The rapidly changing ESG landscape is making it difficult for companies to navigate their way to acceptable ESG standards. At present, there are no established sets of standards and measures, except in some jurisdictions and sectors, and the regulatory requirements have not been fully established or implemented.
The question of what constitutes ESG data and how it can be collected and used, is one of the areas which is presenting challenges. The Financial Reporting Council (FRC) which functions as a regulator of auditors, accountants and actuaries and issues accounting, audit, assurance and standards and guidance and sets the UK’s Corporate Governance Stewardship Codes has started work on providing guidance on ESG data, and in particular the production, distribution, and consumption of data.
FRC’s work is outlined in their Statement of Intent on Environmental, Social and Governance challenges in July 2021 and an FRC Lab report on Improving ESG data production in August 2022.
This article summarises the content of this work on ESG data.
FRC’s Approach
As explained in FRC’s Statement of Intent, the systems for ESG data production, distribution and consumption are significantly less mature than those for financial information. To address this shortcoming, the FRC Lab has launched a project in three phases, with the first phase focusing on the production of ESG data.
The report focuses on the company’s perspective on ESG data production, both for internal and external use and is based on information obtained from a diverse range of organisations across different sectors and sizes.
There are three elements to ESG data production:
- Motivation – Identifying what data is needed to meet business strategy, stakeholder, and regulatory needs
- Method – Collecting and processing data effectively
- Meaning – Using the data strategically
To understand these elements and FRC’s approach, we must first understand what is meant by ESG data.
What is ESG Data?
ESG data is sometimes called, non-financial information and stands for environmental, social and governance data. However, the FRC has concentrated on environmental and social matters predominantly, and in particular on climate issues, due to the investor and regulatory pressures in the last few years.
FRC’s project focuses on understanding what companies consider to be ESG data and how they approach its production. Their project aims to understand how companies are collecting data which enables them to respond to the risks and opportunities associated with environmental and social issues.
The three elements of ESG data – motivation, method and meaning, some of which are discussed in greater detail below.
Motivation
This element encompasses the drivers for data collection and how companies identify what data is needed.
The key drivers are:
1. Business and strategy needs: this can be further broken down into
- Operations: needed to monitor costs of performance relating to the company’s license to operate
- Purpose: to monitor alignment with strategic objectives linked to sustainability
- Commitments: to track progress against goals
- Internal stakeholders: to address employee interests
2. Investor and stakeholder requests: these include requests by
- Investors
- Debt providers
- Existing and prospective customers
- Industry authorities, bodies, and initiatives
3. Regulatory and framework requirements: this is related to legal requirements across different jurisdictions, stock exchange rules, and data points required by standards and frameworks voluntarily adopted.
There are several challenges facing companies, including the volume of requests, rapid changes in legislation and nuances in similar but different data requests.
Meaning
Once data is collected, it will need to be interpreted and used by the company. This step relies on the level of board and executive oversight. ESG information is shared with board or the relevant ESG committees, between once ad four times a year. This information is shared through reports and scorecards.
How this information is used, will depend on the frequency and approach used in reporting:
1. Scenario analysis, forecasting and management: The Task Force on Climate-Related Financial Disclosures (TCFD) requires these elements, but the methodology is also being applied to other areas for risk assessment and modelling.
2. Analysis of performance and progress against targets: Data on performance may be reviewed from both an operational basis and a sustainability perspective. Ultimately, it can be used to assess performance against strategy and to identify where action is needed.
3. Capital allocation and procurement choices: ESG factors are influencing capital expenditure decisions, particularly where needed to fulfil commitments, but also operational expenditure choices, both on type and on selection of suppliers.
4. Remuneration decisions: Some companies are using ESG metrics for performance bonuses or long-term incentive plans to increase accountability and reward good ESG performance.
The FRC Lab report also provides a step-by-step approach to ESG data production and includes relevant questions for the board. Details can be found here.
In Summary
The way in which ESG data is being used is still evolving. The type of indictors and the timeliness of data for decision-making are still challenges companies face.
Prospect Law is well-placed to help companies with these challenges, though its ESG Audit, Training and Advisory services.
Dr Jacqueline Faridani
Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.
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