By: R Mukund, Founder & CEO of Benchmark Digital Partners LLC
Today’s emergence of enterprise carbon accounting solutions onto the corporate sustainability scene couldn’t be more welcome. Indeed, Boston Consulting Group reckons more than 90% of firms aren’t measuring their emissions correctly. And research suggests that, while 75% of corporate boards consider management of climate-related risks to be critical to strategic success, 47% of companies have yet to integrate them into their legacy financial risk management processes, stemming in part from a pervasive lack of necessary know-how among corporate leadership.
Companies must address this issue. It’s a daunting challenge, but not as bad as it may seem at first. Companies need not “stack” a climate accounting system on top of their existing employee safety, risk mitigation and other accounting technologies. The right systems, teamed with robust internal buy-in and data analytics, can cover all three legs of the environmental, social and governance (ESG) stool. Such an approach is far better than accounting for each of the ESG components piecemeal, or, worse yet, only capturing carbon data. A one-legged stool, after all, will fall over.
To be clear, capturing emissions data is still absolutely critical. Such data can empower listed and unlisted companies alike to better field the demands of their stakeholders, particularly the investors whose patience for unabated carbon emissions, perhaps companies’ greatest financial liability, wears thinner by the day.
Yet, while they are an advantageous resource, technologies that enable companies to identify, measure, monitor and report their emissions are just a component of a true sustainability strategy. Organizations seeking to burnish their ESG credentials should use their emissions data to inform their emissions abatement efforts and their management of other financially-relevant ESG issues—across all three pillars.
A comprehensive accounting system, as opposed to one that is purely emissions-based, will help organizations balance priorities and provide a comprehensive picture of how they are living up to their ESG commitments. The first step in upstarting such a system, then, is understanding and accommodating the expectations of your priority stakeholders. This process will not only help organizations figure which emissions to track and how to disclose the information to distinct audiences, but it will also help them factor their stakeholders’ broader ESG priorities into the cost-benefit analyses of potential emissions abatement measures.
Take, for example, the CFO of a commercial real estate firm, whose portfolio-wide carbon accounting finds a handful of properties emitting far more carbon than they should. If our CFO determines that installing either a rooftop solar panel array or building energy management system (BEMS) in these properties entails comparable lifecycle costs and promises comparable emissions reductions, then the selection of the measure will likely come down to its anticipated effects on the firm’s full ESG performance profile.
Different internal and external stakeholders, however, may have their own ideas on what our CFO’s ESG priorities should be. For example, they may apply different values to the company’s performance on the social pillar of ESG, complicating how the CFO uses her budget.
How do the solar array and BEMS compare in terms of risk of personal injury to the facility management personnel tasked with operating and maintaining them? And how do these measures compare in terms of anticipated tenant experience outcomes? External stakeholders, such as investors, and internal stakeholders, such as employees, will likely have different opinions on the answers to these sorts of questions.
No CFO can balance these competing priorities if they can only account for one facet.
Comprehensive, cloud-based accounting systems solve that issue. These solutions help users steamline the manual, spreadsheet-driven workflows employed by distinct business units when reporting on the ESG metrics that leadership (and their stakeholders) deem financially relevant. Further, these platforms automate the traceable collection of sustainability KPIs, including operational emissions, and translate them into useful financial terms. As a result, ESG platforms help users to integrate their carbon accounting with broader ESG performance measurement and management while minimizing the risks of delay, human error and data misrepresentation.
The result? Investment-grade ESG data.
ESG platforms also help users estimate and verify the impacts of emissions abatement efforts on financial and ESG performance. Returning to our commercial real estate CFO, the data analytics capabilities at her disposal with an ESG platform can help her to evaluate the social impacts of the rooftop solar array and BEMS and present those findings to her stakeholders. Once the ESG program matures and stakeholder priorities are “priced-in,” our CFO will be better able to navigate future capital allocation decisions and, ultimately, continuously monitor whether her firm’s ESG performance satisfies the expectations of her stakeholders.
Further, there is one major drawback to an emissions-only accounting system: it eliminates the accounting for the other ESG pillars. While they might not be in the news as much as climate change, issues like employee safety and local environmental impact are still critical. They should not be cast aside.
Accordingly, CFOs and corporate leadership generally would do well to take note of how a total ESG accounting system helps them comply with ESG standards or helps them to identify where the company may run afoul of environmental regulation or expose itself to expensive workplace accidents.
Moreover, comprehensive accounting systems can be leveraged to secure internal buy-in for their ESG program and eventually cultivate an “ESG culture.” Similar to how cloud-based accounting platforms can help users see the social impacts of emissions management measures, they can also pinpoint correlations between, for instance, human capital management, community relations or environmental stewardship efforts and the organization’s emissions profile.
Climate change is, as the UN put it, the defining challenge of our generation. Yet it is not the only challenge. Accordingly, internal and external company stakeholders should demand climate data, but they demand far more, too. Organization CFOs must be ready to speak about all of the ESG pillars.
Doing so is not as hard as they imagine. And it is worth it in the end.
About the author:
R Mukund is Founder & CEO of Benchmark Digital Partners LLC (renamed from Gensuite LLC on 1-Jan-2021) and a proven organizational leader with nearly 30 years of experience in progressive roles as a technical professional, team leader, Six Sigma Master Black Belt, executive program manager, and most recently, chief executive officer since 2010. He has a track record of distinction in diverse organizations from research & technology, consulting, corporate diversified & global, and cloud-based, tech-enabled services.