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Sustainability Data Strategy: Three Tips for Finance

The most widely used Sustainability (or E.S.G.) Data Management and Reporting tool today is the spreadsheet. The spreadsheet is – by far – the most flexible tool available for ad-hoc data exploration, modeling, and reporting of quantitative (numeric) data. When there is a data problem and no other solution presents itself, a talented spreadsheet power-user will find a way.

Spreadsheets also suffer from known limitations, such as:

  • Sharing and securing data for “one version of the truth”
  • Supporting collaborative work with centrally managed security controls
  • Scaling up to handle large data volumes
  • Automating data acquisition and transformation

This matters to Corporate Finance because major regulators will soon require CFOs to sign off on sustainability metrics as part of their financial disclosures. In 2023 the SEC will finalize rules that will “require disclosures on Form 10-K about a company’s governance, risk management, and strategy with respect to climate-related risks”, following the European Union and others.

All this is why Verdantix, a research firm, projects that the ESG (Environmental, Social, Governance) reporting software market will grow from $905 million in 2021 to over $4.34 billion by 2027, at a CAGR of 30%.

Read on to learn how to navigate this new landscape from a Finance and FP&A (Financial Planning & Analysis) perspective!

A Familiar Story for Finance

This evolution from spreadsheets to using a software solution is familiar to anyone who works in financial reporting or FP&A (Financial Planning and Analysis). Planning software solutions such as IBM Planning Analytics, Pigment, Anaplan, and Workday Adaptive Planning (to name a few) have gained increasing traction over the last five years. Many of them co-opt spreadsheets as a reporting tool while adding powerful infrastructure and capabilities to support scalable secure collaborative planning activities.

Anyone in finance who has made this transition successfully will attest to the qualitative business benefits of deploying a planning software solution including:

  • Being able to easily validate, explain and trust the numbers!
  • Having more time to do high-value work like analysis instead of toiling away at manual manipulating data
  • Increasing agility and resilience by compressing forecasting cycles from quarters down to months, weeks or days
  • Automating delivery of relevant and timely information to all parts of the business

Conversely any organization that still thinks that spreadsheets (powered by late-nights) can get the job done risks being left behind. Planning software solutions for finance are now table-stakes for any competitive growth-oriented business. This will soon be true for Sustainability Reporting too.

The Catch: Data Preparation

But there is one thing all these Financial Planning (and Sustainability Reporting) software solution vendors gloss over: data preparation. Yes, their solutions are all “easy to configure” … once your data is properly organized and ready!

Even when the business requirements for the new software solution seem straightforward (“We just need standard financial reporting”, “We want to plan salary expenses”) there is always some effort required to align each company’s unique IT/data landscape and business processes with the inputs the new software solution expects. This is called “data preparation”, and most of it takes place outside the new solution. Up to 80% (or more) of a deployment effort can be spent on data preparation. Sometimes spreadsheets are used to short-cut data preparation but over-using this approach limits the benefits of the new solution and should only be used as a stop-gap measure towards maximizing automation.

All this is true of a Sustainability Reporting software solution deployment too, except – if anything – the data sources are more varied, more numerous, and less well-understood, as we’ll discuss in the next section. There are no short-cuts to solving the data challenge, but it helps to acknowledge that the challenge exists, and to be prepared to put in the necessary effort. As reporting on sustainability metrics evolves from being a voluntary “nice to have” to being part of an audited and verified regulatory filing, Corporate Finance and Sustainability Reporting teams will need to work closely together.

Data Sources for Sustainability Reporting

When a publicly traded company prepares financial statements for a regulatory filing, the contents – income statement, balance sheet, statement of cash flows – are governed by familiar standards (like US GAAP or IFRS) and are well-defined and uniform across all companies and industries. The primary data sources are General Ledger/ERP systems, which are often owned by the same teams that create the reports.

Sustainability/ESG reporting differs from Financial Reporting in that:

  • The reporting standards are new and evolving, which means that experts are hard to find.
  • Regulators are not always clear on what is expected, and different regulators may align with different reporting frameworks and standards.
  • The frameworks and standards leave room for interpretation depending on a company’s industry, business model and priorities.
  • The data come from many different systems that are owned by functions other than the team whose job it is to produce the reports.

One data source that many companies are especially worried about is so-called “Scope 3 emissions reporting”. As defined by the Greenhouse Gas (GHG) Protocol, Scope 3 emissions refers to GHG emissions as a result of a company’s upstream and downstream activities. “Upstream” can include emissions produced by vendors and employee travel (as two examples) while “downstream” can include emissions produced by sold products, and even investments. Since these are emissions produced by external entities, the most common approaches that companies are taking are (1) sending out surveys, and (2) estimation. Even though Scope 3 emissions are the most extreme example of the Sustainability Reporting data challenge, they illustrate the breadth of what can be involved.

Here is a summary of frequently used data sources for Sustainability and ESG Reporting:

Environmental  Directly produced/Scope 1 emissions: asset management systemsPurchased energy/Scope 2 emissions: utility billsValue chain indirect/Scope 3 emissions: vendor & customer surveysERP/General ledger (e.g. for intensity metrics such as revenue per unit of emissions)
SocialWorkforce demographics & salary data from HR Vendor data from the purchasing system
GovernanceGovernance, Risk & Compliance (GRC) software
Examples of Sustainability/ESG Data Sources

Three Sustainability/ESG Data Strategy Tips for Finance

Besides the new financial filing requirements from regulators mentioned earlier, there are other reasons why Corporate Finance may be looking for sustainability data (such as emissions data or pay-equity data). These include investors and lenders requesting information on sustainability-risk, a strategic planning initiative to integrate sustainability metrics, and emissions data requests from customers or vendors to meet their own Scope 3 reporting requirements.

If you are in any of these positions, here are three recommendations:

Tip 1: Prepare to Collaborate

Begin by reaching out to teams who already report on sustainability data. These may include Sustainability or CSR (Corporate Social Responsibility) teams, as well as Environmental Health and Safety (EHS) teams. Depending on the industry you are in, one of these teams may already have advanced systems and processes for tracking emissions, along with carbon accounting expertise, and knowledge of the Green House Gas (GHG) protocol which underpins how emissions are reported in all the major frameworks. Next, check in with your investor relations team (who may already be fielding questions from investors in this area) and legal and compliance teams, who can advise on governance issues and compliance.

What Finance brings to the table is rigor, controls, and financial audit experience. With sustainability metrics now expected to be part of a company’s audited financial statements, the stakes for accuracy and compliance are going up, and all these other teams will lean on finance for this expertise.

No one inside or outside your organization has all the information, so teamwork is the only way forward.

Tip 2: Start Small, and Build a Phased Approach

It is much better to focus on a small number of metrics and build a robust data infrastructure to track those metrics accurately, than to try to check all the boxes on day 1. When selecting your metrics, we recommend beginning with:

  • The minimum set that you need to comply with regulatory filing requirements, and
  • Metrics that will help you gradually integrate sustainability into decision-making.

Sustainability materiality assessments are a tool that companies use to identify metrics that are most relevant to their businesses, and would therefore be helpful inputs to any decision.

For example, General Motors lists “EV Infrastructure” and “Product GHG Emissions” in the Highest Priority section of their Sustainability Priority Matrix on page 13 of their 2022 Sustainability Report. Even though General Motors has more resources than most companies and has clearly been tracking sustainability metrics for a long time, our point is that even they prioritize.

The reason regulators are getting involved is because investors are looking for verifiable and decision-useful information. Taking a phased step-by-step approach is not only practical, but it is also less risky.

Tip 3: Be Tactical with Technology Investments

This blog post began with the claim that the spreadsheet is the most widely used tool for Sustainability Reporting, and that this should resonate with anyone who works in Corporate Finance and FP&A. Even when Finance has deployed a planning software solution to gain agility, security, scalability, and better collaboration, requirements-gathering and data preparation work was done up-front before you could move off the spreadsheets. It didn’t matter which planning software vendor you chose, that work still needed to be done.

Now consider this: the planning software solution that you have implemented for Financial Reporting and FP&A can also be used for quantitative (numeric) sustainability data. It can store emissions data and do conversions between different units. It can store headcount data by gender, race, and age (perhaps it already does!). It lets you distribute a link to a secure input template for data collection directly to the system (a potential tool for Scope 3). And it automatically adds everything up by location, geography, business unit, and manager.

Of course, your planning software solution may not (yet) have all the pre-built sustainability report formats that the specialized ESG Reporting software solutions have, but it has some tactical advantages:

  • You already own it (zero/minimal software investment cost)
  • You already have experience using it to replace a spreadsheet-based reporting or planning process
  • You can connect it to other systems and pull in data directly, or you can ask people to input data directly into it
  • You already know how to flexibly build reports, so once you have sustainability data preparation is complete (most of the work) creating the reports themselves is not difficult

We are not suggesting that you forego purchasing specialized Sustainability/ESG Reporting software. Our point is simply that you should not rush to make the decision, and the better you understand your requirements and your data before you start evaluating software packages, the smoother everything will go.

Meanwhile, your existing planning software solution is an excellent near-term option for relieving the pain-points of a spreadsheet-based process, while also helping you get a head-start on the data preparation you will need to do anyway.

And in some cases, you may find that it is all you need.