Making sense of the ESG landscape
Environmental, social and governance reporting has been on everyone’s mind, with an increasing number of regulatory requirements affecting organisations across the globe, and stakeholder pressure to ‘get it right’. Companies have started to understand the impact of incoming regulations, more specifically the recent public consultation on proposed changes to the UK Corporate Governance Code and the upcoming changes to Corporate Sustainability Reporting Directive (CSRD) and International Sustainability Standard Board (ISSB).
These developments have a far-reaching impact, instilling the reality that many companies are under-prepared to address the change: the transition from ESG as a ‘nice to have’ to a ‘must have’ means organisations are having to integrate non-financial metrics into their strategy goals to comply with legislation. The clock is ticking, with many of these regulations - including the Securities and Exchange Commission (SEC) - becoming mandatory in the next 12-24 months.
But where do you begin? We see it as more of a continuum of ESG ambition, ranging from compliant all the way to transformative (think business process re-engineering). Whatever stage you find yourself on the scale, compliance remains a hard-line minimum. Between having a clear vision for your organisation, anticipating regulatory demands and mitigating risks, we share our view on six key areas that will help you on your reporting journey.
Where can you start today?
ESG reporting is now a key element of the UK Corporate Governance Code and a responsibility of the Audit Committees, so the right governance model is particularly important – do you have the strategic vision and governance in place to deliver tangible developments and improvements? Alignment and objectives should be cascaded from Board level through to Functional teams, with a designated Sustainability SteerCo at the Executive level taking accountability for specific ESG ownership.
Clear sponsorship from the top creates a more engaged team and signals your organisation’s willingness to go beyond reporting requirements to stakeholders: the wider public, your staff, suppliers and vendors alike.
2. Assess your ESG maturity today
The starting point will look different for every business. However, the key is to first look inwards – where do you currently stand, and how does it compare to your future state goal or ESG ambition?
Benchmarking against industry peers, anticipated legislative and Code requirements as well as established good practice is a helpful yardstick for learning what ‘good looks like’. An assurance readiness exercise can provide particular insights to consider against a framework like a Target Operating Model – for example, do your systems enable a single source of truth, supporting integrated and automated reporting? Asking the right questions from the get-go can expose pain points in strategy clarity or KPIs.
3. Leverage existing processes
Finance is widely considered a ‘best-fit’ as the custodian of ESG reporting: it already produces regular reporting for external publication. Integrating your Finance function with ESG reporting teams to drive cross-functional collaboration and metric accountability is key. But while Finance is critical to delivering reporting proficiency, it is important to remember that Sustainability must remain the designated owner of your ESG strategy.
Investment decisions are increasingly influenced by sustainability, and ESG has been proven to be linked to organisations’ bottom line: it will help to rightly give ESG reporting metrics the same weight as financial KPIs. Take advantage of existing controls, reporting processes and reports to make sure you’re not starting from zero and duplicating work.
4. Getting your supply chain on board
In line with the move towards a collaborative ‘ecosystem’ business environment, successful organisations are building stronger relationships across their supply chain and drive more accurate reporting of your value chain. Make it a priority to ensure your strategic goals and operations are aligned with your suppliers’ and vendors’ – this can unlock returns like waste reduction, more impactful decision-making, as well as a better awareness around risks you might not have noticed before. Legislation like the German Supply Chain Due Diligence Act has begun enforcing this on companies with 3,000+ employees as of January 2023.
5. Training the right people
As with any change, you need the right people with the skill set to turn ideas and decisions into outcomes. New ESG reporting metrics intrinsically affect stakeholders and departments across the business and having a cross-functional team is the most effective way to tackle them. Invest in creating a high-performing, integrated team with specialties ranging from Technology to Risk and Strategy – regardless of background, prioritising training on existing and incoming regulation will be key.
With the right skills and specialities to bridge gaps in awareness, you are giving your organisation a competitive advantage that accelerates performance efficiency.
6. Enabling Technology for ESG
Existing Enterprise Resource Planning (ERP) and Enterprise Performance Management (EPM)ecosystems focus more on financial reporting of transactional and managerial data than ESG.
Financial Reporting Council (FRC) states: “With information relating to ESG aspects of a company’s sustainability becoming more significant, the underlying data systems, and the data that supports reporting, pose a challenge. Although investors, governments, and wider stakeholders call for expanded disclosure, the maturity of the systems that produce the information is significantly less sophisticated than for financial information. These challenges need collaborative solutions if ESG information is to be useful to stakeholders and provide them with consistent and comparable information.”
A plausible approach is to run a data-led technology evolution where we understand the data and process that goes across the systems, based on ESG data sources based on ESG use cases. It will create a pathway for better insights into ESG data, resulting in actions which matter, while evolving the technology ecosystem productively as we automate more in time. A possible example is building a 'Data Map' to appreciate the complex interconnected nature of your industry's ESG regulations, metrics and data elements. It will highlight which data is critical or missing in your organisation, and how a data-led technology evolution could smooth the journey towards realising your ESG reporting ambitions.