The value of ESG data depends on outcomes
From compliance to impact to material change, data surrounds it all
The Great Disclosening continues! Even though the SEC missed the rumored October deadline for their climate rule, companies and financial services firms continue to be mired in ESG data and disclosures. Companies are trying to deliver, and firms are looking to consume. Meanwhile, regulators are looking to structure accountability in guidance.
All of this pressure has led to the axiom that ESG is data.
But as I wrote in May in the linked article above, companies must look past disclosures and address climate risk through mitigation and deliver a sustainable transition strategy. Taking a different stance, companies can align with their purpose to provide impact. This extends the usefulness of this data into something the company needs to deliver—value, meaning a positive effect on the business.
Unfortunately, many companies take the limiting approach of leading with the disclosures as the outcome, as evidenced by the job descriptions for sustainability experts, which always contain the alphabet soup of frameworks and regulations.
In asking sustainability professionals why they entered the field, the answer has never been, “To accurately report our environmental metrics as aligned to a standard to provide financial services and regulators attestable, comparable data.”
And so, this past week saw an interesting GreenBiz article make the rounds from Marshall Chase, Director of Sustainability at Micron—Sustainability professionals shouldn’t (and don’t want to) be accountants. Don’t make them.
At the crux of this issue is why sustainability and ESG professionals do their work. Is it to help the company comply or inform decisions that can impact the world or ensure its resilience? Asking this question is like asking an artist why they paint. Is it to cover the canvas or create something extraordinary and perhaps turn a profit?
Chase’s article caused more than a few to stand up and reflect. For a sustainability professional, these questions likely reside with the person’s purpose. For a company, the question hits right at the heart of the value of ESG data. Since Chase covers the employee side well, I’m going to stray into the value of the data.
There is one leading position around the data focus of companies in the article, which is pretty straightforward to understand:
If someone is working on driving more accurate data, they are distracted from driving material or meaningful outcomes. For example, suppose you understand your company has heavy emissions generated inside a particular business unit or in your value chain. How likely will you do something if you improve the data accuracy?
The outcome is not to turn sustainability professionals into accountants, ever grasping for more accurate data reporting. Unfortunately, the origins of ESG and the pursuit of comparable non-financial data for the markets, leading to new regulations, have effectively done just that, which begs the question.
What is the value of ESG data for a company?
Fair warning: while the data’s usefulness has universal business applications, only larger companies may have the roles suggested here. Also, you might disagree with the roles outlined, which is perfectly fine. Regardless, the value of the data remains consistent.
Low Data Value: Compliance
When we talk about ESG metrics and disclosures, the language of data collection and reporting is similar to financial accounting, including concepts like baselines, restatements, carbon accounting, statements, and more. From here, the data is managed, maintained, and consistently reported to regulatory agencies and stakeholders.
Unfortunately, this is the role that many ESG and sustainability professionals find themselves in, to Chase’s point. While there is a certain level of regulatory and domain expertise needed here, Finance should lead the way with the Sustainability office and Legal or Compliance nearby.
Accountants already pull together the financial data from across the business and hold internal stakeholder relationships with lines of accountability. Instead of engaging in data collection processes, the Sustainability office should inform the accountants of activity data to collect, calculation methodologies, and standard reporting frameworks in partnership and leverage the results to inform impact and ESG strategies (the following two sections).
NOTE: I have not come across a company working this way, but it makes for a compelling argument.
From here, Finance can report the resulting data to the Legal or Compliance functions for auditing and regulatory reporting. This keeps the company compliant with applicable regulations and potentially protects against related fines and litigation.
This data is also helpful to Marketing, which might partner with the Sustainability office to publish the data and tell the company’s story via press releases and CSR reports.
Across all of these activities, data accuracy is needed. Still, there is a diminishing return on accuracy’s value, mainly since companies have the data they need, likely understand their businesses well enough to know their problem areas, and since much of ESG data today is based on estimations. Explainability about the calculations and issues may be more favored by stakeholders rather than accuracy if the goal is to show an understanding of the issue or the business. Still, regulations focus on the data itself, which is now inescapable.
The main reason this data is of low value here is that it remains fixed in this situation but represents core business data. Locking it away in any one team, like Finance, or for one purpose, like regulatory compliance, ESG scores, or to publish in a CSR report, will end its useful life.
Medium Data Value: Impact
Even disclosures have value as the starting point to bring attention to an ESG issue through the data. Still, disclosures are unlikely to be a forcing function to deliver the budget needed to improve accuracy or new systems since companies can disclose against existing systems and data.
If the company has decarbonization goals, is experiencing stakeholder pressures, or is driven by a strong sense of purpose, impact will drive those budgets towards further data and systems as the value can be returned to the business. Yet, there are more trade-offs with impact than there are with ESG.
Often, driving sustainable improvements is a concessionary measure. Your company might be trying to save the world and build a strong reputation in this area, but there are likely costly trade-offs with little direct return outside of purpose. But still, to gain more value from ESG data and fulfill a sustainability professional’s purpose, impact the next place to look.
Data collected and calculated from compliance exercises have additional useful life to inform the strategy for impact. For example, suppose the company is reporting its emissions year over year as a compliance exercise. In that case, stakeholders will likely expect reduced emissions, which can be tracked through projects. Those projects continually inform and (hopefully) improve the company’s emissions. This work involves the Sustainability office consulting and conducting education across the business on the value of impact.
While it may seem like an obvious connection to use the data in this manner, some companies see disclosures to impact as a linear path, not a parallel one, and are not taking on the work. In other cases, companies are only focused on the regulations, which means those job postings for alphabet soup may never lead to impact, even with the data.
The Sustainability office must diffuse its domain expertise across the organization while leveraging data as the proof it needs to build support toward action. Still, ever-increasing accuracy or unproductive data requests are distracting if the Sustainability office cannot execute impact. Even worse, if one particularly heavy offender pushes for more data accuracy because of their inertia and not to drive action, the Sustainability office will be placed perpetually on the offensive.
High Data Value: Material Insights and Informing Strategy
In the last evolution, data provides value to the business by delivering insights into material ESG risks and opportunities, allowing the management team to make informed decisions and act.
Using the collected and calculated data from Finance, the Sustainability office can investigate, mitigate, and capture potential areas for improvements in existing processes and innovations in new markets. Bringing disclosure data, non-financial data, and operational, marketing, and financial data together can deliver long-term value.
To Chase’s example, “a company is confident that between 70 percent and 85 percent of its 2022 supply chain greenhouse gas emissions come from manufacturing.” This is informed through carbon lifecycle data the Finance and Sustainability teams have uncovered. In this case, the Sustainability office might work with Operations to find efficiencies in the manufacturing process, saving money with short bursts of investments over time. They may also work with R&D and Operations to uncover alternative materials, lending their expertise to accelerate the transition early so it doesn’t cost them as much to catch up later.
In these cases, as with impact, data drives the value through the activities it generates and the outcomes it produces. Still, the value is more significant, at least to the company. The material improvement in the manufacturing process could lead to higher product volume, lower costs, less waste to process, and avoided transition costs in the future, all informed by a concert of data.
It is worth noting that data accuracy is essential here for understanding the connections between the changes and the outcomes. Data accuracy could further play a role if a bank financed these activities with either an impact or sustainability role, as the bank may want to monitor the progress or final results for more favorable terms (like a sustainability-linked loan).
Overall, the aggregation of several internal systems and external datasets brought together for a cohesive analysis has driven the value. This work has a high cost but one tied to the core of business value.
IT and the Journey to Value from Data
And so, across disclosures, impact, and material change, data has a range of value tied to specific outcomes. If your company is chasing ever-increasingly accurate data and leading with disclosures for the sole purpose of compliance, you are leaving impact and value on the table.
But you still need data to uncover that additional value. The higher the value you seek, the more investment you will need. Again, a company can report disclosures against the data it has. If the company seeks higher-value activities, IT and likely other business units need funding to deliver new systems modernization and connections. That trade-off is more negligible as the return on the investment grows over time, meaning impact and materiality are the only ways forward, not the disclosures.
The dominant data talk track has been around improving accuracy, yet I haven’t seen a company lead with a data modernization in their first run at understanding their sustainability footprint. Every company I’ve talked to is starting with their existing data because it is the most straightforward lift. They anticipate returning to uncover new data and connections over time.
The path to quality ESG data builds on the pressure of disclosures but is funded through impact and material issues. One sustainability and ESG data journey looks like this:
Phase 1: Data inventory, calculate metrics against existing data and estimate the rest. Report out.
Phase 2: Look for areas of improvement in data accuracy where it makes sense, the most material areas. Improve systems and data for reporting. Use this higher quality to inform impact and material change.
Phase 3: Continue data modernization to improve ESG and business insights. Break down data siloes and connect systems in the way your business works as one. Use the new insights to inform a strategy that mitigates risks and captures opportunities.
Funnily enough, the value is built on the first phase where disclosures live!
This approach led in partnership with IT, continually reinforces data modernizations with an eye on the outcomes—driving impact and managing material ESG risks and opportunities. It also includes matching your company’s technology stack digitally to the complexity of its operations and value chain, allowing advanced insights and simulations to be run. What starts with disclosures can end up with business transformation.
Sustainability professionals can’t escape data, but they can break the cycle of endless accuracy and low-value data requests and instead use data for achieving impact and business outcomes. To be sure, publishing a new CSR or ESG report is a proud moment, but after all that work is over, you must ask, ‘What’s next?’ If the answer is ‘next year’s report,’ run.