Module 4 of the HSBC Sustainable Business Accelerator explored “collecting data and governing ESG.” The session focused on key internal Environmental, Social, Governance (ESG) governance and reporting processes that constitute the foundation of a company’s ESG strategy.
The Importance of ESG Governance
ESG governance encompasses two crucial dimensions: traditional corporate governance, which centers on shareholder rights, board leadership, compensation, and ethical conduct, through the ESG lens, and operational governance, which refers to the governance systems in place to manage ESG risks and opportunities. Strong governance practices are critical to the accountability and support necessary for the successful execution of a company’s ESG strategy. They are associated with better financial performance, lower capital costs, and increased operational efficiency. In contrast, poor governance can lead to regulatory and reputational risks, corruption, higher capital costs, reduced shareholder returns, and flawed decision-making.
Key areas within ESG corporate governance include board composition, executive compensation, shareholder rights, ethical conduct, risk management, audit, internal controls, and stakeholder engagement. Take board composition, for instance. It refers to the mix of knowledge, skills, experience, and diversity in a company’s board of directors. It can be assessed by analyzing the percentage of independent or female directors on the board.
What Does Good ESG Governance Look Like?
Good governance is the bedrock of any ESG strategy, and it begins with a strong board and leadership team and a commitment to accountability. A typical setup might include: a dedicated Head of Sustainability or Chief Sustainability Officer (CSO) steering the ESG strategy; a Formal Board Committee (BoD) to provide top-level oversight ensuring that sustainability issues are a priority at the company’s highest echelon; Cross-functional executive Sustainability Committees for mobilizing employees across business units, regions, and functions; a Sustainability Team to ensure day-to-day activities align with the company’s initiatives – this team should not operate in isolation; Supporting structures, such as working groups or committees to further boost the integration of sustainability into the company’s goals; and finally, External Advisory Councils, composed of global thought leaders from various organizations, to provide invaluable external perspectives on ESG issues. Ultimately, it is essential to clearly define who will be held accountable and responsible for ESG within management. According to a PwC report, 66% of investors say they are more confident that companies are on top of ESG risks and opportunities when someone in the C-suite is accountable.
Companies should aim at a fully integrated model where ESG is integral to all board deliberations and decisions. Described as the ‘board of the future,’ it is where sustainability is fully integrated into the organization’s long-term strategy and enshrined in the board’s statutes. While there’s no one-size-fits-all approach to ESG oversight, companies can take steps like appointing a board champion to move towards the ideal model that aligns with their structure and sustainability expertise. The key is to select the approach that best aligns with the company’s existing structure and sustainability knowledge.
Data at the Core of ESG Governance
Data collection, aggregation, and management are central to the current ESG revolution. Accurate, auditable, comparable, and consistent corporate ESG performance data is crucial for several reasons. It enhances a company’s ESG performance, ensures compliance with disclosure regulations, and allows for the assessment, ranking, and rating of corporate ESG performance to attract investments with positive outcomes. Simply put, if you can’t measure it, you can’t manage it. ESG data must be produced or found across company systems, assessed for quality and reliability, collected across business departments and operations, transformed, and analyzed to produce insights, monitored to check progress over time, and kept safe and organized. Yet, while data is crucial to sustainability, it’s also the source of some of the most complex challenges.
The main challenge for companies is that ESG data takes many forms and resides in numerous internal and external systems. Locating, collecting, and managing this diverse data can be time-consuming and complex. Each company’s circumstances, industry, and location further complicate the data collection. To tackle the ESG data challenge, companies must first identify their data needs, locate existing data sources, engage stakeholders, assess data quality, aggregate data, and establish processes for ongoing monitoring and review. Digital tools can be highly beneficial to tackling the ESG data challenge. While spreadsheets have been the go-to for ESG data, they are becoming inadequate. Dedicated software solutions offer automated data collection, aggregation, analysis, engaging dashboards for data analysis and benchmarking, integration with reporting standards, and even audit-ready processes and data outputs. These tools can enhance efficiency and reduce manual efforts. It is crucial to remember that technology is only part of it if data is managed well.
How to Manage ESG Data Effectively?
ESG data management is also a daunting challenge and a significant cost to many companies. Growing disclosure regulations, rising investor interest, and changing consumer demands are increasing the pressure on companies to report their ESG performance. Sustainability teams are feeling the pressure, with an estimated 70% of their time spent on data-related tasks, often resorting to manual processes. The European Commission’s impact assessment underscores the stakes, estimating the total cost of compliance with the Corporate Sustainability Reporting Directive (CSRD) for European companies between €3.6 billion and €8.8 billion over a decade. In a world increasingly concerned with ESG, the ability to collect, aggregate, and manage data is the key to surviving and thriving in the new era of corporate responsibility.
Effective data management and quality data bring many benefits. They offer a clearer view of a company’s position, revealing areas needing improvement and strengths to build upon. This clarity is essential for crafting fact-based, realistic, and pragmatic ESG strategies. For instance, setting meaningful carbon reduction targets requires an accurate understanding of the current carbon footprint. Sound data practices also facilitate the development of robust sustainability reports and help companies keep pace with the escalating demands for data and compliance. Moreover, they enhance risk management by providing insights into both challenges and opportunities on the horizon. Finally, high-quality data is a benchmark against which a company can be evaluated by an expanding array of stakeholders, including banks, consumers, employees, and rating agencies. In contrast, failure to manage ESG data efficiently can lead to reputational damage (e.g., greenwashing by reporting data that is inaccurate, even if unintentional, erodes trust and can lead to commercial and reputational damage), ineffective strategy, revenue leakage, insufficient performance oversight, and difficulties in reporting and disclosure.
Plan for Success?
For companies just starting their ESG reporting journey, they must begin with the most essential and relevant ESG data, determine the primary sources of their ESG data, engage and educate their ESG data stakeholders, establish processes and controls for collecting and storing ESG data, and lastly, never lose sight of their data outputs. In a world where ESG considerations are paramount, the twin pillars of ESG governance and data are the foundation for sustainability and success. Companies that embrace these principles will thrive in the ESG landscape and drive positive change in a rapidly evolving world.
