DEI Weighs High, But Shunted by Corporates?

Two recent developments caught the DEI world by storm.

1. Microsoft laid off its DEI team

2. John Deere rejected DEI policies

These are just two examples of large multinational firms that decided to put profits before people.

Sadly, the number of enterprises side-lining DEI teams, casually rejecting policies, and scrapping DEI teams is on the rise. The issue came to the limelight because two major organizations, each a giant in its industry segment, decided to lean on DEI.

Globally, similar reports by many organizations going slow on DEI are coming out.

Corporate reality:

Although consolidated data on the issue is yet to be established, the trend is contrary to DEI reports by leading market analysis and advisory companies.

Market analyst reports indicate that most corporates have a DEI strategy in place and that these organizations are faring better in the ESG Index.

For example, recent S&P 1500 data shows that firms with diverse leadership consistently earn higher environmental ratings from MSCI, an ESG data provider in the United States.

The scenario is not so different at home in India. Several conversations with leading CXOs and decision-makers in large corporates across industry verticals reveal that these enterprises lag in DEI.

This is not because they do not have the necessary strategy or policy in place, but because revenues, business, and investors take center stage. And the two events are not harmonious.

Cover-ups?

“It is more about corporate culture. We have started implementing DEI, but that is more towards women empowerment,” a leading CXO told me.

Another corporate consultant asked to survey a client’s employee satisfaction index for DEI was gently warned against asking probing questions. He framed the questions in such a manner that the responses were indexed on a scale of 1 to 10. Needlessly to say, there was no qualitative analysis or follow-ups. The company proudly presented its DEI report in the ESG and integrated components of the annual report.

The World Economic Forum’s Global Gender Gap score in 2023 stands at 68.4%, with India ranking 127 out of 146 countries in terms of gender parity.

These frank admissions coincide with the recent findings of the WriteCanvas-ASSOCHAM survey. The survey reveals that the social component of which DEI is a formidable part is most often subsumed with CSR, governance, and environment. Three aspects stand out:

· Corporates equate gender equality with DEI. Nonetheless, women’s representation at the board level was marginalized

· Corporates have all the necessary DEI policies covered under the Company’s Act and global mandates in place. The reality is that not many have adequate physical and digital infrastructure for persons with disabilities.

· Community development, equal access and opportunity, and child labor are gaining ground as part of CSR activities.

Are things turning around in India?

The Companies Act and SEBI mandate women’s representation on Indian boards, leading to remarkable growth in women’s participation on boards.

CareEdge advisory analyzed the top 1000 companies’ board composition from a diversity perspective, observing upticks in the top 150 listed companies and trends in big manufacturing organizations prioritizing inclusion of different genders and persons with disabilities, observes Swati Agrawal, President CareAnalytics.

However, there is no focused regulation or policy regarding Diversity, Equity, and Inclusion (DEI) in India. The focus must be on addressing gender gaps and gender equality, while sustainability reporting focuses on gender gaps and gender equality. The industry must offer employment opportunities and address the banking requirements for employees and customers.

The change can be brought about just in the manner in which the shareholders are forcing corporates to consider environmental concerns to fight climate change. They must closely monitor how corporates implement DEI and ensure that the organizations are not just tick-boxing against all the parameters!

My take:

I believe that DEI adoption in its entirety will take a while. India is at the cusp of implementing DEI. Globally, enterprises are at least taking a small step towards diversity, equity, and inclusion.

Many organizations have promptly begun back-to-work policies for women. This is certainly a positive step. The shift is happening in the corporate sector, and that is a start.

Moreover, business leaders, stakeholders, and shareholders should understand that DEI is not just about improving diversity, but embracing the host of benefits that come along with it.

But there is also a nagging fear. Are Microsoft, John Deere and the ilk setting a precedent? Providing impetus to organizations to exploit loopholes and circumvent the regulations?

One in five CFOs in large enterprises is prepared to meet upcoming requirements to report and seek external assurance on climate-related risks and opportunities.

An Accenture survey indicates that despite the majority of executives anticipating an increase in sustainability reporting requirements in the coming years, well-prepared executives are more likely to view sustainability as a potential opportunity for their companies.

The company has released the report during a period of increasing global sustainability regulations and legislation. These include EU’s CSRD regulation and CBAM, and the US SEC’s climate disclosure rules; measures to enhance market transparency, set carbon content-based import prices, and provide grants for sustainable activities.

Key findings:

According to the survey:

90% of respondents agreed that ESG issues will be a major focus for them over the next five years.
Nearly 85% of respondents said they expect mandatory disclosure to increase over the next three years.
Over 80% of respondents indicated that they are under pressure from three or more stakeholder groups to take sustainability-related action. The most frequently mentioned groups exerting pressure are shareholders, board members, and regulators.
Just 22% of CFOs reported feeling well prepared to disclose on climate-related risks and opportunities and to seek external assurance on their disclosures.
Additionally, only 10% of CFOs felt well prepared to meet these reporting requirements in all sustainability areas, such as resource use and circularity.

These results suggest that finance executives are feeling the pressure of the changing regulatory landscape. The findings suggest that even though finance executives are under increasing pressure to address sustainability issues, most do not yet feel ready to meet many of the new requirements.

Ratings per ESG measurement:

The study found a wide range of preparedness across the nine capabilities.

In this, it rated 12% of businesses as weak, 73% at a moderate level, with some having automated ESG data capture and most approaching the integration of ESG into their management systems, and 15% as having strong capabilities, including gathering comprehensive ESG data, automatically monitoring quality, utilizing ESG data to enhance business decision making, identifying potential ESG risks with predictive analytics, and developing complementary skills within their finance and sustainability teams.

According to the survey, 68% of the “weak” group’s companies reported finding it difficult to strike a balance between profitable growth and sustainability, compared to only 20% of the “strong” group. Additionally, “strong” companies were more than twice as likely (20%) to already view sustainability as a significant value driver for their organizations than the “weak” group (9%).

The study revealed a noteworthy association between businesses that perceive sustainability as a potential area for growth and opportunity and those that are well-prepared for ESG measurement and management.

How prepared are the Indian CFOs?

Indian Chief Financial Officers (CFOs) are the most optimistic in the APAC region, with 94% of them expressing confidence in their country’s economic future, according to the most recent Deloitte Asia Pacific (APAC) CFO Survey 2023 which was released in September last year.

Indian CFOs, also demonstrated an urgency when it came to putting in place suitable processes to comply with climate requirements. Approximately 59% of Indian CFOs plan to implement the required processes in the future, and 37% have already done so. Twenty-two percent of Indian CFOs were found to be adequately prepared to handle ESG challenges, according to the survey.

Using more sustainable materials (55 percent), encouraging or requiring suppliers and business partners to meet specific environmental sustainability criteria (53 percent), and adopting public policy positions that promote sustainability and actions to address climate change (65 percent) were the top three proactive sustainability initiatives by Indian CFOs.

Our take:

India is at the cusp of entering the ESG/sustainability mainstream. Global compliances and domestic mandates such as the BRSR Core are promoting the community to closely monitor the corporate ESG strategy, compliance and reporting. They are working closely with the BU Heads as well as the ESG teams and external partners to not just understand the new concepts, but also the ramification of non-compliance and the financial impact on the business!

The regulatory mandates in India have evolved to be more supportive and balance growth and sustainability.

EU member states have approved a directive delaying the adoption of sector-specific sustainability disclosure standards and sustainability reporting from non-EU companies under the Corporate Sustainability Reporting Directive (CSRD).

The EU Council and Parliament have agreed to delay the deadline for sector ESRS by two years, urging the Commission to publish and adopt sector reporting standards soon.

The new directive will postpone the adoption of the ESRS for non-EU companies to June 2026, and delay 2028 reporting obligations by two years to 2030.

The Council has officially approved a directive, extending the deadline for the adoption of sector-specific sustainability reporting standards for EU companies and general sustainability reporting standards for non-EU companies.

This modifies the Corporate Sustainability Reporting Directive (CSRD) for specific industries and third-country undertakings, allowing the affected companies additional time to implement the European Sustainability Reporting Standards (ESRS), the Council said in a press release.

The European Union’s CSRD, which began in 2024, requires companies to report on sustainability-related impacts, opportunities, and risks.

Forty percent of public companies are reporting scope-3 emissions.

According to a recent report by investment data and research provider MSCI, more and more public companies worldwide are disclosing about their greenhouse gas emissions footprints.

Almost 60% of them reported on Scope 1 and 2 emissions, which is an increase of 16 percentage points in the last two years. The number of companies reporting on at least some of their Scope 3 emissions has increased to 42% from 25% two years ago and roughly 35% last year. This indicates that the pace at which value chain emissions are being reported is growing even faster.

The MSCI report revealed that more businesses are establishing goals for reducing their emissions and that although the rate of goal-setting has slowed, the quality is rising, with a notable increase in decarbonization targets supported by science.

The report showed a stark discrepancy in disclosure between American and international corporations. For example, only 45% of American public companies reported on Scope 1 and 2 emissions, while 73% of companies in developed markets outside of the United States did the same. Similarly, only 29% of American public companies reported on Scope 3, whereas 54% of their counterparts in developed markets did the same.

Goal-setting:

According to the report, despite a slowdown in goal-setting, businesses are still setting climate targets. By the end of January 2024, 38% of companies had declared a net zero target and 52% of companies had disclosed an emissions reduction target, up 1% from the previous year. The quality of climate targets seems to be improving, even though the pace of target setting has slowed. As of 2020, only 1% of companies had set science-based targets aligned with 1.5°C, compared to 20% last year.

MSCI noted that although listed companies’ greenhouse gas emissions seem to have leveled off, they have not decreased despite advancements in disclosure and target setting. The study predicts that in 2024, the direct operational greenhouse gas emissions of the world’s listed companies, or Scope 1, will remain constant at 11.8 billion tons, or almost one-fifth of all greenhouse gas emissions worldwide. Listed companies are currently headed for a 3°C temperature increase this century, according to MSCI’s Implied Temperature Rise metric. Only 38% of companies are on a 2°C or lower pathway, with 11% aligned with 1.5°C.

According to the UN’s Intergovernmental Panel on Climate Change (IPCC), to prevent the worst effects of climate change, global emissions would need to peak by 2025 and then decline by 7% a year until 2030.

The advancement in emissions reporting is being complemented by the expansion of regulatory mandates for climate-related disclosures across various jurisdictions. The EU has introduced new disclosure requirements, while nations are adopting sustainability reporting systems based on IFRS International Sustainability Standards Board’s Scope 1, 2, and 3 reporting standards. The SEC requires reporting on larger companies’ operational emissions but has halted implementation due to legal challenges.

Fifty percent of large US firms dependent on spreadsheets to manage ESG data are ramping up their ESG data and reporting capabilities.

A professional services firm KPMG US survey reveals that most large companies feel confident that they are ahead of the curve in managing ESG data.

KPMG US polled 550 board members, executives, and managers at public and private businesses for its most recent study. Of these, roughly two-thirds had revenues of $1 billion or more, primarily from North America and Europe and a variety of industry sectors.

The majority of large companies are ramping up their ESG data and reporting capabilities, the authors note. Many are planning to increase investments in sustainability-related software and workforce capabilities over the next few years.

However, nearly half report that they are still using spreadsheets to manage ESG data, the authors note.

The difference in perception and the real level of readiness:

The KPMG study showed a discrepancy between businesses’ perceived and real levels of readiness for ESG reporting.

Though 83% of respondents claimed their companies were ahead of their peers in terms of sustainability reporting, many still seem to rely heavily on manual data collection.

47% used spreadsheets are the most commonly used ESG data management system
47% use spreadsheets and ERP systems
38% use spreadsheets, ERP systems with ESG modules
37% use specialized ESG software solutions
33% use ESG data management solutions

Enhancing ESG data management:

Even though almost half of businesses still use spreadsheets to compile their ESG data, the majority have plans to improve their ESG reporting capabilities soon.

58% intend to use artificial intelligence and machine learning to improve their data consolidation and analysis over the next three years
49% are currently offering management and employee training to improve the quality of their ESG reports

The survey indicates that businesses are prioritizing enhancing their ESG capabilities due to increasing regulatory pressure to disclose sustainability information.

90% plan to increase their ESG investments over the next three years
37% will invest in data collection and management tools as a top priority
38% will invest in employee training and education
43% will invest in dedicated ESG personnel

Capacity building:

The survey said that many organizations see developing ESG capabilities as a crucial tool for improving organizational performance and meeting compliance requirements.

The survey revealed that 45% of respondents believe enhancing ESG data management and reporting capabilities is the most effective method for integrating sustainability goals with business objectives.

ESG skills, including data analytics, sustainability management, risk assessment, and carbon emissions reporting, emerged as high skills. 83% of companies predicted increased ESG responsibilities in non-ESG roles.

Challenges:

The study highlighted the significant challenges businesses must overcome to integrate a sustainability strategy into their broader corporate goals.

44% of respondents cited “insufficient resources or capacity to collaborate effectively” as the biggest obstacle
19% of respondents mentioned competing priorities or budgetary constraints
21% said it was difficult to calculate the return on investment for ESG activities
Respondents mentioned internal silos and poor departmental communication as another major obstacle to sustainability integration

Notably, more than 75% of respondents stated that they anticipate organizational restructuring to better align sustainability goals with overall business strategy to achieve better coordination, with 33% anticipating a “major restructuring.’

Quotes:

Tegan Keele, Climate Data & Technology Leader, KPMG US, said, “Artificial intelligence and machine learning technologies can help organizations gain valuable insights from disparate data and make more informed decisions. However, they are not a silver bullet for sustainability reporting or for setting a strategy that adds value to the business. Judgment calls like which data to use, which sources to collect the data from and the type of controls that need to be in place require a cohesive strategy. The strategy should be driven by the organization and informed by the technology rather than driven by it.”

Maura Hodge, ESG Audit Leader, KPMG US, said: “Timely and accurate reporting of sustainability information is key for businesses to meet regulatory reporting guidelines. However, compliance alone should not dictate an organization’s strategy – focusing on the core elements of ESG that will drive financial value over the long-term is paramount.”

Rob Fisher, ESG Leader, KPMG US, said, “Sustainability touches every part of the business, making it very difficult for large organizations to organize around and very easy to have a ‘check the box’ mentality and focus solely on compliance. The organizations that view new reporting requirements as more of an expansion of their broader sustainability strategy and who continue to invest in the right people and technology to make progress on that strategy will be better positioned to both realize and communicate the full value sustainability initiatives can bring to their business.”

MSCI has launched a new platform that will allow private companies to self-report their sustainability and climate disclosures to investors.

The platform allows companies to securely report data to investors, approve or decline requests from GPs and lenders, and proactively provide data to active market participants.

Launched amid increased global demand for sustainability reporting, the platform offers investors insights into private company sustainability practices, similar to public company assessments.

The platform uses the ESG IDP template, a tool created by Apollo Global Management and Oak Hill Advisors, to standardize ESG disclosures for private markets. The tool also provides users with access to an AI-powered, carbon measurement and reporting tool provided by Climate Management & Accounting Platform (CMAP) provider Persefoni.

Eric Moen, ESG Head, MSCI, said, “As companies’ sustainability and climate considerations are increasingly being used in capital allocation, lending, and other decision-making processes, investors need an efficient and effective way to share and analyze this critical data.”

Kentaro Kawamori, CEO and Co-Founder, Persefoni, said, “This collaboration targets a pivotal area in today’s corporate sustainability efforts. It closes the carbon emissions reporting gap for both public and private companies. This initiative represents a material stride towards enhancing transparency in private assets, a sector where data accessibility has traditionally been challenging.”

Tag: Sustainability reporting