By: Tom Christensen, Head of Thought Leadership - Nordics, LTIMindtree

In recent times, environmental, social, and governance (ESG) initiatives have become a priority and crucial part of organizations’ strategies. Reporting this information helps measure the company’s initiatives against industry benchmarks. The report also facilitates informed decision-making and gives visibility of potential opportunities and risks that may impact the company’s valuation. Global regulators insist on ESG risk reporting and standardized ESG risk frameworks. However, setting up accurate reporting poses challenges for modern-day organizations.

Despite a growing need for ESG risk reporting, many companies struggle to report basic climate data required by upcoming mandatory standards. A recent article by The Wall Street Journal highlights varying adoption rates of ESG reporting with challenges in areas such as greenhouse gas emissions, climate risk, and energy management. While regulators around the world are moving towards standardized ESG reporting, there is still disagreement over the preferred framework. Companies are encountering difficulties establishing a unified way to collect and manage ESG data for reporting and ESG audit purposes.

Accurate data is critical

ESG risk reporting requires accurate and reliable data, but therein lies a challenge. This data often comes from several internal and external sources, such as suppliers. Its complexity increases when companies use external products in the process of producing market-ready products. Taking into account the ESG data of these external products in deriving the ultimate emission number for the finished product requires advanced calculations. It also involves certain data risk factors. Incorrect or misleading information can undermine trust in your company and damage its reputation. An incorrect number in a CO2 emissions report can seriously impact the company’s credibility and investor confidence.

Challenges with data sources and quality

One of the biggest challenges in the ESG risk framework is the diversity of data sources, quality, and rules for emission calculation. In some cases, adding customized information or business rules is necessary to streamline the data collection process. Ensuring the data collected is accurate, timely, relevant, and complete is a significant task.

Exploring the complexity of real-life data collection

In a recent project, the client we engaged with relied on different sources of raw ingredients required to manufacture their products. Cost, availability, and ESG considerations were crucial factors in the selection process. The procurement team maintained an internal database with ESG information on each product. Integrating this data source is as important as enriching data with up-to-date ESG information from each delivery received from suppliers in the factory.

It is noteworthy that emission numbers are far from being constant. They can fluctuate across each delivery and between primary and secondary suppliers. Therefore, efficient collection, cleansing, and management of external data from each subcontractor is necessary before combining it with internal data in the collection process. All of this is taken care of in the data pipeline through the transformation process (more about this in the following blog).

From estimation to calculation

Often, companies choose to estimate or make educated guesses about their ESG metrics when exact data is not accessible. Historically, this was done by quickly aggregating data in spreadsheets collected from different sources. This could have been due to a lack of transparency or insufficient data collection. There is a call to replace estimation with accurate ESG calculation, which relies on specific business rules and measurable data to determine ESG metrics. However, its accuracy depends on data availability, reliability, and pre-defined business rules.

This is referred to as Data Literacy, which is the ability to read, work with, analyze, and argue with data. It involves understanding data sources, interpreting results, and making informed decisions based on data. Data literacy empowers organizations to navigate the data-driven world effectively, fostering critical thinking and evidence-based decision-making, including an ESG risk reporting and audit solution.

The need for a strong data strategy and reporting processes

To address these challenges, companies must have robust and reliable data strategy and reporting processes in place. This includes a modern data framework to secure data collection and a modern platform to host and share data for reporting purposes.

Technology choices play a crucial role

The right data governance is key and requires a holistic approach where the company’s ESG risk management goals are incorporated into the strategy definition. Technology also plays a crucial role in addressing data management risks. Breaking down isolated data sources, establishing data collection, and a modern platform to store ESG data and perform analyses can help identify inconsistencies in data. A data catalog can ensure integrity and lineage and assist with traceability.

Cloud solutions offer companies a cost-effective way of storing and analyzing large amounts of data. They also allow sharing and buying data from other private and public branches, which is crucial for complex ESG reporting requirements.

Prepare for the ESG audit ahead

Under the latest EU CSRD directive, the ESG audit mandates that companies showcase the origins of the data supporting their ESG report. This requirement is crucial to providing verifiable evidence, reducing the chances of greenwashing, and safeguarding the brand’s reputation in the public sphere. Therefore, possessing robust data lineage capabilities is an essential part of an ESG strategy, enabling the identification of the precise data sources underpinning ESG calculations.

Invest in data governance and technology.

Data governance risks pose a significant threat to companies’ ability to meet their ESG commitments and maintain their reputation. By investing in strong data management and reporting processes supported by advanced technological solutions, companies can reduce the risk of erroneous data and strengthen their position as sustainable and responsible organizations.

Conclusion

ESG initiatives are now essential for organizations, providing a crucial framework for sustainability efforts and strategic decision-making. Despite the challenges of diverse data sources and complex emissions calculations, accurate ESG reporting is vital for compliance and credibility. By investing in robust data strategies and advanced technologies, companies can enhance their ESG risk management and reporting, prepare for audits, and maintain their reputation. Emphasizing data literacy and strong governance will ensure long-term success and leadership in sustainability.

Check out the next article to gain deeper insights into data governance and understand the components of a modern ESG risk framework.

References

More Companies Are Disclosing Their ESG Data, but Confusion on How Persists, David Breg, WSJ.com, September 21, 2023: https://www.wsj.com/articles/more-companies-are-disclosing-their-esg-data-but-confusion-on-how-persists-e667698c