ESG innovation: Allowing everyone to meet the standard
By Jessica Camus, Co-founder and Chief Corporate Affairs Officer at Diginex
Environmental Social and Corporate Governance (ESG) is a key factor for financial services. Morningstar even found that ESG funds captured $51.1 billion of new money in 2020. ESG reporting is no longer seen as a fad, but an industry standard that all companies should be providing. Despite this, many businesses – especially those at the earlier stage of their growth – still struggle to produce the necessary data, often due to a lack of resources. It is here that there is a role for technology to address these challenges, allowing all organisations to share the same level of insight that investors are looking for.
As ESG matures, so should data production
In spite of the financial and ethical incentives of ESG reporting, it must be acknowledged that it is an undertaking for organisations. The first step is to get board buy-in, which requires making a business case. Next, organisations have to undertake a materiality assessment, which means defining what ESG issues the company needs to report against based on internal and external stakeholder analysis and what factors are relevant to their industry.
Only once those factors – such as emissions, water consumption, good governance, diversity, and human rights – have been identified can the gathering of data begin and sourcing ESG data the traditional way is time, money and resource-intensive. Even once information is collected, it still needs to be analysed and presented in a way that investors can easily digest.
This entire process can take months to finalise. As a result, most companies will turn to external consultants to review the company and produce the ESG report. To bring on these consultants costs tens of thousands, meaning that only the largest of companies can take this approach. This is an issue, as regardless of company size, consumers, investors and stakeholders are all holding businesses to account. Smaller players, unable to afford this investment, will ultimately struggle to secure funding and retain customers. For investors, this means a much smaller pool of options to choose from.
With ESG showing signs of maturity in the market, investors will come to expect all companies – regardless of size and available resources – to provide this data. It’s now time for businesses to harness technology and lower barriers of entry to ensure every company can showcase their ESG efforts.
The right foundation
Any software to improve ESG reporting needs to streamline the process without demanding too much in terms of resources. Beyond this, businesses unfamiliar with ESG reporting – most likely SMEs – will first need to decide on the specific factors they will want to report on.
Instead of capturing everything in their first report, SMEs will make a more meaningful impact by focusing on a smaller number of issues. This will allow the business to action these insights and improve upon these metrics, showing a genuine change. From there, companies can expand their number of material issues, building out the ESG data over subsequent reports.
To identify what these factors are, companies need to review what their stakeholders are prioritising as well as what other businesses are also doing. Having this benchmark in place will make sure the business analyses the data points that are important to their industry.
In addition to the stakeholder and industry benchmarks, companies also need to choose a specific framework to follow. There are a number of ESG reporting frameworks including the The Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), or Task Force on Climate-related Financial Disclosures (TCFD). Deciding on which one to use can be a daunting process. Several factors can influence which framework suits the business – from the location of the company to the type of audience they wish to address.
Data gathering and validating
With the chosen framework as well as an understanding of stakeholder and industry priorities, the data gathering process then takes place. An alternative to consultants, blockchain has shown itself to overcome the issue of resources for smaller businesses.
Each supplier or third party exists on the blockchain, their data feeding directly back into the business. This allows the company to accurately audit their data and verify that it is correct. As all relevant information exists on an interconnected web, businesses save time and money on sourcing this data rather than rely on manual inputting.
The immutable nature of the blockchain also makes it easier to validate the data sourced and identify if there are gaps in the information. Through using this technology, smaller businesses effectively cut out the middleman, reduce the investment in time and money and source high-quality data on par with a large corporation.
Presenting the data well
However, data is only useful if people understand it. Companies finishing the data collection process can share raw data with investors, presented in a way that is well-structured comparable way and supported by evidentiary documentation. In addition, it is recommended to visualize data as well as adding qualitative information, to facilitate the analysis of data trends and contextualization
Any platform that sources ESG data also needs a function that can design and display the information in an efficient and impactful way. Having this integrated into the same platform will make it much easier to produce these reports and won’t require the added step of sharing the data with a designer.
Enabling everyone with technology
By the end of the process, a company will have a comprehensive document that shares insightful data on the business and gives a greater understanding to investors. While technology like blockchain makes ESG reporting easier, its impact does more for the industry than streamline processes.
Technology democratises ESG reporting. All types of businesses can produce this data, regardless of size or industry. On a moral level, it ensures that ESG is part of every company and a factor that investors can review and compare. For financial services, it creates more opportunity in the market – with a broader range of businesses able to compete with established organisations. ESG is maturing and becoming a standard for companies, but it needs to be accessible to every company, not just those with the deepest pockets.