It is no news that ESG impact is hard to measure – just the idea of collecting “environmental, social, and governance data” sounds wishy-washy. As a PhD researcher in Psychology, I love exploring ways to measure the “unmeasurable stuffs”. In this article I am going to explore the 3Ms’ framework that guides companies and analysts to produce and critically evaluate ESG data.
· Motivation: What drives a company to collect ESG data and how to identify what is needed by the company?
The motivation often directly affects what ESG data is collected by the company. There are three key drivers. While there are overlaps between them, different companies place different emphasis on each of the drivers.
1. Business and strategy needs: the data can be operationality driven: These data are often closely tied with regulations, social licence, business model or, like energy consumption, can help reducing costs; Purpose driven: These clients collect ESG data to track how are they progressing on sustainability values; Commitment driven: Sustainability commitments such as net-zero; and Employee driven: to address employee interests and attract talents.
2. Investor and stakeholder requests: Investors requests: to submit ESG questionnaires and report against metrics; Lenders and banks request: use ESG data to assess the uses of proceeds of green and sustainable bonds or loans, traditional refinancing or new credits; Existing and prospective customers – to meet supply chain information checklist and for certifications and labels; Industry bodies, authorities, and initiatives: to meet membership criteria or industry targets.
3. Regulatory and framework requirements driven by legal requirements and standards across different jurisdictions, stock exchange rules and data point.
By understanding the key drivers of the company’s ESG data collection, you can better decide the assessment scales or surveys that can be put into the ESG questionnaire.
· Methods: who is involved in collecting the data, how the data is sourced, the systems and tools used, and how the data is validated?
Once you set off the journey of data collection, you might want to pay attention to how you collect the data. Here are four aspects in data collection you can take notes of:
Roles: who is involved in collecting the data? The roles can split between producer and owners – those who are directly involved in data collection and are often subject matter experts, or coordinators and reporters – those who are responsible for bringing other teams into completing the task, typically from the reporting and coordinating sector.
Sources: where did you collect the data? Is it from internal sources – measured from automated systems, manual inputs, or documents? Or is it from external sources – through suppliers, contracts, and involves designated questionnaires?
Tools: There are various platform to document the data, from spreadsheets and visualisation tools to specialised ESG platforms, financial reporting, and resource planning systems.
After the data is collected, there are also hardcore protocols to safeguard the accuracy and validity of your data. Such as:
- Variance analysis: to compare the data with prior periods, forecasts and targets.
- Lines of defence approach: to apply controls, internal reviews, checklists and sign-offs.
- Internal audits: to review methodologies, data sets and KPIs.
- External assurance: over areas such as data processes and controls, as well as the data itself, typically on environmental data.
Meaning: how the data is used? What are the frequency and approaches when reporting your data?
The board or the delegated committee will usually be the one that receives ESG data. They are the decision makers. As a ESG analyst, your will typically report the data once to four times a year, in the form of reports. In most of the cases the decision makers, but not the analysts, will decide how to make use of the data (Yikes!). However, here are some general ideas as to the areas your ESG data is going to be implicated in:
Forecasting and risk management: your data tells the risks that exists in certain company’s sectors!
Analysis of performance: the ESG report also reveals how the company is performing against their sustainability goals. I.e., their weak points that requires a change in strategy!
Capital allocation: the ESG report tells the executives where to put the money. Do they need more capitals to meet the commitment goals, or more expenditures might be needed to switch to a more environment-friendly suppliers?
Remuneration decisions: The ESG metrics can also be adapted by the human resources sector to long-term incentive plans or performance bonuses to increase the employee’s accountability and facilitate actions.
Finally, here is a 12-step guidance to secure a quality ESG data production:
My personal take on this that Don’t work alone. You will need to work with multiple sectors (legal, energy etc) and stakeholders (internal executives and external investors etc. ) to figure out what data is needed, from whom you can ask for the data, how to devise the most needed ESG strategies and so on.
https://www.frc.org.uk/investors/frc-lab/esg-data
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