Learn more about why collecting ESG data is essential nowadays and how to execute it with automated solutions.
In 2022, the Securities and Exchange Commission (SEC) shared plans to update the rules regarding climate change disclosures and just this year, in 2023, the EU began revisiting its own approach. Neither instance has resulted in finalized laws just yet, but both point to the increasing importance of well-managed climate and environmental data.
That’s where ESG data collection comes in. Environmental, Social, and Governance reporting has been a popular tool in recent years for businesses trying to attract socially conscious investors, but it’s quickly becoming something that all businesses, conscious or otherwise, must concern themselves with.
In this guide, we’ll break down exactly what ESG refers to, examples of data sources it includes, and why it’s so important. We’ll also look at some of the challenges that come up and how to build an ESG data collection strategy that is accurate, auditable, and benefits your company.
With an automated data collection approach, ESG need not be a difficult new reporting task, but an opportunity for businesses to improve their targets and their relationships with investors.
As its acronym suggests, ESG covers data that relates to environmental, social, and governance issues. The exact criteria for ESG differs between companies, investment firms, and countries, but here’s an overview of each aspect with data source examples included:
The most salient aspect of ESG in terms of current trends is data that shows how a company is impacting the environment and addressing climate change issues. With regard to the proposed SEC regulations, some of the data sources that are important include:
Other general environmental data that companies can include are their water usage, management of toxic waste, and general compliance with local environmental regulations. This is especially important if a business receives tax breaks or grants based on this compliance.
The social side of ESG looks at both businesses’ suppliers and their in-house conditions regarding health, safety, and diversity.
The data for this is largely gathered from surveys but is also dependent on basic stats such as the gender and racial makeup of a business. For example, companies are often asked to show how many women and people of color work as senior staff.
The final pin in ESG is governance standards, which are focused on the sense of integrity and diversity in a business. Ethical, and legal operations are of course, of concern but, transparent financial reporting and accounting is another major tenet of good governance.
Data plays a significant role in helping businesses show a clean bill of health regarding governance. The numbers themselves help prove ethical behavior but it’s even better if those numbers are proven to be accurate and traceable.
In their 2021 Global Investor Survey, PWC found that 79% of investors trust ESG information if it has been assured through auditing. This emphasizes how important it is that ESG data collection be done in a manner that is organized and audit-friendly.
ESG data casts a relatively wide net, from qualitative data regarding workplace conditions to quantitative information on emissions and environmental resource management. The scope can be intimidating but why is it worth investing in ESG data collection?
Data collection is where all ESG compliance begins. Later analysis and reporting can’t happen without it and done properly, ESG data collection can offer businesses significant advantages:
The chief pressure behind ESG data collection is that compliance requirements from bodies like the SEC are becoming increasingly strict. Though their newer rules are just proposals at this point, they are an important insight into where this area of business reporting is headed.
Investing in accurate, timely ESG data collection is the first step in making sure that companies are prepared for upcoming changes. Analysis and compliance just aren’t possible unless the data itself is collected accurately and made easily available.
ESG data collection isn’t only useful in terms of compliance, but in making more informed business decisions overall. Having a stronger view of issues such as energy usage can help with making better choices that save in terms of environmental impact and spending. Data on the social aspects, on the other hand, can flag where companies perhaps need to revisit in terms of their hiring and employment strategies.
Knowledge is power, especially when it comes to business success. Collecting and tracking ESG data the same way a company would do with traditional financial data ensures that all sides of a business can be considered when making big decisions.
ESG data is perhaps most important when it comes to dealing with investors and other stakeholders. Many investment firms won’t even consider a business without seeing ESG information up-front.
Investing in ESG data collection and reporting can help make businesses appear more attractive to certain investors and open up new opportunities as a result.
Accurate and consistent ESG data collection is also important for transparency with staff and customers. If a business has made environmental impact claims such as a tree being planted for every order, or the business being zero-emission, it’s the ESG data that will be expected to show that.
Collecting and managing that data ensures that companies can have more transparency with not only investors but the people they employ and those they’re advertising to.
One of the most exciting aspects of ESG data collection is the opportunity it offers businesses to explore their potential more in this area. Emissions data might reveal the opportunity to create new targets and employment stats might boost certain hiring efforts.
ESG data collection isn’t simply a way to please investors and regulators, but to see a business’s avenues for growth.
Because of the scope of ESG data and the regulations it often falls under, it’s generally recommended that companies build a full ESG data strategy. Here’s how:
With steps 2 and 3, in which data is collected and made available in standardized formats, ESG artificial intelligence can be a game-changer. Before we investigate that further though, let’s take a look at a more traditional approach to ESG data collection …
Manual ESG data collection forces businesses to dedicate significant labor and time to examining a huge range of documents to find relevant information, extract it, and then input it all into reporting software. These are some of the challenges that arise with this kind of approach:
Because ESG information can come from so many different types of data sources, collecting information requires employees to handle a significant range of documents. Keeping everything organized throughout is challenging, especially when there is such high pressure to maintain accuracy.
Manual data extraction of any kind is taxing. ESG data collection, however, involves the unique challenge of drawing from everything from water and energy bills to employee information sheets.
Going through such varied information and organizing it into a single place takes significant time, energy, and labor.
Human error is an unavoidable reality when it comes to manual data extraction. The challenges of ESG data collection make it particularly susceptible to errors, especially when employees are feeling stretched.
Another strain on accuracy is how big the scope of ESG can be. It’s not nearly as focused as looking at invoicing or daily business transactions and as such, can be harder to keep organized and error-free. Finally, there’s the risk of fraud in some cases which can be very tricky to mitigate against with manual data extraction.
Alternatively, ESG artificial intelligence systems can be used to automate data collection and counteract many of the challenges just discussed. At FormX, we offer an Intelligent Document Processing (IDP) solution that uses technology such as OCR, machine learning, and large language models to automate ESG data collection.
Our software can scan documents, extract relevant information, and then make it available in standardized formats so that ESG reporting can be done using all data, whether it was sourced from an energy bill or company survey. We have a number of data extractors readily available to use, but new extractors can also be easily trained to suit any kind of document needed without coding required. This adaptive element makes it very fitting for the many formats and data sources that have to be handled when looking at ESG.
As with financial reporting, many businesses have turned to software solutions to automate ESG data analysis. FormX’s technology is built to fit seamlessly with these solutions so that everything from data extraction to analysis can be automated, end to end.
ESG artificial intelligence systems offer businesses a chance to automate an important and usually quite challenging area of data tracking and reporting. Here’s how automating ESG data collection with technology like FormX can benefit a company:
As mentioned, the variety of documents and data sources that fall under ESG purview makes it an unusually tricky area of data to keep organized. Automating ESG data collection, however, simplifies things drastically and ensures that documents are automatically digitized, and information from otherwise unstructured formats are made available as structured, usable information.
With automation, stacks of papers are reduced to relevant data that can be managed and analyzed entirely digitally, and in a fraction of the time manual approaches would have required.
Automated ESG data collection is far less prone to error than manual equivalents and can promise greater data accuracy as a result. For businesses aiming to have more transparency with investors, the lowered fraud risk helps build trust, and if there are ESG regulations to be adhered to, boosted accuracy also ensures that businesses can avoid costly fines or mistakes.
ESG artificial intelligence solutions such as what we offer at FormX improve efficiency by speeding up ESG data collection while simultaneously reducing the need for labor. Automation does more for far less, without ever compromising on accuracy.
As PWC showed, 73% of investors feel that disclosures of KPIs and ESG metrics should have the same reasonable assurance as financial statement audits. Auditing in ESG is becoming an increasingly regular occurrence and, as such, the data needs to be ready for it.
The accuracy that automated ESG data collection provides, as well as the level of digitization involved, ensures that businesses are better prepared for auditing and can more readily provide investors with the assurance they need.
As regulatory bodies such as the SEC create stricter rules around ESG reporting and investors rely more on it for their decisions too, ESG will only become a greater part of business operations. Automating ESG data collection readies companies for this future with technology that can keep up, no matter the changing demands.
Schedule a demo or talk with the FormX team about how our platform can integrate into your business and automate ESG data collection.
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