It’s increasingly common to see news coverage about corporate environmental, social, and governance (ESG) management and greenwashing, especially since consumer interest in sustainability is at an all-time high. Entire industries are racing to keep up with growing ESG requirements and preparing to address pending legislation. Over the past few years, we’ve seen companies band together to try to make sense of ESG and develop an industry-standard framework to sustainability reporting.
Despite the good intentions of industry work groups, not all approaches to ESG hold up to scrutiny: There are a number of reasons why some approaches are doomed from the start. A fundamental obstacle to sustainability programs is failing to sell executive leadership on their impacts and values. Another red flag is when an industry’s sustainability approach has too narrow a focus on the specific pressing issues affecting a select few member organizations. When industry groups develop standards from the “inside out,” without a broader look at global regulations, market pressures, investor expectations, and an eye towards transparency, awareness and measurable change, the broader membership is set up for failure.
The result is an ESG framework which doesn’t stand up to external due diligence, falling short of investor or buyer demands, or accidental greenwashing with major brand repercussions. These issues have been getting more coverage in the media, as consumers and regulators like the U.S. Securities and Exchange Commission (SEC) are starting to dive much deeper into companies’ ESG claims.
To help brands and industry groups that are investing time and effort into ESG get a better return on investment, Assent chatted with The Bassiouni Group’s (TBG) experts in sustainability, innovation, and global impact about the top five pitfalls of industry-developed ESG frameworks and how companies can avoid them to get better results from their ESG efforts.
1. Catering to the Lowest Common Denominator
When industry stakeholders come together to create industry ESG standards and reporting frameworks, the committee is usually full of organizations with different ESG maturity levels and business agendas. Some may be far along the sustainability journey and looking to get deeper into supply chain sustainability, while others might be just beginning to think about ESG. This diversity of perspectives is healthy for creating sustainability benchmarks, but it’s important to create an approach that supports organizations at each maturity level, and accounts for their supply chains. In some cases, the ESG framework that comes out of industry workgroups caters to businesses with the biggest voice or those at the lowest maturity level.
Since these frameworks aim to be as broadly applicable to as many organizations within the sector to make an impact, it should focus on market expectations to address topics, meet regulatory reporting obligations, and demonstrate an ability to adapt based on individual companies’ needs. The result is that many companies can start doing basic ESG reporting, but many will still need the tools to go deeper into ESG goal setting, meet regulatory reporting requirements, and collect data that supports claims and declared goals.
2. Ignoring What Buyers Really Want to Know
A major drawback of ESG frameworks aligned to a single industry mission is that they are often built from the perspective of industry-insiders rather than the investors, buyers, and scoring agencies that will actually use the ESG reports. Although industry ESG frameworks can be aligned with their needs, global ESG reporting standards are already available to address investor and buyer demands. Since many such frameworks exist, solely creating or investing in an industry-specific standard will often either miss the mark or waste time recreating standards that already exist.
This is why it’s so important for these associations to consider the broader context of the market. One of the best ways these industry groups can be effective in supporting their membership is through a set of agreed upon disclosures, internal and supply chain engagement efforts, and collective forward-looking goals. So, while it’s critical for industries to collaborate, share best practices, and align on broader goals aimed toward transparency and disclosure, the effort should be in applying internationally-recognized frameworks to the industry approach.
With the push for greater harmonization in ESG reporting and investors, regulators, and industry leaders seeking more transparency and consistency in ESG reporting, organizations that align around proven standards will be better positioned for future ESG requirements. For example, the Sustainability Accounting Standards Board (SASB), is an international ESG framework that has been vetted and approved by scoring agencies, major investment banks, and ESG researchers. If you’re looking to mature your ESG program, start following an established framework, and then work to add your own industry lens.
3. Leaving Scientists & Suppliers out of the Picture
Most companies are still figuring out the connection between ESG, product compliance, and supply chain management. This means that sustainability management is often a siloed business activity, with multiple stakeholders tackling it from their own internal perspective rather than having one subject matter expert — typically a scientist or engineer in an executive role — guiding a holistic ESG strategy. And that’s why industry working group communities rarely include subject matter experts, and even more rarely include the voice of their supply chain when designing data collection methodologies.
The success of your ESG program depends on developing your suppliers into ESG partners. When not done properly, this can become a major gap in industry-developed frameworks, according to Kathrine Nasteva from TBG: “Suppliers are not involved in the process of developing brands’ external commitments but are almost exclusively responsible for making sure they’re met. Collecting the appropriate data from suppliers requires quite a bit of capacity building, investment (financial and otherwise), and deeper relationships on the part of the brand.”
Creating an accurate ESG report requires collecting the right data from your supply chain and properly understanding the sustainability risks it indicates. But in order to get that data, you first need to understand what to ask suppliers. In addition, you’ll need to educate them and provide corrective action plans to improve their own ESG performance. All of those processes require ESG expertise in their design and execution.
4. Relies on Suppliers to Provide All the Data
Supply chain sustainability management requires both supplier development — educating and engaging suppliers in your program — and supplier intelligence — gathering insights about your suppliers that won’t be accessible through surveys. This is particularly true for industries where forced labor is a major concern, like the apparel industry. Suppliers will not self-report if they’re using forced labor or buying goods made with forced labor, so you need a supplier screening solution that will assess each supplier for ESG risks that can work in parallel with direct supplier surveys.
Organizations need a methodology to create an in-depth look into your supply chain, and that view should be effectively presented in a comprehensive dashboard. Businesses will benefit from being able to flag risks per suppliers, have a health and ESG score for suppliers, and to categorize risk types. This allows them to proactively identify potential risks in supplier relationships and suggest corrective actions, or reformulate products, or purchase from a different supplier that has less risk severity. While these actions may introduce some supply chain disruption, the ability to know which suppliers present risk relative to each ESG category will protect against significant losses like being locked out of the market, product recalls, or major brand damage.
Many ESG frameworks are overly prescriptive instead of focusing on the goal of ESG reporting: For example, if your sustainability framework is highly prescriptive in telling you exactly which question to ask suppliers and doesn’t consider supply chain contexts, then it’s not set up for long-term growth. Established third-party standards like the Global Reporting Initiative (GRI) are more dynamic while still being grounded in ESG science. Aligning with standards that are constantly maintained and updated rather than static will fuel your ESG reporting through evolving regulatory trends and rapid growth in ESG’s role in operations.
Learn how to start uncovering the hidden ESG risks in your supply chain, like forced labor and corruption. Download a free copy of Assent’s guide, Uncovering Hidden ESG Risks in Your Supply Chain.
5. Cherry Picking Which Data to Include Instead of Going Deep
The number one reason why ESG frameworks fall short is that they are especially vulnerable to cherry-picking the types of data that businesses want to report — usually the easiest data to get or the one that tells the most complimentary sustainability story. This makes companies that rely too heavily on industry standards highly susceptible to greenwashing accusations, as they are more likely to tell a more narrow ESG story and omit relevant details that consumers expect.
The apparel industry recently experienced this first hand: A major retailer had to rescind its claims of “conscious” fashion following a lawsuit in August 2022. The data the retailer reported in its fashion industry-designed ESG scorecard was dubbed as “misleading” by the plaintiff, a university student. This lawsuit not only harmed the company’s brand reputation, it also called into question the efficacy of the apparel industry’s custom ESG framework.
For meaningful sustainability reporting, companies need to see deeper into their supply chains and get more nuanced with their data. For example, the Sustainable Apparel Coalition’s methodology, known as the Higg Index, relies heavily on its industry-sourced Material Sustainability Index, which uses averages for data points like water usage, carbon footprint, and chemical usage. While this gives a general overview of a material’s sustainability, it doesn’t go deep enough to provide real supply chain intelligence or give your customers the data needed to understand a product’s specific ESG benefits. Cherry picking which data is easiest to collect and interpret, or manipulating real world data through averages, results in ESG disclosures that cannot stand up to scrutiny.
Learn How to Avoid Greenwashing
Make sure that your ESG program isn’t setting you up for greenwashing accusations: Download Assent’s short guide, The Manufacturer’s Guide to Avoiding Greenwashing. To start your ESG journey, or mature your existing processes, contact Assent to learn more about our Assent ESG solution. It combines expert guidance, services, and an automated platform to deliver deeper insights into your supply chain and create more credible ESG disclosures.