Investors want best-of-the-best ESG data. Here’s how to give it to them

One of the main criticisms leveled against ESG investing is that the movement is all talk, no action. The main reason for this is that there simply aren’t enough entrepreneurs providing adequately ESG-aligned investing opportunities. In fact, a third of VCs face difficulties with identifying suitable ESG investment opportunities, even though 97% of them find it important in making investment decisions, driven by the lack of adequate ESG disclosures and excessive costs for gathering and analyzing ESG information.

At the same time, ESG-focused assets under management are projected to increase from $18.4 trillion to $33.9 trillion in the coming years. Whether these figures become reality is increasingly up to entrepreneurs who need to get serious about delivering high-quality ESG data, fast.

There simply aren’t enough entrepreneurs providing adequately ESG-aligned investing opportunities.

Choose the right disclosure framework

Investors have lower levels of confidence in companies that do not collect investment-grade data (shorthand for data that meets high standards of timeliness, accuracy, completeness and auditability), and the majority of investors see unstandardized and poor quality data as their biggest barrier.

Regardless of your market and industry, the best way to get started with delivering investors with high-quality data is to embrace preexisting reporting and disclosure frameworks as early on as possible. There are many frameworks to choose from, including Sustainability Accounting Standards Board (SASB), Global Reporting Initiative (GRI), Task Force on Climate-related Financial Disclosures (TCFD), CDP (originally known as the Carbon Disclosure Project) and United Nations Global Compact (UNGC). Although founders may need to carefully consider which framework to prioritize in the beginning, most of the frameworks are complementary in nature and mature firms tend to lean on several of them in their reporting.

For example, the GRI framework examines a company’s influence on the broader economy, environment and society to identify material concerns, while SASB is more tuned to serve the interests of investors who are interested in ESG data that could significantly affect the financial performance of firms in their portfolio. In short, GRI is an ‘inside-out’ framework that examines the company’s impact on the world, while SASB is an ‘outside-in’ framework that looks at the effects of the climate on the company and the risks it faces.

What ends up working best for any given company at any particular time will be down to a number of unique factors, and effective prioritization is key.

When eyeing an IPO, make aligning with TCFD your first priority

The Securities and Exchange Commission (SEC) introduced a proposed set of rules concerning mandatory climate disclosures last year. Under the proposed rules, firms who file with the SEC need to disclose a number of data points, including whether climate-related events are likely to push the needle on any of the accounts in its financial statements and what governance structures are in place to mitigate against climate risks. The disclosures envisioned in SEC’s proposal are largely in line with those of the TCFD and Greenhouse Gas Protocol, and if you are gearing up for an IPO, you would do well by ensuring that your ESG data is aligned with these frameworks as a matter of priority.

Adopting the TCFD framework entails applying the task force’s recommendations that fall under the four core categories of governance, strategy, risk management, and metrics and targets. How these recommendations are implemented in practice is down to each firm. However, there are seven core principles — ranging from relevance to consistency and timeliness — as well as best practices, including climate scenario analysis, that are applicable to all companies.

In terms of tangible data, TCFD-compliant firms are expected to disclose information on Scope 1 (direct emissions), Scope 2 (indirect emissions from e.g., energy purchases) and Scope 3 (other upstream and downstream emissions) GHG footprints, as well as a wide range of climate risk-management processes, metrics and targets.

Uber’s latest ESG report is a good example of how the TCFD recommendations are applied in practice. Over several sections dedicated to climate risks, the firm discloses a number of different data points, ranging from reporting that 99% of its GHG emissions are Scope 3 (13,072,774 tCO2, to be exact) to noting that 9% of the total miles driven by its drivers in London created zero emissions. Uber’s ESG report also includes a detailed climate risk scenario analysis, wherein the firm discloses that it may face acute physical impacts from climate events such as flooding.

While VCs certainly don’t expect startups to match the breadth and scope of Uber’s report, it does set an excellent benchmark, specifically for founders who might soon find themselves filing with the SEC.

Start by setting science-based targets

Regardless of the disclosure framework a firm ends up aligning with, setting up emission reduction targets that are specific, measurable and time bound are no-regrets activities. In fact, even if you decide to forego aligning with any framework at all, you will find that investors are increasingly keen to see tangible data on your firm’s interplay with climate and the environment.

The best way to get started is to set concrete and data-backed targets in line with the Science Based Targets initiative (SBTi). SBTi provides a clear framework for establishing a wide range of emission reduction commitments, such as setting Scope 3 reduction targets or more ambitious goals to go fully Net Zero.

The concrete measures a firm will take to set a science-based target will differ based on its ambition and industry. SBTi has laid out numerous resources, such as a handy How To Guide and an FAQ for small- and medium-sized enterprises that you can use to get started.

Moving ahead with science-based targets is a wonderful default position to take because they can be effectively leveraged under any reporting framework, and we’re already seeing guidance emerge on how to leverage them under complementary frameworks such as TCFD.

It’s always the right time to invest in good governance

ESG investing is not all about the environment, and governance is a topic that is too often ignored by entrepreneurs. Recent research has shown that the portfolio make-up of institutional investors in particular are strongly driven by the governance dimension, making the G in ESG a no-brainer to focus on.

Although there are no science-based target frameworks to help establish measurable governance targets, founders and board members can avail themselves of decades of literature on what constitutes good governance and what are the right governance indexes to focus on. Using Uber’s latest ESG report as an example again, best practices include reporting on board diversity and oversight, gender diversity across the entire staff, and tangible actions leadership has taken with regards to climate change.

In the end, what most investors want to see are founders that attract well-rounded teams that are committed to creating value and to ensure that you capitalize on the rise of ESG investing, all you need to do is make sure that your concept of value goes beyond simple profits.