"…if this isn't the data that is fundamental to managing the business, then it's the wrong data, no matter who is asking for it…."
For the last few years, there has been much focus on Environmental, Social and Governance (ESG) reporting frameworks for investors and the international architecture that supports global reporting. However, focusing only on the needs of investors and regulators risks ignoring the most important users of ESG data, the companies themselves.
The Financial Reporting Council's Lab (FRC Lab) sought to understand why companies were producing ESG-related data, how they were managing that collection and how they were using it. They conducted more than 40 in-depth interviews to understand the challenges that companies face and some of the solutions. Overall the FRC Lab found that many companies were evolving their approach to ESG, embedding it into the company so that it supports strategic change.
Across the interviews, they heard that there were three key stages to ESG data production:
What motivates a company to collect ESG data? For almost all of our participants, the answer was a combination of different factors.
However, for most participants, what was crucial was the alignment between ESG and an organisation's purpose, values and strategy. ESG data needs are not separate from these goals; they are an enabler of them. Therefore, effective organisations set their ESG data collection and information objectives based on what will be useful for managing the business, not just to meet external disclosure requirements.
Once there is a clear understanding of why ESG data is collected, companies then focus on how. The objective should be to ensure that the necessary resources (both in terms of people and systems) are in place for the organisation to meet its goals and measure performance against them. It is important, therefore, to establish a framework of prudent and effective controls, which enable risk to be assessed and managed, as well as identify where improvements are needed. In addition, ESG data and information should be collected, collated and reported to ensure appropriate quality and integrity with supporting policies and procedures.
This is where considering the digitisation of the systems and processes that underpin ESG data is fundamental. For example, we heard from many companies whose ESG reporting systems were still focused on spreadsheets, emails and ad-hoc data requests. Whilst these reduce the upfront cost, they impact both the longer-term cost of responding to data needs and the flexibility and usability of the data itself. Companies that have used ESG as an opportunity to build systems for data collection integrated within (or to a similar level of sophistication as) financial systems are best placed to use resultant data within decision-making. Having data of the highest quality and accuracy ensures that boards and stakeholders can make effective decisions and are better prepared for additional reporting demands in the future.
Once the data is collected and validated, how does the company use it? The saying "What gets measured, gets managed" is highly relevant to ESG data. For data to be used effectively, we heard from participants that ESG data should not be considered an external reporting exercise but a management information one. Group-level external and internal reporting should be reflected and mirrored in subsidiary, operational and budget-level decision-making. Management must have historical and forward-looking predictive data aligned with objectives and targets. All levels of the organisation need to be held to account for decisions that impact the delivery of ESG targets in the same way they are for financials. We heard that leading-edge companies are developing continuous improvement approaches to data to ensure that the right data is collected, data that provides meaning and supports the evolving strategy and need. Additionally to fulfil the prospective requirements of the new ESG reporting regulations in Switzerland and the EU, the data level needs to be raised to equal the level of the finance data.
Software specifically aimed at corporate reporting, such as the MDD Platform, can identify weaknesses within the reporting process and thus eliminate them systematically. This has been the proven solution for financial reporting and can therefore also be applied to ESG reporting. Thanks to a high-level system you can learn from best practice examples within the financial reporting process and publish a high quality, efficient and integrated report.
By keeping in mind, the different stages of producing ESG data, its decision-usefulness and relevance to their strategy and their stakeholders, companies can report ESG data that works both for them and the wider investor, stakeholder and regulator community.
First, you should think about your current reporting tools and systems. Are up-to-date and are they suitable for the medium-term? The implementation of new requirements and standards is an opportunity to think about setting up flexible, robust and agile systems for your financial and non-financial data. Ideally, the content should be based on one data source, one single source of truth. Guaranteeing the possibility of a multi-channel publication (XBRL/ESEF, HTML, PDF and print). With the MDD Platform you also have the option to implement the XBRL tags, so you can enable the required machine-readability of your climate reports.
Finally, the MDD Platform is a digital solution that allows for a high quality, precise, secure and multi-channel corporate report publication. It ensures that the various stakeholders are able to make effective decisions and that you as a company are better prepared for the corporate reporting requirements of the future.
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