The consciousness of Environmental, Social & Governance (ESG) responsibilities of companies is increasing across the world. This is particularly driven by the realization that governments alone will not be able to address the significant climate change challenges and companies will need to play their part.
Regulators across the world are responding to this by requiring significant disclosures from companies. For example, the Securities & Exchange Board of India (SEBI) has not only mandated significant ESG disclosures but now also requires audit of certain disclosures.
SEBI has also mandated that the disclosures should not stop within the boundaries of the company but should extend to the value chain (for example, key suppliers & customers).
The disclosure challenge increases for companies that have global operations since the regulations in each country may vary. For example, the State of California in the US has mandated new climate-related rules that apply to all global companies having significant operations in California. Requirements for ESG disclosures & actions are restricted not only to regulatory considerations but are also being driven by pressure from investors, lenders, and customers.
Given this increased importance, companies are now setting up structures and processes to monitor, report, and act on the material ESG indicators.
Technology as an enabler
The information relating to ESG indicators is significantly dispersed within the organizations. Historically, most companies compiled their ESG indicators through manual or semi-automated processes. However, in our view, given the significant & increasingly complex disclosure requirements coupled with varied & disaggregated data sources, this is no longer sustainable. Tech-enabling the ESG journey is now essential and could benefit companies in several ways:
Productivity – companies could use technology to generate information & reports required by different reporting frameworks and varied stakeholders (regulators, rating agencies, investors, customers) from a central data library.
Accuracy – Data integrity and an audit trail can be better ensured through automation & technology. For example, companies can introduce process controls using tech-enabled workflows and introduce automated controls for data inconsistencies similar to financial data. This can aid smoother audits and prevent inaccurate data from being presented, mitigating greenwashing risks.
Skill set gaps – Companies may not have sufficient internal resources for complex calculations around greenhouse gas (GHG) emissions and similar specialized areas. The use of automation may help to address this.
Business integration & management decision making – The use of technology also enables companies to obtain, monitor, and analyze data on a more regular/real-time basis thus enabling better management review to achieve the company’s ESG & related business goals. Further, ESG goals and strategy can be integrated with the core business operations.
Green finance ecosystem – A strong data management system around ESG data would enable companies to better access the increasing pool of ESG-linked/green finance.
Choosing the right ESG Tech
We are seeing several companies now recognizing these benefits and seeking to deploy technology in their ESG journey. Over the past few years, several solutions have emerged in the ESG tech space. These solutions help collect, store, and manage vast amounts of data across all ESG indicators help companies stay compliant with relevant ESG regulations and standards, and monitor performance against their ESG goals and plans.
In addition to core disclosure & reporting features, companies should consider the capabilities of the chosen technology in advanced areas such as GHG vectorization and supplier assessments. The ability of the ESG tech platform to integrate with other internal and external data systems, use Artificial Intelligence, and efficient data collection from varied sources is another factor to be considered. Dashboarding, analytics, and visualization capabilities are another important factor. Finally, given the rapidly evolving ESG landscape, the ability of the chosen technology provider to customize features per a company’s specific requirements, and its ability to regularly upgrade the product are also important considerations.
In conclusion
Technology has been a great enabler in reducing the cost, time, and risk of an enterprise’s financial reporting, internal control, and financial management activities thereby aiding smoother management of business operations. We believe that ESG tech could similarly be leveraged for improving the quality of ESG data management, which in turn could aid a company to better monitor, manage, and achieve its ESG goals.
Source: Techgraph
