Sustainability has come onto the agenda of many businesses, with environmental, social, and governance (ESG) goals becoming major considerations. ESG reporting is a way for businesses to disclose the impacts of ESG programs to their stakeholders. Reporting requires businesses to collect and track data on their ESG performance and report this information in a transparent and consistent manner. This involves implementing processes and systems for collecting and reporting on data, and some businesses may need to ensure that the information is verified by a third party.
What is ESG
The ESG areas cover these issues.
Environmental: Climate change, reducing carbon emissions, deforestation, biodiversity, air and water quality, waste management, pollution
Social: Customer relations, employee relations and wellbeing, community relations, health and safety, supply chains, human rights, work-life balance
Governance: Board composition, management practices, succession planning, equity and inclusion, diversity, compensation, regulatory compliance, fraud, data, security, corruption
There are definite business benefits to environmental, social, and governance initiatives. Fossil fuel energy prices are expected to remain high, so reducing energy consumption can reduce costs. New industrial processes that reduce emissions can also lower the cost of energy. On the other side, changing regulations may penalize unsustainable practices and companies may be forced to move away from non-sustainable activities. Firms that are slow to change could find themselves playing catchup.
The saying that you can only manage what you measure is true for ESG. The Boston Consulting Group (BCG) reported that the top environmental, social, and governance areas for measurement are:
- environmental: supply chain optimization, reducing energy consumption at premises, reducing waste;
- social: protection of client and employee data, improving diversity and inclusion;
- governance: critical-incident risk management (including cyber resilience), real-time monitoring of risk, predictive risk analytics.
By integrating company data with data from supply chain partner’s businesses can identify areas of intervention beyond the company’s own processes.
Implementing a program
BCG have also published a framework that businesses can use to implement ESG programs.
- Establish the baseline. Identify the potential of an ESG initiative.
- Assess the opportunities and effort of the initiative, with questions such as:
- Which innovations will have the biggest impact?
- Which ones can be implemented quickly and easily?
- Which ones require larger, longer-term investment, and which will require external partners?
- Which ones do not form part of the core business and will therefore involve going to external parties like venture capital?
- Manage the portfolio. Because not all initiatives will succeed, a portfolio of initiatives must be managed, cutting and adding them over time as technologies advance, and new opportunities and business models arise.
- Rethink the operating model. New ways of working will emerge which will likely require some form of business transformation. Companies will also need to work in an ecosystem environment with suppliers and customers.
ESG reporting and analysis
Data is one of the most important requirements of an ESG program. It is only with the analysis of data that situations can be visualized and changes made. Therefore, to implement ESG reporting requires establishing a system for collecting data on the company’s environmental, social, and governance practices, as well as its performance in these areas.
Once the data has been collected, it should be analyzed to identify areas where performance is good and areas where there is room for improvement. This analysis can help the company develop goals and measurable targets for improving ESG performance.
There must also be a plan for reporting on the company’s ESG performance so the information can be shared with various stakeholders, including investors, employees, and customers. This can help the company demonstrate its commitment to responsible business practices and provide transparency into its operations.
Reasons for implementing reporting
ESG reporting that is transparent and verified is essential for developing actionable solutions. It allows businesses to set benchmarks, track progress and then communicate how their ESG goals are being met.
Increasingly, investors and lenders use ESG reports to assess a firm’s risk exposure and determine their possible future financial performance. Investors are tending to avoid companies that lack environmental, social, and governance reporting.
A report showed that consumers, particularly Gen Z, are more willing to support brands with an effective environmental, social, and governance strategy. Amongst employees, a majority of millennials consider the sustainability agenda of an employer when making their employment choices. So reporting ESG can improve an organization’s chances of attracting talent.
Regulatory authorities are signaling that they may make reporting on ESG mandatory. Companies will therefore be obliged to publish sustainability information.
5 ways that ERP plays a role in ESG?
Because an ERP system provides a comprehensive view of a company’s operations, it can be used for tracking and reporting on ESG metrics.
- ERP systems can provide companies with significant advantages when producing ESG reports.
- An ERP system is a repository of data from all functions of a business. The data can be used to provide visibility into how to measure and reduce waste and carbon emissions, optimize processes to be more energy efficient, and monitor plant machinery for energy waste.
- An ERP system is an extensible platform that can be used to collect data from internal activities and from external partners. Having a wider view of data, e.g., from suppliers, can give executives greater insight into streamlining sustainability operations.
- With workflows, process controls, segregation of duties by roles and access, and audit trails, an ERP system has built-in safeguards for a company’s governance.
- As the single-source-of-truth, an ERP system enables reporting and analysis of ESG initiatives to be done more easily. In addition, the data is readily available to comply with the various ESG reporting standards and formats.