Making ESG Data Decision-Useful

The most important categories of data and metrics to track to set sustainability benchmarks and objectives in order to evaluate sustainability/environmental, social, and governance (ESG) performance across ESG factors over time differ from one company to another, often even when they’re in the same industry sector. Each company’s unique strategic plans will determine how its leaders respond to these issues.

“The key advice here is to develop an informed strategy at the start of the process based on a materiality assessment,” says Marjella Lecourt-Alma, CEO of Datamaran. “Only then can you be sure that you’re focusing on the right things, avoiding ‘boiling the ocean,’ and reducing the risk of greenwashing by not delivering on the promises you’ve made in an uninformed strategy.”

According to Lecourt-Alma, conducting a double materiality assessment is a critical starting point for an informed ESG strategy. This process identifies the financial impact of the outside world on a business and also the impact of a business on the outside world.

“You can then understand which issues are most material and, perhaps more importantly, make confident decisions on the issues that resources can be diverted away from to better focus on the most important ones,” Lecourt-Alma says.

Traditionally this required interviews with internal and external stakeholders and desk research on competitors’ and peers’ ESG initiatives and performance. The sustainability lead might attend conferences and trawl the news for insights into future regulations and public opinion, but companies often outsource these tasks to external consultants. With increasing scrutiny on ESG from all stakeholders, Lecourt-Alma says getting this right is more important now than ever, so in-house ownership is becoming essential.

Keeping Up with Disclosure Guidelines and Requirements

The biggest change from new regulations is the shift toward governance over compliance. Organizations are expected to develop ESG strategies and business structures that determine the sustainability policies they put in place. They’re also responsible for monitoring progress and ensuring that reporting is in line with the targets and goals they’ve set.

The requirement for regularly monitoring ESG issues and reporting on any changes from one year to the next ensures that the ESG issues that finance professionals identify remain relevant to their organization. Where previously this was a two- or three-year process, it’s now expected annually.

Also, for some companies the assurance requirements for ESG disclosures for the Corporate Sustainability Reporting Directive (CSRD) will increase from “limited” to “reasonable” in the next few years. Auditability and the data quality that drives decisions is becoming more important, Lecourt-Alma says.

The CFO’s Role in Sustainability/ESG

Successfully embedding ESG into an organization requires cross-functional collaboration. However, with the requirement for more integrated reporting between financial and climate-related disclosures, the CFO is taking on more responsibility.

“It’s important for a CFO to be aware of the risks and opportunities…ESG issues… might incur—after all they will affect the company’s financial performance,” Lecourt-Alma says. “Collaborating with other departments on ESG strategy, beyond reporting, helps determine this and align decision making at every level of the organization.”

The CFO has become an important role in ESG following the introduction of governance-focused regulations, especially related to ensuring accuracy of metrics and accountability for achieving targets. A robust decision-making process requires investor-grade information that provides strong rationale to support the broader corporate strategy. This hasn’t always been the case with ESG data, Lecourt-Alma notes.

“With an evidence-based approach, companies can feel confident in the goals and targets that they committed to in their strategy,” she says. “The metrics can then be used to demonstrate their performance and provide true and transparent accountability.

“This demands a collaborative effort—typically between the CEO, the CFO, and the general counsel or CLO [chief legal officer], alongside the head of sustainability/ESG—making sure everyone is working toward the same outcome and appropriate budgets are allocated,” she says.

The most valuable way for finance leaders to support the overall ESG strategy is by working closely with other key internal stakeholders to help better assess the risks and opportunities arising from ESG issues. It helps to compare these against the corporate business strategy and expected financial performance, allowing more informed strategic decisions.

“CFOs can also continually educate themselves on those key issues to understand the deeper implications of ESG through engaging with internal experts and owners of those issues,” Lecourt-Alma says. “Other sources of ESG business intelligence, including benchmarking against competitors or peers and monitoring regulatory and policy trends, are also critical.”

Parsing Decision-Useful Sustainability/ESG Data

Natural language processing (NLP), a branch of AI enabling computers to understand text and speech in a similar fashion to human beings, has transformed ESG. NLP helps companies collate data at the scale required to verify what’s most relevant. It demonstrates trends, monitors changes, and flags opinions as they gather momentum and tracks regulatory changes.

Generative AI is already showing that it can take this raw information that previously required specialists to decipher and make it understandable for decision makers that aren’t ESG experts. It empowers leaders to make informed strategic decisions.

“They’re experts on their business; generative AI is now able to provide the ESG insights and recommendations directly,” Lecourt-Alma says. “A word of caution: Don’t confuse the benefits of specialist ESG generative AI with more general generative AI.

“Having ESG specialists involved in ‘teaching’ the technology is essential for useful ESG insights,” she says. “It’s almost impossible to spot the errors and biases otherwise.”

Sustainability/ESG’s Role in Organizational Reputation

Datamaran’s research shows that the changing U.S. narrative around sustainability and ESG is making companies more intentional about how they manage and communicate about their ESG strategy and initiatives. They seek reliable data to ensure that they have hard evidence to share with stakeholders to prove how and why they’re making these strategic decisions.

“Give business leaders the option of having more relevant data to make critical business decisions, and they take it,” Lecourt-Alma says. “This data-driven approach justifies their decisions, but also reassures them they aren’t risking greenwashing, criticism, or reputational damage.”

Greenwashing comes in many guises, but Lecourt-Alma believes that the most common is unintentional. When a company makes promises that are difficult to keep, it’s usually because errors were made at the strategic planning stage. Only later does the company realize it isn’t able to deliver.

“The best way to avoid this is with a laser focus on the issues that are proven to be most relevant to you,” Lecourt-Alma says. “This means you can deploy the resources that are required to deliver this and feel confident that you can achieve the goals and targets you’re setting.”

Trends in Sustainability/ESG Reporting/Disclosure

The biggest reporting trend is the greater emphasis on disclosure around governance, beyond metrics. This is a seismic shift, Lecourt-Alma stresses: It means rather than outsourcing ESG entirely, companies have to make strategic decisions using knowledge of how their business works and create committees and processes that will be held accountable.

“Smart ESG is also a growing trend, not only for data collection, management, and reporting, but also for business intelligence to support the governance of ESG issues,” she says.