their income.
You require social impact evidence that your supplier (and you, consequently) is meeting goals.
The wrong way
To assess this evidence, you choose standard ESG criteria and conduct an ESG survey. You ask your new supply chain partner questions such as:
- What are the carbon emissions of the fishing boats?
- How many women fishers are there?
- What is the governing structure of the fishing community?
This information doesn’t help us learn why sustainable fishing isn’t happening in the first place. The stakeholders are experiencing barriers to sustainable fishing practices, and this ESG survey can’t offer information about why.
The right way
Instead, the social enterprise working with the fishers needs a robust IMM. The social enterprise needs to:
- Understand and develop a theory of change
- Regularly collect data directly from the fishers
- Unify data from multiple other systems
- Clearly visualize the data in dashboards
The fishers’ voices in this process are critical to understanding the challenges they face. IMM would allow the social enterprise to course-correct and tackle sustainability challenges directly. In this way, the learning in the IMM process can lead to real data reporting. If the impact evidence shows fishers are using sustainable methods while getting a better price for their fish, this is the true ESG contribution for the hotel chain.
Robust IMM can be complex for an SE or non-profit to handle alone. There are roadblocks like cost, technology, and specific expertise. They need help. Corporations, like social enterprise accelerators, can provide the resources necessary to support their supply chain partners. With effective impact measurement and a sustainable supply chain, companies meet their ESG goals while driving long-term value.
More than ESG
The market increasingly demands that companies align business practices with their stated values. Sustainable supply chains and ESG standards are a great place to start, but not the whole story. To drive real impact, corporations need to advocate for and provide IMM to their social enterprise partners.