A best-practice model for how companies should gather, and make effective use of, environmental, social and governance (ESG) data has emerged from the Financial Reporting Council (FRC). The guidance is aimed at a broad range of UK companies, from private businesses and listed corporates to housing associations.

Published on 30 August, Improving ESG Data Production notes that current systems and methods for producing, distributing and consuming ESG data are “significantly less mature” than those that exist around financial information. As such, the report puts forward a three-phase cycle for ESG data management, comprising 12 steps, that companies can adapt to fit their own business models.

These are the main phases that the guidance urges businesses to consider.

(i) Motivation – what is the purpose for which you are planning to gather ESG data in the first place? And what sort of data do you need in order to meet particular strategic, stakeholder or regulatory needs?

(ii) Method – what are the most effective means for collecting and processing the types of data you require? 

(iii) Meaning – once you have gathered and processed the data of highest relevance, how can you then use it with the greatest strategic impact?

Credibility risks

In setting out this model, the FRC hopes it will encourage companies to avoid some of the pitfalls or inconsistencies that have blighted the effective production and use of ESG data. For example, it points out, some companies have begun, or ramped up, data gathering to back up their delivery on key commitments or goals – particularly in relation to net zero. So, their collection efforts are geared towards monitoring progress against interim targets.

However, the report warns, some corporates have announced ambitious commitments before obtaining hard data on their current ESG status, and properly assessing whether the envisaged targets are achievable. “While ambitious goals can spur much-needed action,” the report notes, “there is a risk to credibility if a later data-gathering exercise puts feasibility into question. This has led some to delay making formal commitments.”

On the data usage front, the report cautions businesses against putting all their eggs in one basket when liaising with the ESG rating community. In a piece of verbal feedback quoted in the report, one anonymous company says: “We had been on [a sustainability] index for many years, so were not so concerned about ESG rating agencies. But we realised that some investors listen to one agency and others listen to another. So, we are now engaging with four different agencies.”

At a broader level, the report stresses: “Do not treat ESG data just as part of an annual reporting cycle. Integrate it in regular processes and embed it in the company’s culture to understand: a) company performance and impact, b) risks and opportunities, c) progress against commitments, and d) what action (including strategic change, capital allocation and incentivisation) is necessary.”

Joined-up approach

In a statement, FRC ESG and Climate Group Chair Josephine Jackson said: “High-quality data is critical to high-quality decision-making. Improving the systems and processes for the production of ESG data, as well as embedding a joined-up approach to data collection, will result in better decision-useful information.

“In turn,” she added, “this will lead to more relevant and reliable disclosures for all users who rely on companies for clear reporting of ongoing performance and future prospects.”

Commenting on the guidance, ICAEW SDG Manager, Dipak Vashi says: “It is good and welcome news that the FRC is intervening on published ESG data to attempt to drive standards and make the available data more user and decision friendly – especially in the wake of recent criticisms.

“The three-phase model proposed by the FRC should guide UK firms to produce best-practice ESG data to support their stakeholders’ needs and foster greater collaboration towards decision-making that will address the climate challenge we are all facing.”

However, he adds: “This is not the end of the road. Far more work needs to be done to ensure published data is of the highest quality – ensuring UK PLC can determine the right path for fighting the climate-change war.”