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How to keep your ESG data from managing you

Natalie Runyon  Director / ESG content & Advisory Services / Thomson Reuters Institute

· 6 minute read

Natalie Runyon  Director / ESG content & Advisory Services / Thomson Reuters Institute

· 6 minute read

As more stakeholders and regulators clamor for companies' ESG data, it can become easy to get bogged down in the manual collection and management of such information

ESG is a proven moneymaker, and 90% of company executives reported their ESG spending has led to moderate or significant financial returns, according to a recent report from the Infosys Knowledge Institute. In addition, a company that currently spends 5% of its budget on ESG activities can expect a one percentage point profit increase if it aligns its operating or capital budget to increase ESG spending to 15%, according to the report.

Despite the correlation between ESG investment and overall financial performance, corporate budgets are likely to be an obstacle in the current economy, given the uncertainty of the macro-economic environment in 2023. Indeed, companies need more financial resources and operating model changes to achieve ESG goals and sustain profit growth. In addition, the time and resources it takes to manually process the necessary data to comply with regulations and other requests, such as those from rating agencies and suppliers, adds to the perception that achieving these goals are costly.

Multifaceted complexity enables a reactive approach

It is easy for companies to get bogged down in reaction mode from the inertia of the manual collection and aggregation of ESG information needed to fulfill the current and future regulatory requirements. So, unfortunately, they slog ahead rather than taking an integrated, proactive, and strategic approach to ESG.

“The ESG movement from at least a finance and accounting perspective for the most part has been driven by external reporting rather than an integrated approach throughout an organization,” says Shari Littan, Director of Corporate Reporting Research & Policy at the Institute of Management Accountants (IMA).

Further, more than half of companies still house their ESG data in spreadsheets, according to one survey, and this is perhaps one of the most illustrative elements of an organization taking a reactionary approach in the collection, aggregation, analysis, and reporting of sustainability data.

It is easy for companies to get bogged down in reaction mode from the inertia of the manual collection and aggregation of ESG information needed to fulfill the current and future regulatory requirements.

Additional complicating factors that keep these efforts in low gear include, the how the data sets are siloed throughout the company and the lack of cross-functional transparency in defining the owners of a particular ESG data set. Without this, it is difficult to determine which individuals need to be involved in each phase that the data will have to go through, including collection, aggregation, visualization, and reporting — all with the right level of controls and data governance along the way. The lack of awareness in who or what function ultimately owns the process for each data set increases the complexity of this process as well.

How to avoid allowing the data to manage you

Multiply the aforementioned challenges for one data set by 10, because the materiality assessment identified this number of critical concerns along with the numerous requests for information from rating agencies, suppliers, etc., and it is easy to understand how organizations can become overwhelmed and confused.

Indeed, a panel of experts recently indicated that the industry is still 18 to 36 months away from simplifying and converging around a standardized definitions, data formats, and reporting criteria.

Given that, there still are ways for organizations to help simplify the process and get ahead of the growing requests for data.

Collaborate with industry peers — Another challenge is the lack of focus around how to report ESG data and the process for creating and executing a proactive ESG strategy. This includes how ESG reporting is implemented within organizations and how it is integrated across industries.

Leading efforts to gather industry peers to proactively define sector standards for defining ESG, material issues, and requirements for tools that drive efficiency will short cut the complexity. To assist in clarifying this process, Littan cites IMA’s participation in the Committee of Sponsoring Organizations, which is taking a look at how corporate financial functions can standardize existing internal control guidelines and advise on how to apply sustainable business and ESG principles to existing financial analysis and reporting infrastructure. These efforts include recommendations for how the systems, processes, and oversight structures need to evolve to accommodate the large numbers of ESG data sets and unstructured data moving through the ESG data journey from collection to reporting.

Invest in automation that will evolve with you — The hesitation in investing in technology now is that these tools won’t meet the future state of ESG. This is where a software solutions provider that has endeavored to partner with companies on the leading edge of building out their ESG capabilities can help.

One of the benefits of a technology tool or other solution is that it enables better automation and integration from the first step of defining what issues each stakeholder group cares about and how these issue will be quantified and measured within a given footprint. This is especially important when breaking out data into specific categories (Scopes 1, 2, and 3 for example) or a specific location, according to R Mukund, CEO of Benchmark Digital ESG.

Another way that software tools help is by assigning specific roles to each individual who is participating in the ESG strategy. This allows the people who are “engaged in a particular activity to relate to the ESG strategy because they understand where their role fits in,” says Mukund, adding that such tools also have built-in capabilities for information controls, data governance, and auditability.

The current challenge at the intersection of ESG and the selection of technology tools is the competition for scarce resources across several internal corporate functions, including sustainability, finance, legal, tax & accounting, and other corporate functions. However, Littan argues that the finance and accounting functions are usually the first place where technology investment for sustainability is needed because these functions always have the experience of managing robust oversight of data, understanding internal controls, building systems and processes for oversight, along with the existing infrastructure for analysis and reporting.

Between now and then, the complexity in the ESG ecosystem — due mostly to additional regulatory requirements across jurisdictions and the lack of standardized definitions and reporting — is likely to get worse before it gets better.