ESG data is new gold

The new sustainability regulation, which refers to business environmental, social responsibility, and governance (ESG) aspects, obliges large companies starting from next year to set the number of new quantitative and qualitative metrics and measures. Among them are the determination of double materiality assessment (financial and impact materiality), Scope 1, 2 and 3 calculations, creation of an ESG risk matrix, setting goals for future KPIs, etc. All are necessary to show where the company is in its business model today and where it plans to position itself in the future in relation to the European sustainability agenda.

Assessment of internal company data

In most cases companies’ management knows how – on their own or with the assistance of consultants, they will analyse the new applicable norms of European sustainable regulation. Once that is done, the next step is to make an initial assessment of the quality, transparency, and traceability of the company's existing ESG data in light of the new Corporate Sustainability Reporting Directive (CSRD) regulatory requirements. For this purpose, the company must perform the following actions:

• assessment of the readiness of existing data;
• identification of the related data flows;
• verification of the persons responsible for the data;
• assessment of the data renewal frequency;
• examination of the existing governance structure on the four-eyes principle base.

Companies that have reached this stage admit that it is exactly the initial ESG data assessment that creates the greatest difficulties for them in the way to sustainability reporting. The most common challenges faced are:

• data is located in different systems, in different departments, and is fragmented;
• data is collected manually in Excel;
• it is difficult to track the history of who has entered and/or changed what data in the system and at exactly which moment;
• the four eyes principle is not applied to the part of the data, the reliability of the data is difficult to confirm through the existent internal control system.

After identifying the above-mentioned internal challenges, it is difficult to move further toward the main goal of providing a qualitative sustainability report. Therefore, the question that is heard around more and more frequently is: "What IT solutions are available on the market for ESG data management purposes?". There is no clear and unified answer to this question that would be equally suitable for all companies. Although every responsible manager who has asked themselves this question should make some serious market and situation research before making the final decision the choice of the tool. This is ultimately important because an ESG data management tool in the enterprise must at first place increase:

1. data transparency
2. data traceability;
3. efficiency of the data-flow processes.

These criteria should always be kept in mind when evaluating the tools that would be suitable for your business.

Choice of ESG data management tool

When initiating the process of ESG data management tools market research, it is worth involving all those team members who are related to data processing and control in the company on a daily basis. Typically, those are Chief Accountant/CFO, Chief Legal Officer, HR Director, Chief Risk Officer and, of course, Head of Sustainability. Only by including all these stakeholders at the negotiating table, it will be possible to ensure that the chosen tool will be suitable for the effective and efficient management of the company's ESG data and will not confuse users with inappropriate redundant system blocks.

It is obvious that the compliance regulatory requirements of sustainability reporting will notably increase the workload of some departments within the company. Therefore, maximum digitalization for ensuring ESG data flow processes is crucial in ensuring the efficiency of future work processes. In turn, choosing the best tool for your company's needs today will save managers time and owners money in the future. 

The practical goal of the whole exercise is to choose the right tool that will ensure an effective and efficient high-quality ESG data management system in the company to be used in the long term. Such a system must be able to be used also to improve the analysis of financial indicators and the efficiency level of internal processes, which will also support the overall results of the company's operation and increase its competitiveness in the market.

External partners’ data

The next big thing to remember when choosing an ESG data management tool for the company are your external partners to whom, according to the CSRD, your company will provide its ESG data upon their request and from whom you will request and receive ESG data for your sustainability reporting needs. Therefore, in order to avoid the manual and time-consuming transfer of such data, it is preferable for the tool to possibly be integrated into the cooperation partners’ systems, without bringing on board any cyber security risks.

In order to evaluate the mentioned aspect, it is necessary to initially identify the range of the existent external cooperation partners of the company from whom data will be received and to whom will be transferred. At this stage, research should be carried out, identifying what data will fall into the mentioned circulation, and defining the purpose of each data exchange flow. It will provide a working framework to help assess the capacity of ESG data management tools to address the above-mentioned business needs.

Another important aspect of the work with ESG data management in a company will be external auditors. It is known that in accordance with CSRD requirements, the limited assurance of the sustainability report will be required to be performed by the auditors. For the auditors to verify the sustainability report, the company must ensure proof of full traceability and transparency of its data and processes. So, an ESG data management tool should also be able to generate appropriate reports in the historical retrospective.

ESG data management tools

Obviously, the market for ESG data management tools is currently evolving and changing fast, with many tool developers yet to announce their readiness to offer tools in the near or distant future. Even though let's try to summarize below the existing tool options in three large categories.

ERP systems with new ESG blocks. Suppliers of large ERP systems are currently actively developing ESG blocks in addition to their existing systems. This could be a good option for those who are already successfully using a particular ERP system and want to continue doing so. Others who are in the open market research stage should remember that although these systems are reliable and normally sold under well-established global brands, they often are expensive and complex. In practice, they may not be easily compatible with all other existing systems in the company, as well as with those of the external partners. The initial data in these systems is still mostly entered manually.

New ESG solutions on the market. Often such offers come from smaller IT developers who decided to focus on sustainability technologies, or from start-ups with an ambitious goal. Such tools are usually more affordable from the price range point of view and tend to be friendly from the users’ experience perspective. However, they mostly include only one or a few modules of a comprehensive ESG data management system. For example, a module that offers to automate the calculation of Scope 1, 2, and 3 in the company.

ESG data management systems based on the XBRL. Some developers of XBRL tools offer a completely new approach to data processing based on the specifics provided by XBRL open data standard and artificial intelligence. Importantly, sustainability reports in accordance with CSRD requirements will have to be submitted to the regulatory body in a machine-readable and human-readable format, that is in XHTML format embedded with the Inline XBRL data standard markup. So, companies should consider the contribution that could be made by integrating the XBRL data management system into their processes, in order to avoid double data conversion work at the stage of the final sustainability report preparation. Orients, together with experienced partners from Oxford, UK, Corefiling offers just such a unique new generation tool based on the synergy of the open XBRL data standard and artificial intelligence. Our tool is secure, easy to connect to the company's and its’ partners existing systems, efficient to use, and a cheaper option than complex ERP systems. Contact us if you are interested in learning more about it. 

To summarize, the world is entering era of artificial intelligence when reliable and high-quality data is gold in the hands of its caring owners. It is obvious that we are on the edge of a revolution in the corporate data field. Therefore, it’s better to use this opportunity by making a smart investment, which will allow not only to meet the new regulatory sustainability regulatory norms but also to promote positive changes in the business and help improve its financial results in the future!

Want to know more about options and fees, email our Business development and digitalization partner, Jekaterina Novicka, at jekaterina@orients.lv.