Environmental, social and governance (ESG) issues are increasingly an area of focus for investors, regulators and other stakeholders. Numerous frameworks have been developed for corporate reporting on these matters and we are starting to see a degree of international convergence through the work of the International Sustainability Standards Board (ISSB). However, with regulators in other jurisdictions – most notably the US and EU – developing their own sustainability disclosure requirements, companies still have to contend with different frameworks and questionnaires.

With this challenging landscape as a backdrop and recognising that ESG data systems are not as mature as those for financial information, the FRC Lab launched a project on the production, distribution and consumption of ESG data.

The first phase of the project focused on corporate perspectives on ESG data production. The findings and recommendations were published in August. The report, based on discussions with private and listed companies, sets out the current landscape, the challenges faced by companies and positive actions to address those challenges. Three stages or elements of data production were identified:

1. Motivation

What motivates the company to collect ESG data and how does it identify what is needed?

The key drivers for collecting and producing ESG data that emerged from the discussions were:

• business and strategy needs;
• investor and stakeholder requests; and
• regulatory and framework requirements.

While for some companies the latter two are the primary drivers, those companies that recognise the strategic value of ESG data benefit from its production and do not consider it a burden. Where the data is used for business and strategy needs, companies can:

• monitor costs and performance, resulting in cost savings and reductions;
• demonstrate alignment with purpose, strategic objectives and commitments; and
• maintain positive engagement with, and address interests of, both internal and external stakeholders.

Companies want to think about what would be most useful in managing the business and not purely what is required to meet external disclosure requirements. Engaging with stakeholders and collaborating with peers to identify sector-relevant metrics can be helpful in identifying what is important and addressing the challenges around volume of and differences in requests.

2. Method

How is ESG data collected?

Once companies identify what data is needed and why, they need to focus on how to get the data. The discussions highlighted that the processes and tools used are predominantly still manual, with spreadsheets very much in use. However, there is increasingly a move to business intelligence visualisation tools, specialised ESG platforms and integration within financial reporting and enterprise resource planning systems. The choice of tools, as well as internal motivation and expectations, will drive the frequency of collection (and use of) the data.

One factor in how the data is collected and used is who is involved. In our discussions, we identified:

• producers and owners (typically subject-matter experts and who are directly collecting the data); and
• coordinators and reporters (typically from a reporting or sustainability function and who are responsible for collating and consolidating).

Finance teams and accountants are often involved in the latter role. What is crucial is that they do not work in silos, but seek to bring people together across the business to avoid duplication of data and to maximise effective collaboration. The role of finance teams in producing ESG data is also seen as critical to bringing rigour to and implementing controls in the data collection process. Internal audit teams are also starting to get involved, which helps enhance the credibility of the data for decision-making and reporting. Better controls, processes and internal reviews can also ease the way for external assurance.

3. Meaning

How is the data used within the company and how does it impact decision-making?

How the data is used will depend on the motivators for data collection, the level of maturity of the systems and resulting quality of the data, as well as the level of board and executive oversight. The more awareness there is of 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 results in a virtuous circle of more effective data use for decision-making both internally and by external stakeholders. Capital allocation and procurement choices, appraisals and remuneration, and review of targets and commitments are types of decisions that benefit from timely and high-quality data.

A subtopic of ESG that has risen to prominence in recent years is net zero – the target and companies’ commitments to achieve it. Companies are increasingly committing to reduce greenhouse gas emissions and announcing goals to reach net zero or carbon neutrality. However, reporting on these commitments has been criticised by many as too aspirational and investors continue to call for better information on this topic.

The topic of net zero also often came up in our discussions on ESG data production, particularly in relation to challenges on sourcing data from third parties. In view of this increased focus, the Lab carried out a separate project exploring investor needs and company challenges on reporting on net-zero commitments. The report was published in October and highlights three key elements that investors seek to understand:

• Commitments – the level of ambition, scope, nature and timing of the commitment, and what is included and excluded;
• Impacts – how the commitment impacts strategy and business model, including information on transition plans, assumptions, uncertainties and risks and opportunities; and
• Performance – how performance is being measured in the short, medium and long term, how high-quality data and accountability will be ensured, and actions management is taking in response to changes.

Our conversations found that these elements form part of an iterative reporting process, where both companies and investors are developing and evolving their understanding. As companies develop definitions and estimate impacts, this improves their understanding of what is important for them to measure. In turn, as they improve processes and data, it helps them refine the scope of their commitments and potentially increase the ambition of their aims. Many companies are still in the early stages of working out what their net-zero commitments mean practically and may currently only be able to provide a foundational or basic understanding of the commitment. In future, investors expect companies to report on progress against the commitment and targets, and any necessary refinements.

Some basic considerations that companies should keep in mind when reporting on net zero are clarity and strategic impact. When considering the commitment itself, it is important to be clear about the terminology used, as terms such as net zero or carbon neutral are often used interchangeably, but hold different scopes and meaning. Investors also want clarity on whether offsets are used and, if they are, the type of offsets. Finally, investors value disclosures that not only link the commitment to the business model and strategy, but also provide estimates of expected future costs.

Both projects have demonstrated that robust processes, systems and controls will enable companies to better understand their progress, take effective decisions and report in a more fulsome way on ESG issues, including net zero. Companies should not consider reporting as a static requirement once a year, but an iterative process for strategic purposes that is useful both internally and for investors and other stakeholders.

The Lab has launched the next stage of the ESG Data project looking at distribution and consumption of ESG data by investors, data providers and other stakeholders, as well as a project on materiality. Visit frc.org.uk/investors/frc-lab for further details and links to the reports, and email FRCLab@frc.org.uk if you would like to participate.