Best Practices to Enhance ESG Reporting Processes and Outcomes
As the growing number of national and state regulations covering environmental, social and governance (ESG) disclosure become the law of the land, organisations large and small will need to ramp up their reporting processes or risk falling short of compliance requirements.
Despite pushback from various parties over the years, comprehensive ESG reporting is now a reality. In California, for example, on October 7 the governor signed into law the Climate Corporate Data Accountability Act (California SB 253). The Act is the most wide-reaching legislation of its kind in the U.S. and will directly impact ESG reporting for a large swath of organisations in the Golden State.
On a national level, the Securities and Exchange Commission (SEC) is getting close to finalising greenhouse gas emissions and climate-related sustainability regulations for publicly traded companies. If approved, that ESG reporting could be mandatory in 2025.
In Europe, ESG regulations continue to expand. The Sustainable Finance Disclosure Regulation (SFDR), a European Union (EU) directive that has been in effect since March 2021, requires financial institutions (banks, insurance companies, investment firms and other related businesses) to report on a wide range of ESG metrics. In July, the EU approved the European Sustainability Reporting Standards (ESRS) that will affect businesses that have more than 250 employees and €40 million in revenue.
With ESG reporting becoming a standard requirement for organisations, setting up a structured data collection process will be essential to ensure compliance with regulatory mandates and industry standards. Reporting should leverage today’s cutting-edge digital tools – ones powered by artificial intelligence, machine learning or robotic process automation technology – to create repeatable, scalable processes to collect and calculate ESG data.
Some of the key benefits of having an efficient, comprehensive reporting tool and process include:
Effective resource allocation: Necessity drives the need for efficient ESG data collection. With limited resources, organisations can prioritise investments that deliver the most significant impact on the organisation’s ESG activities. Collecting relevant ESG data also allows companies to allocate resources strategically.
Improved performance monitoring and continuous improvement: Regular data collection allows organisations to measure the current state of ESG reporting and compliance activities. This data-driven approach helps track progress over time, identify areas for improvement, and set actionable targets for reducing the organisation's environmental impact and enhancing social and governance initiatives.
Enhanced organisational decision-making: Access to comprehensive data empowers decision-makers to integrate ESG considerations into various aspects of the business. This includes identifying socially conscious suppliers, evaluating energy-efficient technologies and making sustainable investments that align with the organisation's values and long-term objectives.
Advanced data collection: Manual data capture and spreadsheet-based processes are prone to errors and inconsistencies. Establishing a formal ESG data collection process ensures data accuracy and reliability, providing a solid foundation for making informed decisions and setting meaningful ESG goals.
At AArete, our ESG team has found that most organisations are not prepared, and do not have the resources, to manage ESG reporting. Here are several challenges they face – and solutions to overcome those issues:
Challenge: ESG data encompasses a vast range of organisational activities and metrics. Centralising and normalising such diverse data from dissimilar sources can be daunting and time-consuming.
Solution: Start with understanding what data you are required to report via regulations or different reporting frameworks. Next, map out where that data resides within the organisation and integrate data management technology and platforms to consolidate and analyse data efficiently.
Data quality and verification
Challenge: Ensuring the accuracy and reliability of ESG data is critical for credible reporting. Organisations may struggle with data validation and verification, especially when relying on manual processes or third-party sources. Reporting requirements often change – and are different in each country and for each area within ESG. Keeping up to date with rules and regulations can be difficult and require substantial human capital resources.
Solution: Implement robust data validation procedures to identify and rectify data discrepancies. Engage in third-party assurance or audits to enhance data credibility and stakeholder trust. Invest in data governance practices that emphasise data accuracy and quality. Use a robust technology platform that keeps all standards, emission factors and related information up to date so you do not have to keep up with the industry updates.
Scaling with ambitious goals
Challenge: As organisations set lofty ESG targets – such as net-zero carbon emissions – the volume of data to monitor and report on increases significantly. Annual data collection, verification and reporting become more challenging as the organisation grows.
Solution: Implement scalable data collection processes and technologies that can accommodate the organisation’s growth. Consider automated data collection and reporting solutions to handle large data sets efficiently. Continuously review and improve data collection methods to align with the organisation’s expanding ESG goals.
Leadership buy-in and understanding
Challenge: C-suite decision-makers may be hesitant to greenlight investments in automated ESG data capture, reporting and analysis technology, and the talent and resources to implement and manage a robust process. Ensuring that everyone in the organisation understands the value and importance of ESG is crucial for successful implementation, but difficult to achieve.
Solution: Develop a comprehensive business case that outlines the positive impacts of ESG integration and validates the investment in time/labour costs and technology associated with data capture, analysis and reporting. Engage leadership through workshops, presentations and data-driven insights to demonstrate how ESG data can inform strategic decisions and drive business performance.
Naturally, every organisation faces different challenges regarding ESG data collection and reporting. There are, however, common best practices that leaders can use to chart a roadmap to success, including to:
Hyperfocus on automation: Implementing automation in data collection processes can significantly improve efficiency and accuracy. By using automated data-gathering tools and systems, organisations can reduce the manual workload of team members and minimize the risk of errors and data inconsistencies. Automation can cover various aspects of ESG reporting, such as data extraction from internal systems, third-party data sources and sustainability surveys.
Centralise efforts and standardise practices: Establishing a centralised ESG data management team or department helps ensure consistency and alignment across the organisation. This team can be responsible for overseeing data collection, analysis and reporting. Standardising data collection practices, such as using consistent methodologies and metrics, enhances data comparability and ensures data integrity, which is vital to having consistent insights and making informed decisions for the organisation.
Regularly validate and verify data: Periodically validating and verifying ESG data is essential to maintain data accuracy and reliability. Internal audits and assurances from third-party experts can enhance the credibility of reported data and demonstrate the organisation's commitment to transparency and accountability.
Prioritise data security and privacy: Ensuring data security and privacy is paramount, especially when collecting sensitive ESG information. Organisations should have robust data protection measures to safeguard ESG data from unauthorised access or breaches.
Create a single “source of truth” dashboard: Adopting technology solutions to create a centralised ESG data repository is crucial for streamlined reporting and decision-making. A single “source of truth” dashboard provides a comprehensive view of the organisation’s ESG metrics, allowing stakeholders to access real-time data and track progress against ESG goals. The dashboard should display key performance indicators, trends and targets in a user-friendly format.
ESG reporting is here to stay and there is no turning back the clock. However, by following these best practices, your team will be prepared to meet head-on the challenges of complying with ESG measurement and reporting requirements. This will help position your organisation for future success.
John Marchisin is a managing director at global management and technology consulting firm AArete, and Tyler Thomas is the company’s sustainability lead. AArete recently launched AAchieve.ESG, an AI-powered software solution to help businesses of all sizes reduce their environmental footprint and promote sustainable practices.
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