Putting ESG data at the heart of a company
"…if this isn't the data that is fundamental to managing the business, then it's the wrong data, no matter who is asking for it…."
For the last few years, there has been much focus on Environmental, Social and Governance (ESG) reporting frameworks for investors and the international architecture that supports global reporting. However, focusing only on the needs of investors and regulators risks ignoring the most important users of ESG data, the companies themselves.
by Thomas Toomse-Smith
Setting the stage
The Financial Reporting Council's Lab (FRC Lab) sought to understand why companies were producing ESG-related data, how they were managing that collection and how they were using it. We conducted more than 40 in-depth interviews to understand the challenges that companies face and some of the solutions. Overall we found that many companies were evolving their approach to ESG, embedding it into the company so that it supports strategic change.
Across the interviews, we heard that there were three key stages to ESG data production:
Motivation
What motivates a company to collect ESG data? For almost all of our participants, the answer was a combination of different factors.
Business and strategy needs
Investor and stakeholder requests
Regulatory and framework requirements
However, for most participants, what was crucial was the alignment between ESG and an organisation's purpose, values and strategy. ESG data needs are not separate from these goals; they are an enabler of them. Therefore, effective organisations set their ESG data collection and information objectives based on what will be useful for managing the business, not just to meet external disclosure requirements.
Method
Once there is a clear understanding of why ESG data is collected, companies then focus on how. The objective should be to ensure that the necessary resources (both in terms of people and systems) are in place for the organisation to meet its goals and measure performance against them. It is important, therefore, to establish a framework of prudent and effective controls, which enable risk to be assessed and managed, as well as identify where improvements are needed. In addition, ESG data and information should be collected, collated and reported to ensure appropriate quality and integrity with supporting policies and procedures.
This is where considering the digitisation of the systems and processes that underpin ESG data is fundamental. For example, we heard from many companies whose ESG reporting systems were still focused on spreadsheets, emails and ad-hoc data requests. Whilst these reduce the upfront cost, they impact both the longer-term cost of responding to data needs and the flexibility and usability of the data itself. Companies that have used ESG as an opportunity to build systems for data collection integrated within (or to a similar level of sophistication as) financial systems are best placed to use resultant data within decision-making. Having data of the highest quality and accuracy ensures that boards and stakeholders can make effective decisions and are better prepared for additional reporting demands in the future.
Meaning
Once the data is collected and validated, how does the company use it? The saying "What gets measured, gets managed" is highly relevant to ESG data. For data to be used effectively, we heard from participants that ESG data should not be considered an external reporting exercise but a management information one. Group-level external and internal reporting should be reflected and mirrored in subsidiary, operational and budget-level decision-making. Management must have historical and forward-looking predictive data aligned with objectives and targets. All levels of the organisation need to be held to account for decisions that impact the delivery of ESG targets in the same way they are for financials. We heard that leading-edge companies are developing continuous improvement approaches to data to ensure that the right data is collected, data that provides meaning and supports the evolving strategy and need.
Conclusion
By keeping in mind the different stages of producing ESG data, its decision-usefulness and relevance to their strategy and their stakeholders, companies can report ESG data that works both for them and the wider investor, stakeholder and regulator community.
The full report from the Lab – Improving ESG Data production – is available for free on the FRC website. The Lab is now looking to connect with data providers and investors on the distribution and consumption of ESG Data.
Thomas Toomse-Smith is the Head of Innovation and Digital at the Financial Reporting Council (FRC). Thomas works across the FRC’s policy remit to identify ways to innovate corporate reporting and make the most of the digitisation opportunity. He is a qualified accountant and has worked on corporate reporting in the UK and US as a preparer and an auditor.