“Better sustainability disclosures are in companies’ as well as investors’ own interests,” wrote Blackrock CEO Larry Fink earlier this year. His annual letter, seen by many as a bellwether of investor sentiment, signals the increasing pressure that companies are under to prove their environment, social and governance (ESG) credibility.
That pressure has translated to action, and the number of companies publishing a dedicated sustainability report has increased by 57% since 2011. As a result, the market for technology that helps companies understand and report their ESG position has boomed.
Datamaran, the first ‘ESG-tech’ company to secure a patent on unstructured data analysis of external risks, provides one such solution, helping multinational companies such as Philips and AT&T to identify, address and monitor ESG-related risks and opportunities. When it launched in 2014, it was one of only a handful of ESG software providers, but the market has rapidly expanded since, says Susie Katus, the company’s vice-president of brand and business development.
“When we launched seven years ago, having a conversation with a CFO about these types of risks and opportunities was uncommon – today, that’s exactly who we work with,” she says. “These issues have real financial and reputational implications for companies, especially in light of 2020, with the public health crisis, the social justice movement and climate change.”
Meeting ESG reporting requirements is increasingly intertwined with companies’ digital transformation initiatives, adds Katus. “The two go hand in hand,” she says. “Corporate leaders recognise that they can’t do this in a silo.”
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Emerging tech for ESG reporting
From AI-driven materiality analysis – defining areas that directly impact your business – to tracing payment flows using blockchain, tech is transforming the ESG reporting space by enabling companies to collect new data and analyse it more effectively. Platforms like GHGSat use satellites to measure greenhouse gas emissions at different commercial sites, while the likes of Tracr use blockchain to track diamonds from mine to jeweller, providing an auditable supply chain.
“[Companies are] using technologies like internet of things, impact measurement and monitoring, data collection and screening technologies like blockchain and supply chain technology,” says Sandip Sinha, industry lead for capital markets technology at Accenture, adding that while we are still at the early stages of adoption, “we are looking at truly data-driven ESG reporting, maybe a few years down the line”.
For that to happen, companies need to invest more in building out their data sourcing and analytics capabilities, adds Bhavna Rawlley, vice-president of capital markets at Accenture Singapore. Evolving standards and norms also put pressure on pioneering companies to continually update their approach to sustainability analysis. For example, just 17% of companies externally audit their ESG reporting, according to the Conference Board, but a survey by McKinsey found that virtually all investors believe this is the way forward.
Companies have made most progress with their environmental reporting, but tech-driven monitoring of social and governance factors currently lags behind. This is because it is easier to quantify climate-related factors, says Renée Friedman, economist and strategic adviser at the VeriStell Institute, a think tank focused on corporate purpose and ESG.
“The ‘E’ side has definitely been leading this over the past couple of years because if you can measure it, it becomes more important,” she says, adding that this has a knock-on effect for the development of ESG reporting and monitoring tech. “The way that companies are collecting data now it’s easier to go for the ‘E’ than the ‘S’ and the ‘G’.”
Smaller companies risk being left behind
The focus on environmental factors is partially why big-polluting industries like mining and energy have been pioneers of the data-driven approach to ESG. But larger players across sectors have been quicker off the mark to transform their monitoring and reporting processes using technology. Only half of the small and mid-cap companies surveyed by White & Case at the start of 2021 reported on sustainability, compared with 90% of S&P 500 companies in 2019.
It is critical that SMEs start to build up these systems, warns Rawlley. “A lot of the time, especially the smaller players or the private players, don’t get into this ESG area because they think the cost is very prohibitive – even if they do see some benefit, it doesn’t seem tangible enough,” she says. “SMEs need to start that foundation today because if they miss the bus now, a few years down the line they will be the ones who are left behind [by investors].”
One reason for the gulf is that larger companies face greater pressure from policymakers. A number of reporting standards, from The Global Reporting Initiative (GRI) to the Task Force on Climate-related Financial Disclosures (TCFD), have gained traction in recent years, which has increased the scrutiny placed on industry leaders. While the EU’s directive on non-financial disclosure, which makes sustainability reporting mandatory, only applies to “large public-interest companies with more than 500 employees”.
There are limitations to standardisation in an area as complicated as ESG as many variables are interdependent, says Friedman: “You will get a set of agreed indicators over time, but will that capture everything? No.” But, she adds, reporting according to sustainability standards is as much about addressing the demand for more concrete data from investors and signalling that they are “willing to be open and transparent” about their ESG credibility.
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