The business community is being called to account more than ever before. Success is no longer judged exclusively on the basis of the bottom line. The beneficial effects for people and the environment also play a role. In their sustainability reporting, companies make use of Environmental Social Governance (ESG) metrics. Jan Bouwens, Professor of Accounting at the Amsterdam Business School, explains what is needed to achieve reliable measurements of ESG metrics. He also talks about the launch of a scientific journal called Accountability in a Sustainable World Quarterly.
More and more customers and consumers want companies to take responsibility when it comes to social challenges and environmental issues. This requires companies to maintain appropriate reporting standards. ESG metrics enable them to report non-financial business information and performance in a transparent and unambiguous way. Uniform standards make it immediately clear what a business contributes when it comes to the environment (E), social structure (S) and governance (G). Bouwens says: ’Various market parties, such as semi-autonomous public bodies as well as the International Accounting Standards Board (IASB) are looking at how they can design such standards. What exactly does a rate of emission mean? How can you show you are socially responsible? And how do you demonstrate there is no child labour in your business chains?’ Such metrics should be developed in more detail in the coming years.
Together with 3 colleagues, Bouwens set up the interdisciplinary journal Accountability in a Sustainable World Quarterly. So what is its objective? The journal aims to initiate a dialogue so scientists can transfer their knowledge to practitioners and vice versa. The founders hope that by exchanging ideas, academics will be able to formulate meaningful research questions.
The first issue is due to appear in November 2022. The journal is a collection of peer-reviewed research and editorials by leading academics and practitioners. Every article is expected to address the problems companies are currently grappling with. ’Examples include the reporting of social metrics. How can this be done? If a company wants to invest in sustainable means of production, how can they be sure they will achieve their goal? It’s an environmental objective that might take 20 years and evolves over time. Building certainty is something both companies and scientists are struggling with. And that’s exactly where you want them to swap ideas.’
Danger of greenwashing
Bouwens observes that 2 questions play a key role in the development of norms and standards. ’First, how can companies produce proper reports that give investors and other stakeholders an accurate picture of their performance? And second, how do you know if the reported performance is in line with actual performance?’ When company reports claim successful outcomes without justification, we call that greenwashing. In other words, outcomes were promised but did not materialise. This can arise due to a decision to report metrics showing good performance and leave out areas showing sub-par performance. ‘Companies can also manipulate the various metrics. They might then claim that the business is sustainable even though they did not actually achieve their social or sustainability goals. That’s why you need an external auditor to verify that what the organisation says is indeed correct,’ the economist explains.
How can you prevent greenwashing? ’When a company states it has saved 100 tonnes in CO2, should they be able to substantiate that? You can, of course, put on paper how you should report it, but there should be someone who can verify the accuracy of the claim.’ In the end, measuring ESG metrics is nothing other than an audit of the figures. ’But which figures should you choose and how do you define them? As a business, you need to determine whether what you say in your reporting standards and how these standards are applied is accurate,’ Bouwens points out. ’It’s one of the challenges we’re now embarking on: who will ultimately check whether the ESG metrics used are the right ones? Will it be the same auditor or someone else?’
Achieving climate goals
Bouwens acknowledges that, in practice, many companies are finding it extremely difficult to satisfy the climate goals set out in the UN-sponsored Paris climate agreement. The same is true fortranslating these goals to the workplace. ‘Companies are under pressure to meet climate goals. And they also need to find ways to report about these goals and develop processes to ensure emissions are calculated accurately. It’s not as if they can simply put a meter on the smokestack. But companies can appoint a specialist ‒ a physicist or chemist ‒ who can pass judgement on such things. This would then have to be verified by an external auditor. This individual would have to establish whether the process was executed properly and whether this led to the reported outcomes.’
Bouwens believes that working towards a uniform set of ESG metrics will enable companies to make a difference where it matters. ‘We’re on the right track but we have a long way to go. We hope the journal will build and reinforce the ties between academia and the outside world so we can foster knowledge and understanding in the domain of ESG.’