Blog Post

Examining ESG Risk Part 2: Technology as the Link Between ESG and Business Strategy

Al, Miriam, we’ve spoken about ESG as a data story. Can you expand on this idea? Specifically, where the lines are between the role of data and the role of technology?

Park: Absolutely. As we discussed previously, organizations that want to maintain credibility and trust should understand that their claims and reporting must be material, rather than simply idealistic. This means using data to measure performance across ESG metrics and providing clear, accurate disclosures about those metrics.

So, if ESG is a data story — which includes leveraging data-driven insights to protect and enhance value — then, technology is how ESG objectives are aligned to business strategy.

Wrobel: A large part of ESG is communicating material risks and opportunities with stakeholders. Those stakeholders are increasingly sophisticated in demanding transparency, including metrics to back up statements. Accurate, reliable data is essential for both managing ESG risks and opportunities and engaging meaningfully with stakeholders around those issues.

That’s interesting, because technology isn’t often a key focus in ESG conversations. Will you elaborate?

Park: Despite the fact that adequate ESG reporting is a quantitative exercise, and the basis for how organizations are scored and valued in an ESG context, most businesses are still struggling to collect and decipher the information they need. Even when the necessary information is identified and gathered properly, tracking it on an ongoing basis is still a challenge.

Technology can help solve some of these issues. For example, using advanced analytics, legal and compliance teams can search and find key information and metrics within their organization’s systems to benchmark current performance. Once metrics are defined and identified in the environment, the analytics tools can then be used to monitor (much like a proactive compliance monitoring program) for deviations or red flags that indicate a shortfall in performance against the stated ESG obligations.

Blockchain, which can provide track and trace capabilities over supply chains, is another example of where technology comes into play in ESG. When products or materials are tracked over the entire supply chain using blockchain solutions, they can be digitally followed end-to-end. That information is tremendously insightful to reveal potential gaps in sustainability or human rights practices through the sourcing lifecycle. Moreover, because the data is automatically recorded on the blockchain without human intervention, the information is immutable and reliable for ESG reporting. In many ways, it can become a self-fulfilling system.  

Wrobel: Because ESG data comes from sources ranging from utility bills to environmental health and safety registers, gathering ESG data often involves accessing systems that are typically disparate. To ensure integrity of data, we want as few human-related data touch points as possible. For that reason, technology has an important role to play in to drive reliability and auditability of aggregated data.

Aside from monitoring and reporting, are there other ways that technology intersects with ESG efforts?

Park: Yes, data governance and information governance are also important aspects of ESG. There are multiple sides to this issue.

First, organizations need strong data governance to ensure the data they are relying upon for tracking, monitoring, analysis and reporting is managed in a way that upholds data quality and data lineage. Otherwise, it may not be reliable (i.e., bad data in leads to bad data out), which can result in inaccurate reporting (or greenwashing in worst case scenarios), as well as loss of stakeholder and customer confidence.

Wrobel: The point Al makes about accuracy of reporting is part of a larger theme we call ESG Integrity. We ensure data is accurate to support authentic communications and drive transparency by tying ESG claims back to this data. We use technology to help our clients validate the integrity of what has already been said, publicly or internally.

Park: Information governance is also important from the perspective of ensuring effective management and protection of sensitive information — particularly personal information that is protected by various global data privacy laws. Upholding a strong data privacy posture can support organizations in meeting standards on both “social” and “governance” fronts.

Wrobel: Technology is going to be essential to managing the underlying ESG issues our clients are committing to manage. For example, understanding and minimizing energy use requires technology. As energy is increasingly priced dynamically, a company can save significant amounts of money by utilizing energy when it is cheapest. In California, that means using energy when the sun is shining in the middle of the day and scaling back when the utilities need to run gas-fired peaker plants.  

What’s the current state of tools that help organizations implement technology for ESG use cases? Are there any “plug and play” solutions?

Park: Like anything, there won’t be a silver bullet tool that solves for every data-related ESG challenge. That said, many governance, risk and compliance (GRC) software platforms are moving into the ESG space quite rapidly. The data controls, tracking and mapping functions that GRC products are effective at for ethics and regulatory compliance can translate quite naturally to ESG use cases.

While it is still early days, as these tools mature, they will be useful in helping organizations establish a repository to centralize the underlying data and documents that underpin or inform ESG governance. We’ll see an increase in data management functions integrated with these offerings as well.

What organizations should keep in mind is that no technology can serve as a substitute for governance policies, practices and controls. As expectations for ESG reporting, tracking, standards and regulatory requirements continue to evolve, legal and compliance leaders will need to prioritize establishing a holistic approach to their data. With that, their data can begin to enable, rather than undermine, ESG priorities.

This Q&A series will continue, with Part 3, which will focus on how FTI Technology can help clients tackle these issues.

The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.