The No. 1 ESG challenge organizations face: data

Reporting on ESG (Environmental, Social, Governance) and adhering to disclosure requirements is a key sign – to regulators, to investors, to your peers and competitors – that your business takes its ESG commitments seriously.

But it’s important to remember that reporting is simply one part of a much larger process.

The foundations of a strong ESG program are built on data. Data-rich organizations operate more efficiently, more decisively and with greater foresight than their peers — and this is particularly true in a complex, evolving area like ESG. An organization that is able to fully integrate ESG into corporate strategy, with a symbiotic relationship between day-to-day business and ESG goals, will find itself in a much stronger position than its peers.

Reporting, ultimately, should be a by-product of an ESG program where real-time data is integrated into decision making on a continuous, ongoing basis. The alternative – reporting either annually or biannually, attempting to amalgamate data from a variety of disparate sources in a short time period – is much more difficult, and much more susceptible to error and risk.

In a recent survey Diligent conducted with OCEG to assess the current state of ESG planning and activity, fewer than half of respondents had a formal, documented ESG program in place, and under 10% were “highly confident” that their organization had mature, well-documented ESG capabilities.

Furthermore, the survey found that just over half of all organizations surveyed do not publish ESG metrics of any kind, and just 9% of participants are actively using software that supports data collection, analysis and reporting on ESG.

These results would suggest that many organizations can’t get over the data hurdle when it comes to ESG.

Here are some of the biggest roadblocks to overcoming this challenge – and how organizations can remedy them.

1. Identifying data sources

Data is integral to how an organization collaborates, tracks and reports on ESG. After outlining ESG goals and identifying which frameworks to adhere to, organizations need to determine where that data will be sourced. Some of this will be sourced internally (e.g., wage or diversity data), while other aspects may have to be sourced externally (e.g., industry benchmarks, third-party vendor compliance data). Identifying the ESG data your organization will need will be the first challenge, and you’ll need to quickly determine where you’ll source it.

Ongoing maintenance of ESG data will be another area of focus. Organizations must ensure their data reflects real-time risks and regulatory developments. ESG data should remain relevant and timely and, ideally, should update automatically. Organizations must also ensure that all relevant business units are aligned when it comes to monitoring and reporting on ESG, and must be confident that any data they are aggregating is kept secure through internal data systems with the right protections.

2. Shifting operations and culture where necessary

For many organizations, mapping out their ESG goals is an essential early step on the journey. However, turning those goals into actions often requires large-scale operational and cultural shifts. Leadership teams will need to determine how ESG strategies will trickle down. Department heads and even mid-level managers will need to feel ownership of the company’s ESG goals and be motivated to incorporate them into day-to-day processes.

The implementation of ESG technology can go a long way to easing the difficulties that come with that shift – from peer comparisons and benchmarking, to data pre-population and regular, auditable reporting. Initiating a coherent and forward-thinking ESG strategy is the most daunting step for many organizations, but it’s a challenge made significantly easier by available technological solutions.

3. Anticipating future standards and requirements

One of the main points of confusion for organizations approaching ESG is the lack of a single standardized set of frameworks or reporting requirements. While governments and regulatory bodies will likely firm up these requirements in the months ahead, this interim period can be a confusing time for many companies trying to ensure they don’t place their bets on the wrong horse.

Working from the World Economic Forum and International Business Council metrics is a good place to start. The metrics, published in September 2020, were developed as a set of universal and material ESG metrics and reporting requirements that could be reflected in the mainstream annual reports of companies.

4. Keeping abreast of stakeholder sentiment

Stakeholder expectations and attitudes around ESG are evolving quickly. Articulating meaning behind the numbers and percentages is essential when it comes to getting buy-in from stakeholders and value from a data solution. Organizations need to be able to keep a close eye on upcoming regulatory developments and changing stakeholder sentiment to allow them to act in time.

Organizations must consider how they plan on listening to and monitoring the stakeholder landscape – from their largest investors down to front-line employees and consumers. Consider predictive modeling capabilities that can tailor insights and red flags to your jurisdiction, industry and company.

5. Getting your arms around third-party ESG risk

Properly managing (and mitigating) ESG risk across your third-party ecosystem is imperative in a climate of accelerated change. With heightened investor scrutiny, third-party risk management strategies need more thought in order to both drive compliance and mitigate risk. (Scope 3 emissions, for example, account for more than 70 percent of the carbon footprint of many businesses.) Competent management of these risks will not only drive long-term value creation, but also will increase transparency – something particularly important for a number of ESG stakeholders, from employees to communities to investors.

Ultimately, the ESG data dilemma is one that organizations must resolve in order to keep pace with the changes that lie ahead. ESG preparedness will continue to make a real difference when it comes to investor satisfaction, financial performance and demonstrable progress. In a future defined by the issues of the world around us, a strong ESG program underpinned by reliable, comprehensive data is the only way forward.