At a glance
By Rosalyn Page
With increased scrutiny from shareholders, regulators and customers, environmental, social and governance (ESG) reporting is growing in importance.
Many financial and accounting businesses are looking to software solutions to help track and report against a variety of targets, to manage risks and improve performance.
When developing an ESG approach to prepare for the use of ESG software, Fiona Hancock, partner climate change and sustainability services at EY Oceania, says clarity is important. Identify ambitions, specific targets and the plan to meet these commitments.
Where there are issues not being addressed or commitments not being met, she recommends “being transparent around how the organisation intends to get from where it is to that target in the future”.
Identify ESG reporting
ESG reporting provides transparency to stakeholders about how the business is minimising negative impacts and enhancing positive benefits.
“The first place to start is with the materiality of issues and focusing on those that are most material, or relevant, to the organisation,” says Hancock.
The materiality assessment identifies the ESG risks for the business and ranks them in order of impact. ESG goals are then developed, based on the approach taken to address these risks.
With climate change, for instance, this means setting emissions reduction targets.
“It’s important to understand how to get to those targets that are meaningful. With environmental, for example, it’s avoiding risking going into ‘greenwashing’ territory,” she says.
Where to start with ESG software
Hancock says the first step, before starting to pursue any single solution, is to take a step back and do a needs assessment. This will identify existing data and its source, type of reporting needed, data storage requirements and so on.
“Be aware of all the technical specifications and find out if there are people in the team to help guide these things. Then you can start to narrow down the selection of offerings to work out what’s fit for purpose for your organisation,” she says.
Chet Geschickter, VP analyst at Gartner, who co-developed its ESG software market guide, suggests these steps to set up for using ESG software:
1. Understand regulatory requirements
Start by identifying local and international regulations for reporting non-financial performance information.
“If you are in a financial institution, you may also be facing regulations related to your loan portfolio, investments or property and casualty portfolio,” says Geschickter.
2. Establish goals
Next, set the goals and measure progress. This is where a reporting tool is needed to collate data and provide transparency.
“It needs to give internal users the intelligence and information they need to make sound operational and strategic decisions,” says Geschickter.
3. Set a budget
Geschickter says most software platforms have modest base fees, with add-ons for additional users or other metrics. Vendor pricing needs to align with usage requirements.
“If you are in a large enterprise and need a lot of people entering data, a per user fee can be a deal-breaker,” Geschickter notes.
4. Determine scope of use
A materiality assessment is an important part, and it sets the scope in terms of issue coverage.
“It should include a review of relevant regulations and reporting requirements,” he says.
What are ESG reporting tools?
ESG software is used to track specific standards, validate and report on data, and achieve a suitable level of governance in non-financial performance metrics.
This includes carbon emissions, supply chain assessment, product safety, diversity and inclusion, executive compensation and separation of powers.
No single tool on the market today can address all ESG issues, according to Gartner. When considering the options, the software capabilities need to:
- Match the materiality, or issues identified to be tracked
- Report on relevant standards and frameworks for data collection and reporting
- Offer KPI dashboards for performance reporting
- Model, compare different actions and support decision-making
- Provide relevant data and analytics
- Track and manage various ESG programs across the business
- Format and deliver data for different frameworks, standards and rating agencies.
ESG software falls into a couple of different categories, says Geschickter, from the broad to the more specific.
ESG management and reporting tools provide broad-based coverage for the gamut of ESG topics, as identified by broad standards such as the Global Reporting Initiative or Sustainability Accounting Standards Board.
Greenhouse gas (GHG) management and reporting tools go much deeper into emissions reporting to more fully implement the GHG Protocol.
“Scope 3 is a particularly challenging area, and there are even specialised tools that focus just on that,” he says.
More specifically, gas emissions management is considered a separate market by Gartner. “Think of these solutions if you are in a ‘smokestack industry’ with high Scope 1 emissions,” he says.
Financial and accounting businesses need to keep in mind they may be seeking external assurance for some ESG disclosures, either immediately or in the near future, according to Geschickter. For this, they may need solutions that have strong data management.
“There are a lot of calculations and estimates beneath the covers, and software and data management capabilities help you explain how you arrived at the reported information,” he says.