Law firm EY research has revealed that about 73% of investors say that companies largely fail to create enhanced reports encompassing environmental, social and governance (ESG) and financial disclosures, while 99% of investors use ESG disclosures in their investment decisions.

Speaking at the Chartered Institute of Logistics and Transport’s ESG conference, in Johannesburg, on July 25, EY Africa climate change and sustainability service leader Clemence McNulty said 76% of investors are concerned that companies were being highly selective in terms of what information they put out, which raised fears of greenwashing.

“There's obviously a set of stakeholders very hungry for data, but also a very mindful set of stakeholders that believe they're not getting what they need,” she said.

In terms of South African customers throughout the supply chain, she pointed out that 51% of them would happily pay more for a product if they could be assured of its sustainability credentials, which she said was important to facilitate increased investment into sustainability initiatives.

“Three-quarters of South African customers are deeply concerned about the fragility of the planet, being more and more aware of some of the issues that we need to deal with, but often find it very confusing in terms of what they need to do,” McNulty said, noting that as many as 78% of customers say they need more information to make better choices.

“We know that other stakeholders, like regulators and employees, are also very hungry for understanding what companies are doing,” she added, noting the increasing implementation of mandated and regulated sustainability reporting standards that are interconnected to financial reporting, which is assured and which systematically covers material ESG risks and opportunities.

“That flurry of standards is important because it's also through these standards that we will start to have a systematic approach to reporting on ESG, because what's happened historically is that it's very much been a sort of voluntary process.

“Typically, the data is sort of pick and choose your own adventure, which goes back to why investors don't believe what they see. There hasn’t been any mandated assurance or other processes that give that comfort like we have for financial data. We're going into a new world around ESG data,” McNulty said.

She pointed out that accurate and detailed ESG reporting was particularly crucial in the transportation and logistics sector, given the high degree of vulnerability that the sector has to ESG-related material risks, behind only the oil and gas, metals and mining, power generation, automotive and automotive components manufacturing and chemicals industries.

McNulty said there had been much progress already made in terms of companies addressing their Scope 1 and 2 emissions, being that these are internal and controllable.

However, the challenge faced by the sector now was in addressing Scope 3 emissions, which are accumulated through the value chain.

“Companies are starting to look into the value chains, into those indirect emissions, those Scope 3 emissions, and that is where it's really going to start impacting this industry. There is lots of data required, lots of demands, lots of variability,” she said.

However, McNulty pointed out the immense challenges surrounding the acquisition, collation and interpretation of accurate ESG data, particularly with regards to Scope 3 emissions.

She noted a lack of high-quality data and that the data that was available existed in silos.

“Looking into the indirect value chain impacts means that we need the kind of enhanced connectivity across sectors and across organisations that we haven't had before, which has obviously proven to be quite challenging. This is also a challenge because a lot of the solutions that we need to be driving, from an ESG point of view, require partnerships, working within an ecosystem which is typically not the way that companies have worked before,” McNulty said.

She noted that the dependence on third-party suppliers of ESG data presented a significant challenge in terms of ensuring its accuracy, not to mention the challenge of organisations using different and often incompatible information technology systems to record and report their ESG data. She pointed out that about 46% of organisations found the inconsistency in data quality posed a challenge to meet their ESG goals.

This all leads to a general lack of data governance, which impacts the overall ability of businesses to deliver accurate ESG disclosures.