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ESG: The big data challenge

Treating ESG data differently from financial data could be holding firms back from progressing on their sustainability journeys

ESG: The big data challenge

Companies are making good progress towards meeting climate-related reporting requirements, but differing treatments of ESG data in comparison to financial data could be holding firms back from progressing further on their sustainability journeys.

“What we are seeing is that financial data and ESG data are not treated equally,” says Debra McCormack, managing director of strategy, global sustainability, and board effectiveness at Accenture.

“For many years now, ESG data has been collected side of the desk. People are preparing information for the Corporate Social Responsibility (CSR) report, or other ESG reporting, in offline spreadsheets that are being updated manually rather than going through systems that have been tested.”

This data management process has a knock-on effect on the quality of reporting and an organisation’s perception of the climate-related risks it faces.

In April 2022, the UK’s Financial Conduct Authority began a review of how companies performed against is new listing requirements, which were aligned to those of the Task Force for Climate-related Financial Disclosures (TCFD).

The regulator discovered that only 64% of companies under its purview included climate change as a principal risk in their annual financial reports, while 19% included it as an emerging risk.

Finance teams should make sure they are applying “the same internal controls, oversight and risk mitigation and management” they apply to the financial data systems to ESG data systems, says McCormack.

“Companies need to recognise they need to improve how the sustainability data is collected, define a clear plan to capture the key data so that they are establishing the quality that’s necessary for disclosure.”

To do this McCormack says organisations need to design end state ESG data storage, and work on ensuring their reporting solutions identify the right metrics. “This will the lead to the value creation in the information for the internal performance,” she says.

Moreover, the differing treatment of ESG data may lead to reporting challenges for Scope 3 emissions, which is currently the “most difficult part” for companies, says McCormack.

Emissions reporting requires data to be submitted detailing  the emissions a company is indirectly linked to, typically produced along its supply chain and so, having reliable data is key to effectively assessing the true impact of the organisation.

That said, the UK’s Financial Reporting Council (FRC) noted companies had “risen to the challenge” of providing climate-related financial reporting in its review earlier this month of the FCA’s new listing rules.

When engine maker Rolls Royce conducted its first quantified climate-related scenario analysis – a standard practice for finance teams – it enabled the company to better report in alignment with the TCFD framework.

This subsequently helped the company  make “considerable progress” on its net-zero strategy, says Rachael Everard, head of sustainability at Rolls Royce.

“Our external reporting recognises the strategic significance of climate change. Mitigating our impact on climate change and decarbonising our product portfolio are intrinsically linked to our purpose and business strategy,” she says.

Being more transparent and climate-conscious has presented companies with new wider organisational opportunities.

“We believe there are significant business growth opportunities to come from Rolls-Royce playing a leading role in the transition to net zero,” says Everard.

“Climate change poses a potentially significant risk to our business, and we are working to ensure we have the appropriate governance, risk management, strategic resilience and metrics in place to respond.”

Accreditations and targets

Organisations have been quick to align themselves with sustainability charters to demonstrate their activeness in the ESG space. At the beginning of the month, luxury retailer Burberry announced it had received approval from the international Science Based Targets initiative (SBTi) for its net-zero emissions target.

Using accreditations can be a form of validation for companies who are seeking an external body to verify they have engaged with their sustainability agenda, says James Ghaffari, director of B Corp Certification.

B Corp Certification denotes a business is meeting high standards of ‘verified performance, accountability, and transparency’ on factors from employee benefits and charitable giving, to supply chain practices and input materials.

Organisations which have achieved B Corp certification include ice cream manufacturer Ben & Jerrys, clothing giant Patagonia, and Innocent Drinks – a subsidiary of Coca Cola.

The number of newly B Corp certified companies in the UK this year reached 228 in June – an increase from the 806 certified over the last 5 years.

B Corp is “both a certification and a movement,” explains Ghaffari. “There is a certification that sits at the basis of everything that we do, which is about helping companies to understand their social and environmental performance. […] The reason why we are a movement of companies is that we want to make sure that our aim is to change the way in which business is done fundamentally”

The certification requirements are updated regularly keeping in line with evolving industry standards. “We are in the process of doing our biggest evolution of the performance standards to date […] and looking at how we transform our standards to make sure we are really asking companies to meet a bar that is continually improving and reflective of really high social and environmental performance,” he says.

However, while companies can be quick to sign up for sustainability charters and apply for accreditations, some can often be unprepared for the required upkeep.

“One of the challenges that we continue to see is the fact that once an organisation creates their ESG commitments and put a person in the sustainability role, they often fail to realise they actually need to deliver against those commitments,” says Accenture’s McCormack.

Last year, the British national newspaper The i reported the SBTi had removed 119 companies, including Bugaboo and Travis Perkins, from its initiative since 2015 for failing to adhere to the requirements of the programme. Those companies have been able to reapply to the initiative or have decided to choose a different route.

Greenwashing: an increasing risk

Over subscribing to climate targets paired with the common ESG data reporting challenges can increase the risk of ‘greenwashing’ – the idea a company portrays it is more sustainable and ‘green’, than it actually is.

This is something investors and consumers are paying close attention to, as sustainability conversations become more mainstream.

Shareholders are becoming increasingly more active in holding companies – and more specifically directors – to account of their ESG claims. Earlier this year, Shell shareholder group ClientEarth launched legal action against the oil company’s board over mismanagement of climate risk.

Similarly, regulators and government agencies are also paying close attention to market participants. In July, the UK’s Competition and Markets Authority (CMA) said it had opened an investigation into environmental claims made by clothing retailers Asos, Boohoo Group, and Asda’s clothing arm George  potentially misleading consumers.

Furthermore, the World Health Organisation (WHO), in partnership with Expose Tobacco, accused the tobacco industry of greenwashing in a report. The WHO stated “ESG criteria generally do not consider the sustainability of the company’s actual core product or services at all, instead focusing on how a company operates, rather than what it actually does”.

In response to greenwashing claims, Tadeu Marroco, finance and transformation director at British American Tobacco (BAT), told The CFO, “our purpose is very clear, we want to build a better tomorrow and the way we do that is by reducing the health impact of our business through the offering of a great choice of enjoyable and scientifically substantiated less risky products.”

Both BAT and Philip Morris International are in the midst of a transition to focusing on non-combustible tobacco products in a move towards greater sustainability.

The increase in greenwashing probes and scepticism has emphasised the need for greater global comparative regulation to provide a strong framework and expectations for companies. Guidelines for such regulation now fall under the scope of the International Sustainability Standards Board (ISSB) which is set to publish its first set of standards later this year.

However, it is up to individual jurisdictions whether they incorporate the guidelines into local legislation.

Stepping up to the plate

It is evident the ESG space is no longer just a ‘nice to have on the side’ for companies, but an essential conversation requiring real action and integration within an organisation’s strategy. The last couple of years have seen companies step away from “the traditional corporate social responsibility (CSR)” as they “double down on their sustainability efforts,” says Ghaffari.

“Regulation around [ESG] is certainly coming and so there is going to be more reporting and compliance structures being put in place. The way to get around that is to start building that muscle now and prepare for that coming down the line,” he says.

Preparing for new climate-related regulations may require structural changes within processes to ensure they can measure and house the necessary data.

The US’ Securities Exchange Commission (SEC) estimated compliance to its proposed climate disclosures could cost around $640,000 for large companies during the first year, with ongoing annual costs predicted to drop to $530,000.

Additionally, achieving an organisation’s sustainability targets “requires a combination of skills, data and resources from across finance, strategy and sustainability,” says Rolls Royce’s Everard.

Chief financial officers therefore play an integral role in embedding sustainability DNA not just within the C-Suite or its finance function, but throughout the entire organisation to help drive a company’s agenda.

In doing so, they play a key role in ensuring employees are trained with the necessary skills to execute the strategy effectively.

To hear more about ESG and what you need to know, register to Nasrin Moola’s (Director, ESG, Reporting and Assurance, KPMG) session at the CFO Executive Dialogue here.

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