Achieving major improvements in sustainability and environment, social, and governance (ESG) objectives requires long-term strategic planning, effective data analytics, and, often, business transformation. There’s a saying, “what gets measured, gets managed,” and this is especially true for ESG. The ability for enterprises to integrate third-party data related to ESG has been a breakthrough in making sustainability/ESG initiatives more measurable and transparent, according to Patrick Ball, chief revenue officer of Crux. Historically, the ESG data ecosystem has been highly fragmented, making it nearly impossible for organizations to wade through the vast volume of data and determine the right data sets to use, he notes. ESG data suppliers like MSCI ESG, Institutional Shareholder Services’ ISS ESG, and RepRisk emerged to help fill this void by providing third-party validation and developing more standards around ESG data.
“We expect this push toward standardization will continue, with ESG data and ratings following a similar evolution to international financial accounting standards,” Ball says.
Patrick Ball, chief revenue officer, Crux
In terms of digital transformation, migration to the cloud and advancements in data-integration technology have made it easier for organizations to ingest and analyze a high volume of ESG data more efficiently. Qualitative ESG data, such as text in Task Force on Climate-Related Financial Disclosures reports, is especially cumbersome to analyze.
“Automation enables enterprises to extract and interpret this data with greater speed and accuracy,” Ball says. “More data means more insights to assess gaps in ESG efforts and fuel new strategies.”
Areas for Improvement in Sustainability/ESG
According to a study by software company Unit4, 20% of employees believe their company is perceived to have poor ESG credentials, which adversely impacts talent acquisition and retention. Yet for companies that do invest in ESG, the talent benefits are clear. A study by professional services firm Marsh McLennan found strong ESG performance can help companies improve employee satisfaction and attract prospective employees, ultimately driving competitive advantage.
Scrutinizing ESG factors and applying them to decision making were historically limited to finance and asset management for the most part, though in recent years, various companies have become more creative in applying ESG to diverse use cases, from retail to supply chain management. Across industries, organizations are taking a more data-driven approach to ESG with improved measurement, analysis, and disclosure of ESG metrics. Ball says he likes to think of this growth in terms of a data integration maturity curve.
“In companies with the most advanced level of data maturity, leadership is brought into ESG data integration, and the organization can scale its data operations while balancing costs with ROI [return on investment],” Ball says. “These organizations have reached a point where ESG data is embedded in their operations, and they’re able to provide stakeholders with transparent and evidence-based decisions around ESG.
“At the opposite end of the spectrum, we see organizations with low data integration capabilities, which have an ESG vision on paper but no data team or architecture to implement data integration,” he says. “For low-maturity organizations, the quickest way to scale ESG data operations is often to outsource to a vendor.”
Working toward Sustainability/ESG Goals
Net zero commitments are one of the most common sustainability goals—more than one-third of the world’s largest publicly traded companies now have net zero targets, according to Net Zero Tracker. Corporate commitments have focused primarily on Scope 1 direct emissions, as Scope 3 value chain emissions are difficult to measure without robust supply chain data, according to Ball.
The social component of ESG can be tricky to set metrics for because it relies more on qualitative or subjective data, Ball notes. Social goals are often tied to a company’s recruiting efforts; diversity, equity, and inclusion programs; community-building initiatives; charitable contributions; and fair labor practices.
A key goal with the governance component of ESG is more transparent and data-driven decision making, Ball says. Governance is often evaluated based on board structure, compensation programs, codes of conduct, and audit and risk oversight.
Realistic Strategic Planning
A common issue that Ball and his Crux colleagues have seen is “greenwishing,” where organizations set an ambitious ESG goal—such as “net zero emissions by 2030”—with no clear road map in place to achieve that objective. Before moving forward with an ESG initiative, organizations should start by putting strong data governance processes in place, Ball says.
“They should assess which component of ESG makes most sense for their business to focus on, what processes they have in place today, and how they can work backward from their end goal, which will likely require change management,” he says.
The more data organizations integrate, the more they can monitor and manage processes in real time to avoid spiraling costs on the path to ambitious targets, he notes. The volume of ESG data available can be overwhelming, so Ball suggests that a good place to start is by integrating core data sets from well-established ESG data providers. Organizations can then identify what gaps they need to fill with more niche data sets tailored to company needs.
Making the Case to Prioritize Sustainability/ESG
ESG is no longer a nice-to-have—it has become a need-to-have. ESG regulatory scrutiny is growing, and with more legislation and the U.S. Securities & Exchange Commission’s climate-risk disclosure requirement on the horizon, businesses can’t afford to put off investing in ESG. On top of that, many consumers are demanding stronger ESG commitments. According to PwC, 76% of consumers say they would discontinue relationships with companies that treated the environment, employees, or the surrounding community poorly. Ball says that companies willing to track and disclose their ESG data gain more credibility and trust in the eyes of the consumer.
“On the flip side of the coin, if businesses aren’t transparent about ESG, they could face reputational risk and accusations of greenwashing,” he says.
ESG also directly impacts value creation. Integrating and analyzing ESG data will help the business understand and optimize operations more broadly, providing a road map for what strategies are the most effective. According to McKinsey research, rising operating expenses can affect operating profits by as much as 60%.
“Reducing waste also leads to cost reductions,” Ball says. “There’s a significant correlation between resource efficiency and financial performance.”
Shared Responsibility for Sustainability/ESG Initiatives
CFOs play a critical role in organizational reporting, making them excellent advocates for ESG. CFOs can help stakeholders to better understand the value creation and cost savings from ESG efforts, Ball says.
“Given CFOs’ focus on the long-term financial sustainability of an organization, they can document and report how ESG efforts will impact an organization’s risk, which is a factor in capital access,” he says.
Because ESG strategy relies so heavily on data, leaders such as chief technology officers, chief security officers, and chief information officers also need to be involved in establishing a data governance framework for ESG. Additionally, larger companies may have more specialized roles, such as chief data officers or chief sustainability officers, who play a crucial role in ESG efforts in collaboration with the finance function, the CEO, the chief operating officer, and the board of directors.
September 2023
