From Awareness to Adoption

Over the course of these three weeks, I began to look at sustainability reporting and ESG integration in a new light. My team analyzes current investor practices and stewardship efforts and provides our clients with suggestions on how to incentivize them better to incorporate nature into their financial disclosures to generate a positive impact on the environment. After our initial group meeting and two client meetings, we were able to nail down the scope and organize the necessary materials for the next step of our research. 

The most crucial thing that has been brought to my attention is that the real question here is not only how we could help the companies to bridge the gap between knowing the disclosure framework and knowing how to act on it, but also how we get those companies and investors on board to include nature as part of their decision-making process in the first place. Before I was exposed to the project, I always assumed that companies and investors had the incentive to integrate nature and sustainability for the sake of long-term environmentally friendly development. However, this is not the case since adopting a biodiversity and nature-related reporting framework into the decision-making process is not without cost. 

The process of ESG disclosure involves a series of operational costs from data collection to internal dataset building to optimizing the current stewardship and portfolio practice. The process not only requires extra financial input but also a huge amount of time to be spent on building an internal database and training teams to be familiar with these metrics. When faced with more pressing matters like KPI and immediate financial performance, especially when regulations are not in place, it becomes hard for the decision-makers to prioritize long-term ecological considerations. 

Another observation I have made is that for the companies that have already taken action, most of them are at the stewardship stage, and there are a few that have already gone on to the portfolio stage. My initial interpretation for this is that stewardship could be easily incorporated because it has more to do with engagement and voting instead of altering the entire capital allocation at the portfolio level. 

This variation may not only reflect different stages of market maturity but also different roles and mandates. So our next step is to differentiate between asset owners and asset managers in adopting the framework, and to try to answer why these discrepancies appear. Ultimately, it’s not just about how we could inform companies and investors to incorporate a sustainability framework, but how we could encourage them to adopt it. The start of this project has introduced me to different angles of ESG disclosure, and as we move along with our research, I hope to have a more nuanced understanding of how we utilize the nature-related reporting framework to generate a measurable impact.