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The Story So Far
Lets start here, ESG action been driven by companies who
- Target customers who themselves are morally conscious, and as a result this leverages competitive advantage and forms apart of the company mission think, Patagonia on the good side. But unfortunately there is also a bad side, where marketing is abused, this is called "Greenwashing" which we explain below
- Wish to target morally conscious talent and workers, as well as customers to drive competitive advantage
- Are large enough, or sell to large enough market on the B2B side, that it forms a part of their long term company strategy
- Are involved with ESG investment as an asset class and therefore use this as a method to fulfil investor demand for sustainability
This has very much been the carrot of the ESG movement, and this has made some progress. However, often a major inflection point is experienced in an industry once regulation catches up. This is very much the stick, and its happening at pace.
With growing demands of consumers, and difficultly in validating ESG claims made without clear and understandable legislation, this has led to a wave of false claims and marketing being geared towards green movements which are not justifiable, This is the term known in the industry as “Greenwashing”, a challenge that legislation must combat.
Regulators around the world are going big on disclosure, enhancing and releasing regulatory requirements for organisation reporting that will lead to ESG no longer being a option.
Want to understand the basics of ESG? Particularly, the hottest area emissions? Read our recent article here
What is the state of play in regulations?
Legislation has been around in a form for some time now for the very large companies, however this has had major flaws. Reforms have been expected and in the pipe for some time, finally clarity seems to be arising on what this means and what steps companies must take now to be ready to embed ESG within their business. While its started with the very large, and at a surface level, it will gradually filter down into smaller companies, and with increasingly greater requirements being placed upon them.
If you operate in the EU, read our article on new EU legislation and upcoming changes here.
While their are still some unknowns, what is clear is that legislation will be particularly challenging for companies who span multiple geographies, and will have varied reporting requirements across these territories.
What are the biggest challenges facing those getting going in ESG Reporting?
Measurement vs.Estimate
Because of the very nature of emissions being impossible to measure for the majority of sources, measurement in is effect, estimation. All measurement must therefore be subject to a level of confidence in the estimation, based on the detail and information that is available to support it.
Data
In order to make accurate measurement, data is required. The types of data are not often readily available, as it typically isn’t captured or use by the organisation already. Further compounding this problem, the need for ESG spans across companies, and the sharing of information.The foundations for coordination are not yet established and therefore this can often mean it leads to manual processes and additional work.
The approach taken therefore must be tailored to the approach that is most appropriate in a given companies circumstances with the level of data that is achievable. As well as maintaining a level of flexibility to allow the process to enhance and mature.
Lack of standardisation and the need for change
Regulation as we have explained, is only just starting to shed some light on what expectations are and introduce standardisation which can be adopted. The landscape is expected to continue to shift over the coming years. The time for sitting and waiting however is over, companies must take action to be ready before it arrives, knowing that their processes will need to continue to evolve and develop as factors change around them.
Learn By Doing
Solving the challenges that ESG will place on organisations will inevitably require some iteration and you must start where you are today, over time developing sophistication as knowledge is built and the groundwork on data and dependencies become available.
As is often the way, taking a principle based approach is likely to yield the best outcomes. Extending on the point above that emissions are estimations, this therefore means that this is a data modelling challenge, and you will have similar processes already operating in your organisation that this sits alongside. Don't, therefore look at this in isolation, look to leverage consistency across these disciplines to drive efficiency and ease of transition.
Approach
The common approaches to deriving emissions are detailed below, this typically takes spend data (of varied degrees of detail) and converts to emissions through a "factor". Being the assumed amount of C02 Emitted per Pound, Euro or Dollar of spend. Factors can also be of varied degrees of detail and source, and typically accuracy can assume to increase the more detailed you perform the calculations or the closer the source is the origin. This will become increasingly a challenge for organisations as they will be required to sign off that they have a suitable degree on confidence in the accuracy of their emissions. This can only be achieved if they understand the basis for arriving at the measurement, and they can perform an assessment of its potential weaknesses.
Method 1
Spend by Spend type (Software, Office Supplies, Widgets) x Industry Assumed Factor.
There are a range of publicly available datasets which can provide you with this information as a starting point.
Method 2
Add additional dimensions to this data to increase granularity, such as geography, changes in factors over time with an appropriate source of factor.
Method 3
Consideration for whether spend has changed by volume - leading to increased emissions or purely on price inflation.
Method 4
Supplier level spend data x supplier specific factors.
Spend level data resides in your ERP system.
Supplier factor can either coming by way of publicly available information (Published Financial Statements or press releases), or through direct communication with suppliers. Data providers also exist to aggregate this publicly available information to reduce data gathering efforts, as regulations develops this will become simpler and more accurate as a source.
Other Considerations
If you are seeking a solution, choosing your partner and any tooling that you require is a key decision. When considering an out of the box solution you should consider
- Are they attempting to deliver to a broad range of customer types and industries
- Does it lack flexibility to adequately tailor it to your organisations needs
- Is it one size fits all with regards to the starting position from which you begin
These factors have risks, risk that it wont achieve the desired outcomes or that you will later become restricted by conflicting priorities of customers across sectors and industries as legislation needs before specific to sectors. As your maturity increases this may lack the flexibility to customise or integrate with your existing processes and data.
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If you want to learn more about how Viridian can support you in your ESG journey head over to here