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As calls for greater transparency around environmental, social and governance (ESG) criteria mount, consistent and accurate ESG reporting is fast becoming table stakes for both private and public companies.
But collecting and managing ESG data is a challenge that even high-profile organizations are struggling to address. Some are handling ESG data management issues on an ad hoc basis, rather than taking a systematic approach. And the sheer variety and inconsistency of ESG data and benchmarks — and the options for reporting them — can produce wildly different results.
Below are a few best practices for gathering accurate and complete data for ESG reporting that companies should keep top of mind.
1. Ensure you collect the right ESG data
Understanding your company’s entire ESG footprint is essential for comprehensive reporting. Some organizations may neglect to report certain emissions sources for entire business units (which can lead to eyebrow-raising changes in reporting from one year to the next), while others may omit emissions generated in an office or factory located overseas. Whatever the case, companies should be prepared to evaluate their operations meticulously.
Start by assessing the processes that generate the most revenue for the company. For instance, an aerospace manufacturer may first want to measure the emissions generated and resources consumed in the production of its aircraft, rather than its travel and entertainment activities.
From there, leadership can expand efforts to encompass all of the company’s Scope 1 and Scope 2 emissions. Scope 1 involves direct greenhouse gas emissions emitted from sources controlled by your organization (e.g., pollutants from a smelter), while Scope 2 covers indirect GHG emissions associated with the purchase of electricity, steam, heat or cooling.
Scope 3 emissions — upstream and downstream emissions that occur in the value chain of the company, such as the transportation of raw materials — are another story. Forthcoming regulations requiring ESG reporting on Scope 3 emissions are geared toward public companies, but these rules can have knock-on effects on their private partners and suppliers. These requirements are also close to being implemented — the Security and Exchange Commission (SEC) is slated to release the final version of its climate disclosure rule in early 2024, and the European Union’s European Sustainability Reporting Standards have been adopted and will start take to effect in 2024.
2. Consider the technology at your disposal
There are two classes of technology that can help companies manage and report ESG data: governance risk and compliance (GRC)-related software and data collection tools.
GRC technology refers to an integrated suite of software capabilities for handling corporate governance, enterprise risk management programs and regulatory and company compliance — which can include ESG reporting. Most GRC technology platforms do not facilitate ESG data collection, but rather focus on controls, metrics, framework mapping and reporting. They can also enable the accumulation of data into a “rough draft” of what might be released in a public disclosure. While most GRC technology platforms address ESG data in separate modules from where they address financial controls, these solutions may eventually integrate to handle internal control over sustainability reporting (ICSR) side by side with internal control over financial reporting (ICFR).
Data collection technology helps companies collect ESG information in the first place. For example, a large organization trying to report on Scope 2 emissions must consider all its different offices and locations, each with their own individual bills and consumption volumes. To gather all that information timely and efficiently, companies may rely on several different technologies, including automation, data scraping and smart meters — digital meters that record energy consumption — to get a holistic picture of their environmental impact.
Overall, the best approach to an overall ESG program will capitalize on both types of technologies.
3. Create ESG data collection processes
Having the right technology is only half the battle. You may have cutting-edge software and deep pockets to help organize your ESG data, but if you can’t measure that data in the first place — or employees are struggling to submit it to the proper channels — your organization is no better off than it was before.
Company leadership can start by taking time to lay out and document a well-thought-out process including related controls. Once that plan has been mapped out, use it to educate and train employees that are new to tracking data, or simply unaccustomed to filling out paperwork.
All of this should be geared toward enabling external auditors to access ESG data in a consistent, reliable manner. When the auditors begin to ask questions, you don’t want to become the corporate equivalent of a small business owner bringing in an overfilled box of receipts to his tax accountant.
4. Collect data consistently, on a regular basis
A key challenge in ESG data collection is inconsistency in reporting. Some organizations only report annually and sometimes even on an ad-hoc basis, leading to delays and inaccuracies. When the SEC begins to clamp down on public companies, ESG data may fall under the same tight timeline now required for year-end reporting on standard financial information — and large, accelerated filers will likely have even less time to disclose their data. Those companies will need up-to-date metrics to stay compliant.
5. Get executive buy-in
ESG reports can have far-reaching implications for an organization's reputation and regulatory compliance. Yet sustainability data is often handled by individuals who may not have the authority to make crucial decisions. That’s why it’s important that those who handle ESG data report directly to the C-Suite — and that company leadership and ESG professionals share the same vision.
Elevating the voices of those in charge of ESG might be an inevitability — especially as the SEC gears up to release its new climate-related disclosure rules, and ESG metrics become the purview of the traditional financial reporting function in organizations. But it’s important to get ahead of these changes now, so that your company isn’t forced to make drastic shifts as regulators begin to ramp up scrutiny.
Expectations for ESG Data Management Are Only Getting Higher
As the ESG reporting landscape evolves, staying ahead of changes and implementing these best practices will be crucial for companies to effectively gather precise and complete ESG data.
When the Sarbanes-Oxley Act took effect in 2002, few companies wanted to invest more in financial record keeping and reporting. Now there are whole departments devoted to financial record keeping and ensuring internal controls over financial reporting are operating effectively. It’s quite possible that the same will happen for ESG in the wake of the SEC’s new climate-related disclosure rule. If so, companies need to be prepared with enough resources, tools and strategic know-how to satisfy stakeholders and regulators alike.
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