truth for ESG
With the global economic outlook increasingly uncertain and recession fears mounting, you might expect business leaders to throttle back on sustainability initiatives.
That’s not the case, according to new research from ThoughtLab and Workflow Quarterly publisher ServiceNow. Nearly half of the 1,000 global C-level executives in our survey—and 60% of execs with direct oversight of ESG initiatives—reported that ESG is a C-suite and board priority. Similar numbers say their ESG efforts drive top-line growth by meeting customer demand for sustainable products and services.
The business leaders in our study also report generating significant cost savings from energy efficiency and waste reduction. And they say ESG investments boost reputation, customer loyalty, and investor interest. Furthermore, the survey reveals that 90% of companies with leading or intermediate-level ESG programs are also leaders in digital innovation.
Regulators are increasingly pushing companies to integrate ESG considerations into financial disclosures. The goal is to hold firms accountable for the environmental and social impacts of their investments and operations. Governments aren’t the only ones demanding accountability. Lenders often consider ESG scores when setting interest rates on business loans. Investors pore over sustainability reports to understand climate risks. B2B customers demand ESG transparency to protect their brands. “It’s not just the government saying, ‘Thou must improve,’” Knickle says.
Responding to this growing stakeholder clamor is no easy task. Meeting ESG demands requires tapping into data sources across every conceivable layer of an organization—and beyond. Tracking what a company directly emits (so-called scope 1 emissions) and indirect emissions from purchased energy generation (scope 2) is difficult enough. Getting meaningful data from across the supply chain (scope 3), which includes both direct and indirect suppliers, can quickly become a data-intensive nightmare.
Organizations need a single source of truth—a cohesive and unified reference point for all data needed to meet ESG reporting demands.
At first blush, it would seem that an organization’s existing enterprise resource planning, or ERP, software would fill the bill. While ERP systems do link numerous business processes to allow data flow between them, ESG reporting requires deep integration with human resources, health and safety, and labor relations, as well as diversity, equity, and inclusion programs across a company. Typical accounting, procurement, project management, risk management, and compliance systems can’t supply much of that data.
The takeaway? ESG and advanced digital technologies go better together. Yet many companies still rely on legacy tech—such as spreadsheets—to manage their ESG programs, according to a January 2023 report by Verdantix, a market research firm.
That, however, is set to change. According to Verdantix, the ESG reporting software market will surge to more than $4.34 billion by 2027 from less than a billion in 2021—a 30 percent compound annual growth rate.
“ESG is a team sport and so is the data collection process,” says Kim Knickle, Verdantix’s research director for ESG and sustainability. “You’re collaborating across the entire organization and potentially with hundreds, even thousands, of suppliers to create investor-grade data. This is not a problem to solve with a spreadsheet.”
“ERP is a big part of the puzzle, and it’s a good starting point, but it’s not the answer to getting everything necessary,” says Siddharth Bhansali, a director at EY’s EMEIA Sustainability Technology Center of Excellence.
“You need an overarching solution that sits on top of all these systems to be able to capture and report and make sense out of it all,” he adds. “Plus, you need to add a layer that maintains the integrity and reliability of the data with a legitimate audit trail.”
It’s a tall order that few organizations have so far managed to achieve, notes Amy Cravens, research manager for IDC’s governance, risk, and compliance technology practice. “It’s going to take some work to integrate all these data sources and automate things so that the whole process is more efficient,” she says. “But that takes a lot of time and expertise. With a lack of resources that most companies face, it’s going to be a big issue. The software is getting there, but whether it will be implemented and enabled appropriately will be a big factor.”
While today these platforms concentrate primarily on perfecting ESG reporting, the value of wrangling all this data extends far beyond a static report.
“It’s a waste of time if the only reason you’re doing all this work is for reporting purposes. It’s just a cost,” Knickle says. “But if you can analyze that data to drive business decisions, then you’re getting full value from that effort.”
Besides, these looming regulations aren’t just about reporting. They’re about making performance improvements that move the needle on climate issues, social justice, cybersecurity, privacy, and more. “There is a reason why these rules are being created,” she says.
Ideally, an ESG single source of truth results in a digital dashboard accessible across the organization. These dashboards synthesize real-time data from throughout the organization and deep into the supply chain. They also provide industry benchmarks and historical trends that help companies track progress and inform decision-making.
There’s more at stake here than just ESG reporting. Ultimately, better visibility into your organization and your supply chain yields better risk management, which in turn creates cost savings, operational effectiveness, and growth. “It’s so critical for organizations to establish clear data standards and a strong IT backbone,” says Jennifer Bisceglie, founder and CEO of supply-chain management firm Interos, which helps companies create ESG dashboards. “Equally critical—you’ve got to invest the time and resources in cultivating strong supplier relationships.”
Carbon emissions are a case in point. Supply chain emissions on average account for more than 11 times a company’s direct emissions. Yet only one in five companies reports its supply chain emissions, according to research from CDP, a nonprofit that helps cities, companies, and other entities measure their carbon impact.
They face increasing regulatory pressure to do so. EU companies may be required to disclose their full carbon footprints starting this year under the European Sustainability Reporting Standards. U.S. companies may face similar requirements within the next two years under new Securities and Exchange Commission regulations.
“If the biggest emissions happen within the supply chain but the supply chain is not providing you those numbers—or you’re not seeking them out—then organizations will not be able to meet their targets,” EY’s Bhansali says.
He recommends that companies add specific disclosure requirements to all supply contracts. Companies can also offer incentives to suppliers that reduce their emissions, such as financial assistance or preferential business status.
“It’s the carrot-and-stick approach: Use the contract to require it and put that incentives carrot out there, too,” Bhansali says.
Two sectors have created consortia that make them stand out as leaders in the effort to consolidate and report ESG data. The chemical industry’s Together for Sustainability initiative, founded in 2011, promotes sustainability practices in the chemical supply chain and is working to create a single standard for both auditing and assessment. And in the automotive industry, a consortium called Catena-X, funded by the German Federal Ministry for Economic Affairs and Energy, provides a platform for automotive suppliers to publish their emissions data down to the individual product level.
As other industries create similar data-sharing consortia, ESG data should become more granular and useful. That will help organizations move beyond mandated reports toward true transformation.
“You need to change the business model and the way you engage your customers, your suppliers, and your partners, not to mention how you portray yourself,” says Bhansali. “It’s a much larger change within the organization that has to be owned by the board and by the CEO.”
