Measuring ESG performance requires better data across the value chain

February 16, 2021 Tradeshift Editorial Team

Large organizations are coming under increasing pressure to provide more robust evidence that their ESG commitments are reflected throughout their extended supply chains. The pandemic has also revealed that many organizations are ‘flying blind’  in terms of the make-up of the increasingly complex global supplier networks they rely on. As part of our Q4 Index of Global Trade Health, we spoke to Saverio Lapini, Marketing Director at Normative.io, to understand more about how accounting data can help to bridge this gap. 

 

We’ve been talking about ESG reporting for years. What evidence are you seeing that sustainability is becoming a more strategic priority for businesses? 

 

You can see that ESG is rising from at least two different viewpoints. If you look at asset owners, like pension funds and sovereign funds, over 70% of them now have ESG policies in place. This was just not the case 5 years ago. Since asset owners and investment managers have ESG policies in place, also the companies they invest in will have to respect their ESG criteria and report on their ESG performance. This factor alone is scaling ESG reporting faster than ever. But companies are doing a lot even without the pressure of their investors. We see a new stream of sustainable finance that is attracting a lot of capital to finance sustainable companies. 5 years ago, green bonds looked like futuristic inventions. Now they are a must-have in the financial toolbox, and more innovative forms of sustainable finance hold a great potential too, like sustainable bonds and sustainability-linked loans. 

 

There’s still a lot of debate over standards relating to how businesses report ESG. How much of an issue is that, and how close are we to agreeing on a common set of standards? 

 

The lack of a common standard is one of the major issues in ESG. In the EU, many problems will be solved by the EU taxonomy which will enter into force at the end of 2021, uniforming the reporting requirements across the Union. In the international landscape, two of the major reporting frameworks, SASB and IIRC, recently joined forces to create a common reporting framework, and we think that many other frameworks will follow suit. It feels like we are getting close to the inflection point, where a handful of events could accelerate the development of the whole sector exponentially.

 

How do companies typically measure ESG performance today? How effective is that in providing an accurate picture of performance? 

 

Measuring your ESG performance in-house is very hard, only a handful of companies have the capacity to do so. And even those who do, only account for the emissions generated by their own operations, which are about 10% of their total footprint. Over 90% of companies’ environmental impact is generated in the value chain, and it’s really hard to get a hold of those emissions. Most companies use external expertise for their assessments, but because of the cost barrier, they still perform only the few calculations required to publish a decent sustainability report. They then take some easy actions to reduce emissions, like switching electricity providers or reducing business travel, but there’s so much more they could do.

 

Can you tell me a little bit about the work Normative is doing to help companies improve the way they measure sustainability? 

 

Today, many companies spend 80% of their time (or budget) calculating their impact, and 20% making efforts to become more sustainable. Normative flips that equation. Our software calculates companies’ emissions automatically in a tenth of the time, freeing up energies to focus on what matters: improving the environmental impact. We deliver insights on the main sources of companies’ emissions so they can focus on the highest-impact actions, because reducing business travel or switching electricity providers aren’t the only things you can do. Our calculations are based on science and companies can use them to reduce their impact and comply with any law or reporting framework in the world. It is interesting to see that our clients usually reach out to us because they want to publish a sustainability report, and they need good data for it to be credible. But after they realize that the bulk of their emissions come from a handful of activities, they can’t help but do something about it. That’s where we feel we are really making a difference.

 

According to the Sustainability Consortium, just 25% of large organisations have visibility of their supply chain beyond tier one. Why do so many organizations find it so hard to gain a deeper level of visibility into their supply chains? 

 

The main issue is probably collaboration, because gaining visibility in the supply chain is not something you can do on your own. To get good data on your supply chain, your suppliers must evaluate their environmental impact and share their data with you, which is by no means a simple task. With globalization, every company has suppliers that come from the other side of the world, speak a different language and are bred in a completely different culture. Even the basic communication tasks can sometimes be an issue. In addition to that, every supplier also has suppliers of its own, making the issue exponentially more complicated. Normative simplifies this whole process. We don’t ask companies to collect tons of data from their suppliers, because we know how hard it is. Our clients only provide us with their accounting data, e.g. the invoices of what they bought, and we automatically calculate the emissions connected to their purchase. This way they not only save time, but they also get the most comprehensive calculations they could possibly get, because everything they buy is recorded in the accounting system. Normative transforms simple accounting data into fully transparent environmental impact assessments of your entire supply chain. We put companies in control of their emissions and empower them to take climate action.

Read more about focus on sustainability, unlocking faster more predictable cash flow, and need for better access for diverse suppliers in Tradeshift’s Q4 Index of Global Trade Health

About the Author

Tradeshift connects buyers, suppliers, and all their processes in one global network. We help you transform the way you work with suppliers today – and adapt to whatever the future brings.

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