The handwriting is on the wall. If your organization has yet to embrace environmental, social and governance (ESG) best practices, reporting and data-driven planning, it will soon be compelled to do so. It will happen through emerging financial disclosure requirements for public companies. And with public disclosure requirements will come the scrutiny of ratings agencies, shareholders and would-be investors and lenders.
Not a public company? That may not matter, as many public companies are already turning to their private partners to ensure that their social and governance policies are in line with their own and that supplier environmental impacts are accurately reflected within their own disclosures. No less important will be the growing scrutiny of consumers and public opinion, as ESG-related measures become more visible and measurable.
Defining Terms
To better understand the growing interest in ESG initiatives and disclosures, let’s take a closer at each category:
- Environmental criteria include carbon emissions, water and waste management, and material sourcing with an eye toward climate change and meeting reduction targets.
- Social criteria include diversity, equity, inclusion, labor relations, community relations, and customer data privacy and security.
- Governance criteria examine company leadership and board governance, executive pay, audits, internal controls, business ethics, intellectual property protection, and stakeholder rights.
Why Now?
All three categories have been on corporate agendas for some time, but criteria such as carbon emissions, diversity and inclusion, data privacy and business ethics have been in the headlines in recent years. Leaders on the E in ESG have already embraced voluntary frameworks, such as those from the Taskforce on Climate-Related Financial Disclosures (TCFD), the Carbon Disclosure Project (CDP), and the Sustainability Accounting Standards Board (SASB). But we’re now reaching an inflection point whereby disclosures will no longer be voluntary.
On November 3, 2021, the International Financial Reporting Standards Foundation (IFRS) – the body sets accounting standards in more than 140 countries – established the International Sustainability Standards Board (ISSB) with the goal of delivering a comprehensive, global baseline of sustainability-related disclosure standards. While many U.S.-based companies use GAAP rather than IFRS standards, the US Securities and Exchange Commission is headed in the same direction. In 2021 the SEC solicited comments from public companies and signaled its intention to propose disclosure and governance rules around carbon, human capital and cybersecurity risk as soon as the first half of this year.
Carrots and Sticks
There are many reasons that 71% of US Fortune 100 companies already have carbon reduction targets in place and that 54% of these firms also acknowledge the risks of climate change in their reporting. It’s not just that they’re subject to rising global regulatory pressure and scrutiny from partners. Nor is it just that they’re trying to “do the right thing” or win over ESG-driven investors and consumers. There’s also the fact that carbon and related waste are costly (all the more so amid geopolitical instability and rising inflation). Eking out every possible bit of carbon-related cost goes straight to the bottom line. There’s also that fact companies are struggling to hire and retain people. Inclusive policies can go a long way toward improving a company’s reputation and building a more loyal and sustainable workforce. Finally, there’s the fact that better-governed organizations are invariably more stable, sustainable and profitable than those with blind spots and a lack of checks, balances and clear, well-enforced policies.
Next Steps
For all the reasons cited above, I added ESG-related financial reporting and planning to my data-to-decisions research agenda late last year (soon after the formation of the ISSB). Yes, lots of companies have been leading the way on disclosure and niche vendors have been toiling away on ESG-supporting technology for years. But it’s now obvious that ESG measures are going mainstream. But as every CFO will recognize, ESG criteria will be just another piece of the reporting and planning challenge. For that reason, vendor consolidation (as well as organic innovation and development work) are clearly ahead for tech vendors that deliver disclosure and planning capabilities.
As demonstrated by recent announcements by Google, Salesforce and SAP, among others, mainstream tech vendors are quickly adding ESG-related capabilities to their portfolios. And as the tech landscape evolves, tech buyers will need help figuring out ESG in the context of their other reporting and planning requirements.
I’m currently surveying tech vendors to detail the ESG-related capabilities that they offer today and what they plan to add to support ESG-related reporting and financial and operational planning. My next step, in the coming weeks, will be to deliver a report on what’s out there and which vendors have concrete, near-term plans to step up their ESG capabilities. It’s already clear that disclosure options (from the likes of Insight Software and Workiva) are more plentiful than ESG-specific planning capabilities (like those offered by IBM’s recently acquired Envizi unit and by Workday). But I’ve talked to at least a few vendors that have planning solutions in the works.
From my perspective, ESG is hugely important, but it’s also just a piece of the puzzle, along with many other performance measures, business risks and regulatory concerns. Better that the ESG capabilities are incorporated into existing tools and platforms rather than requiring entirely new investments that might create new siloes of specialized data and analysis. ESG must be a holistic part of the totality of what organizations stand for and how they perform.
