Improving ESG data production
The Financial Reporting Council (FRC) has published a report on environmental, social and governance (ESG) data production. The report is designed to help companies consider how to collect and use ESG data more effectively to support better decision-making. It sets out the three elements of ESG data production—motivation, method and meaning, and suggests actions that can be taken by boards to address challenges and how ESG data is collected and applied.
ESG metrics are an increasingly important parameter on which stakeholders base their assessment of an organisation. However, in its ESG Statement of Intent, the FRC recognised that, when it comes to ESG data, the ‘underlying data systems, and the data that supports reporting, pose a challenge’ and remain significantly less sophisticated than those for financial information.
The Report on the production of ESG data is a helpful tool, as it captures the challenges associated with ESG data production, but also suggests positive actions to overcome them and how boards can improve how ESG data is used and collected.
The Report focuses on three key aspects of ESG data production:
- motivation, focusing on what motivates the company to collect ESG data and how to identify what is required
- method, looking at how ESG data is collected, and
- meaning, assessing how data is then used and how it influences decision-making
What is ESG data?
ESG data obviously relates to information on environmental, social and governance factors, but exact definitions vary. For example, as the Report states, ‘Some consider ESG to be synonymous with sustainability information and a company’s impact, whereas others consider ESG to be focused on what affects the company, or both’. As noted in the Report, building a shared understanding of what ESG means within a company will be key to ensure an organisation focuses on collecting the right data.
What are the key takeaways from the Report?
The key takeaways can be grouped into three areas:
1. Challenges and positive actions
As mentioned above, the Report outlines both current challenges relating to ESG data production and suggests positive actions to address them.
For example with respect to:
- motivation—identifies different drivers for collecting ESG data, which include business and strategy needs, investor and stakeholder requests and regulatory and framework requirements. In order to ‘understand the universe of data requirements’, the Report suggests that a company may ‘start with assessing what is relevant to the company’s decision-making (through the consideration of stakeholders and risk management), adding on elements required by regulation, and then considering additional voluntary elements which best match the needs of key investors and stakeholders’
- method—recognises that ESG data collection involves different people, sources, systems and tools. With respect to sourcing data, the Report provides the example of how companies may depend on third parties (primarily suppliers) for their external data and provides suggestions as to how to engage and collaborate with them effectively
- meaning—acknowledges that how ESG data can be used is still evolving and will vary according to the maturity and quality of data, processes and systems. The Report goes on to suggest that ‘the more awareness there is on how ESG data can be used strategically, the more there is a business case for investing in the human resources and systems needed to improve the quality of the data. This in turn leads to more effective use of the data both internally and by external stakeholders’
2. Questions for the board
The Report recognises that the board plays an important role with respect to ESG data. For example, it finds that ‘For data to be used effectively and to not be considered solely an external reporting exercise, boards need to set the tone at the top and recognise its importance, which then cascades through the organisation.’
It identifies a series of questions for boards which can assist with issues such as improving the overall quality of, and processes for, collecting ESG data. These vary from asking what ESG data is needed to support a company’s goals, to what processes are in place to periodically review quality and accuracy of data, to whether its reporting on financial and non-financial information is connected.
3. Step-by-step approach
The Report provides a pragmatic set of recommendations relating to ESG data production. These include suggesting that companies:
Are there any other developments related to ESG and data on the horizon?
The Report was only the first phase of the FRC Lab’s work in this space. It will now assess how ESG data is distributed and consumed.
In terms of wider developments, a number of regulatory developments and initiatives will likely lead to continued heightened focus on this topic:
- regulatory attention—the FCA has indicated that it sees a ‘clear rationale’ for regulatory oversight of certain ESG data and rating providers. It will continue to work with HM Treasury, who is considering bringing ESG data and rating providers within the FCA’s regulatory perimeter. Should this be granted, further regulatory intervention can be expected
- focus on engagement with suppliers—currently at the proposal stage, the Corporate Sustainability Due Diligence Directive will require in-scope companies to identify and take action against adverse human rights and environmental impacts both within their organisation and across their wider value chains. This will inevitably encourage further flow of data and alignment between companies and their suppliers
- emerging frameworks—some of the emerging frameworks are pre-emptively looking to address potential data challenges. For example, as the Taskforce on Nature-related Financial Disclosures (TNFD) framework goes through further iterations before being finalised in 2023, the Nature-related Data Catalyst initiative is already looking to identify and address nature-related data challenges in order to then help facilitate the speed and scale of adoption of the TNFD framework
Bigger and better data
As focus on ESG issues continues to grow, we can expect the demand for quality ESG data to as well. The Report can be an opportunity for companies to reflect on how they can ensure that ESG data is as relevant and useful as possible for both them and the broader investor, stakeholder and regulatory community.
This analysis was first published on Lexis®PSL on 8 September 2022 and can be found here.