THE ART OF LEVERAGING UNIFIED ESG DATA AND TECHNOLOGY TO BUILD TRUST AND OPERATIONALIZE LOW CARBON STRATEGIES

― ESG efforts have become increasingly important in recent years as awareness around the topic has grown, leading to an amplified focus on a business’ ESG (Environmental, Social, and Governance) contribution and performance. In The SustainAbility Institute 2023 Trends Report, a survey of managers and senior executives showed that 46% of companies increased their focus on ESG while planning for 2022, while only 3% expected to decrease ESG-related spend over the full course of the year.

by Penny Murphy, Partner, Regional Digital Services Lead, Asia ERM

ESG efforts have become increasingly important in recent years as awareness around the topic has grown, leading to an amplified focus on a business’ ESG (Environmental, Social, and Governance) contribution and performance. In The SustainAbility Institute 2023 Trends Report, a survey of managers and senior executives showed that 46% of companies increased their focus on ESG while planning for 2022, while only 3% expected to decrease ESG-related spend over the full course of the year.

In light of increased pressure to contribute to a low-carbon world, technology has emerged as a key player in helping companies report on their ESG metrics, manage performance and support the transition to low-carbon economy. It is without a doubt, that in this last decade we have seen a boom of technology and new means of interpreting ESG data to support low carbon strategies. In this article, we will explore the application of technology and unified data towards building trust and focused execution towards transforming your ESG agenda and operations.

Building trust in the era of rising ESG accountability

There are numerous ESG benefits for businesses that get it right, including providing competitive advantage, attracting investors, improving financial performance, building customer loyalty and helping to make a company’s operations sustainable. Tracking ESG performance is not declining. The SustainAbility Institute’s “2023 Trends Report” stated that 73% of executive compensation at S&P 500 companies increasingly includes performance metrics tied to ESG considerations – a 7% increase since reported in 2020 at 66%.

An ESG score (also called ratings) for organizations is commonly used as an evaluation of its focus and direction when it comes to ESG and how well the company proactively manages ESG issues that are most material to its business. Although the market has gradually increased the use of ESG scores and ratings, there are still potential limitations and shortcomings such as lack of standardization, data quality, transparency, and a time intensive exercise.

Whilst many ESG rating providers have sought to address these matters by aligning to regulatory frameworks, the market demand continues for innovation to enable transparency. For example, in “Rate the Raters 2023” by The SustainAbility Institute, when asked to rate their level of overall trust in ESG ratings providers to accurately judge corporate sustainability performance, 52% of corporates and 59% of investors responded with a “3” (on a scale of 1 to 5), indicating moderate trust. Of particular concern are black box rating methodologies and questionable data accuracy.

This is where technology has stepped up to the challenge to provide an automated and auditable way to collect, compile and manage the information to make ESG ratings more accurate, contextual and accessible.

For example, with the vast amounts of information available today, collecting data on a company’s ESG practices can be a daunting task. Artificial intelligence can now be used to augment this process, using natural language processing (NLP) algorithms to sift through company reports and news articles. Machine learning algorithms can be used to identify patterns and relationships in vast amounts of data, allowing for more accurate ESG ratings. These algorithms can spot correlations between social and environmental issues and financial performance, giving analysts a more complete picture of a company’s impact and quicker means to identify relevant information and provide wider context to ESG issues.

To respond to this need, at ERM we have launched ESG Fusion - an AI-enabled software platform that provides on-demand ESG Due Diligence and Screening. To address transparency, the software uses methodology standards to evaluate more than 160 research indicators that elicit a variety of ESG topics such as climate change (physical and transition risks); supply chain; and diversity, equity and inclusion (DE&I). Such technology also reduces what is typically a time intensive research exercise – by providing a 48-hour turnaround screening covering industry-inherent ESG risk, company-specific ESG risk based on the track record of controversial behavior, and an assessment of a company’s ESG risk mitigation based on management practices.

Designing a unified data-driven low carbon transformation roadmap

Organizations are currently facing a major challenge in where to focus time, resources, and budget to combating material ESG issues, and the use of data to align efforts is becoming increasingly important. Effective ESG data management can help identify trends and opportunities for reducing carbon emissions at various levels, from individual actions to larger-scale efforts.

Though it may seem daunting, the use of data to support the foundation of low carbon strategies and enable technology choices are critical. Companies need to undergo a data-driven transformation to achieve improvements in low carbon transition performance.

Broadly, companies need to consider these aspects for their ESG transformation journey and leverage enabling technology where possible, to create speed, scale and transparency:

• Firstly, understand what data sets they have within the organization and its relevancy. ESG-related data is diverse and scattered across the value chain and ratifying what data is relevant to making a material ESG impact is crucial.

• Streamline the relevant ESG data collection and enable standard data inputs and outputs. There are many technological advancements to leverage in the market- such as automation, integration of existing data sources/ systems, use of energy management systems (EMS) , data crawlers and natural language processing (NLP) on supply chain information.

• Select, configure, implement and sustain relevant digital systems that help operationalize sustainability objectives to support continuous ESG and EHS improvement.

• Design a centrally managed ESG data program and roadmap of ESG projects and initiatives which requires reporting/disclosures complying with global regulatory requirements.

• Measure and convert relevant data to actionable insights through predictive/ preventative models, data curation, underpinned by an integrated data governance strategy. For example, big data analytics, machine learning, and AI can process vast amounts of data from various sources, including energy consumption, emissions data, and supply chain information to identify patterns, trends, and opportunities for reducing carbon emissions. Companies can use predictive analytics to forecast their emissions trajectory and set emissions reduction targets based on data-driven insights.

• Provide ESG dashboards and reports to stakeholders through visualization. Visualizing data and on demand dashboards can provide stakeholders with a customizable view of a company’s ESG performance, allowing them to quickly understand the impact of different factors

• Drive and track ESG performance across organizational levels in alignment to ESG and Sustainability frameworks eg: TCFD, GRI, GRESB, ISSB

Companies who can harness strategy, data and technology will gain trust, credibility and focused execution to a low carbon future. Our work with many companies to implement a Unified ESG approach has provided a robust way to manage ESG-related data and drive an agnostic technology roadmap.

A promising future for companies who digitise

The future of digital technology in ESG for low carbon transition is promising, as companies and investors continue to seek innovative solutions to address climate change and improve sustainability performance.

Leveraging technology to mobilize the vast amount of ESG data not only provide investors with much-needed accountability, but also enable managers and corporations to focus on their sustainability imperatives and contribute to a better world.

About ERM

ERM is the largest global pure play sustainability consultancy. We partner with the world’s leading organizations to create innovative solutions to sustainability challenges and unlock commercial opportunities that meet the needs of today while preserving opportunity for future generations.

Our diverse team of world-class experts supports clients across the breadth of their organizations to operationalize sustainability, underpinned by our deep technical expertise in addressing their environmental, health, safety, risk and social issues. We call this capability our “boots to boardroom” approach as its comprehensive service model allows ERM to develop strategic and technical solutions that advance objectives on the ground and at the executive level.

https://www.erm.com/