“It’s no longer optional to know what’s going on in your supply chain. It’s no longer optional to evaluate the impact and risk of your company. Welcome to a new world, where sustainability is becoming mainstream.”
That’s according to Frida Emilsson, the co-founder and chief operating officer of Worldfavor, a sustainability platform looking to make it easier for companies to access and share ESG credentials.
The Swedish business began its days in 2011 with a vision to create an app that would give consumers a real-time insight into the impact of each purchase they made.
But it soon faced hurdles. “The demand was really there from the consumers,” Emilsson said at the National Sustainability Congress, which took place earlier this month in Hilversum, the Netherlands. “But we couldn’t find a single company that could provide us with the information to make this idea come true.”
But fast forward to 2021 and things have changed. Gone are the days when revenue and profit were the only barometers for measuring a company’s success. The conversation around sustainability is more urgent than ever, giving ESG credentials ever-growing importance for businesses.
So what drove that shift from sustainability being a nice commodity, to being something that, as Emilsson puts it, is “100 percent business-critical”?
Climate change shifts shopping habits
One of the driving forces is consumer demand. Shoppers are no longer selecting products just based on their look, price and quality. The climate emergency has pushed them to demand to know the environmental and social impact of their purchases.
According to a report by NielsenIq, 81 percent of consumers feel organisations should be working to improve the environment, while 94 are more likely to be loyal to a brand that is completely transparent.
And investors in turn are pivoting towards sustainable options in response to growing consumer interest in more environmentally friendly products.
According to a 2021 report by Worldfavor, 63 percent of private equity companies globally are tracking their portfolio companies’ sustainability as a way to increase their return on investments.
And it’s not only consumer demand causing investors to take notice. An increase in regulations and legislation are pushing sustainability to the front of their criteria.
Coming into force this year, for example, is the first stage of the EU’s Sustainable Finance Action Plan (SFAP), a major policy objective, backed by a broad set of regulations, that aims to promote sustainable investment across the 27-nation bloc.
A key part of the plan is the EU taxonomy, a classification system for sustainable economic activities, which looks to clearly define what classifies as being ‘green’.
“The development of the EU taxonomy is forcing us to really connect sustainability and financial reporting for the first time,” Emilsson said.
And regulations like this are only going to increase in the coming years, resulting in ESG data being just as important as financial information going forward, according to Emilsson.
Standardisation is key
But there are still hurdles to overcome. While companies now know it’s vital to measure their ESG data, how to go about that can be tricky when the landscape is filled with various frameworks and standards.
“This is, of course, a natural reaction in a space that is quite immature and where change is happening so fast,” Emilsson said. “But it is time to move away from that Wild West era of ESG reporting, and there is one easy solution for that - standardization.”
And she believes we’re already headed in that direction. For example, in 2020, the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI) announced a coalition to make ESG reporting more standardised and comparable.
Another major challenge is the data gap. “There is a huge gap between demand for information and supply,” Emilsson said. “There is no good way of retrieving ESG data at scale. And this is especially the case for private companies and SMEs.”
A Worldfavor poll found that 58 percent of private equity companies have difficulty obtaining ESG data from their portfolio.
More regulatory pressure
So what does the future hold? We should expect increased amounts of regulations and legislation as the EU continues to raise the bar for sustainable financing, according to Emilsson.
This will force the data gap to narrow, and there will be fewer frameworks, meaning the increasingly accessible data will also be shared in a more standardised way. “That’s key to solving this challenge and solving sustainable development,” she said.
Emilsson also believes there will be more ESG reporting on human rights across the supply chain as increased pressure is put on suppliers, subsidiaries, distributors, and other partners to disclose their practices.
So what can companies do to stay successful in a fast-changing environment? Emilsson says they must embrace the change. “You get what you measure. So the ability to measure relevant ESG performance and KPIs are really essential to improve,” she said.
A common pitiful she sees among companies is that they focus just on one pillar of ESG, such as the environment. Instead, she said it’s “important to focus on everything - that is really essential to create change and to be credible among stakeholders”.
And finally, organisations must embrace standardisation. “Aligning yourself with well-established sustainability frameworks is really going to take it to the next step,” Emilsson concluded.