Digital leap for ESG reporting

May 16, 2023: Non-financial disclosures have assumed the centrestage for large businesses. Even smaller value-chain partners are getting covered under these disclosure requirements, through identified supply-chain risks and corrective action by large and small businesses to recalibrate their approach towards Environment, Social and Governance (ESG) performance improvement. The disclosure requirements have become complex in the last couple of years. Many stakeholders have started expecting not just disclosures but also transformational commitments from the companies. In the race to champion this space, companies are equally keen to invest and benefit from technological solutions that are cost-effective, resilient, and bespoke.

Businesses have predominantly looked at the non-financial requirements classified under “four plus one” heads. The four requirements are regulatory disclosures (such as Business Responsibility and Sustainability Report in eXtensible Business Reporting Language for India), ranking and rating disclosures (Dow Jones Sustainability Index, Morgan Stanley Capital International etc.), traditional disclosures (based on Global Reporting Initiative, International Integrated Reporting Council etc.), and sector-specific disclosures (Higg Index, GRESB, etc.). The overarching requirement is to establish internal controls, goals, and targets. This is required to ensure that the ESG lens is applied at all levels calibrated against the bearing on business aspiration and protection of shareholder interest. These controls also include the usage of market intelligence and peer performance to recalibrate internal procedures. Many requirements of institutional investors are also met through the internal controls established by businesses.

Though a majority of the requirements may complement some in the other
areas of the disclosure ecosystem, the additional requirements, data collection protocols and procedures across different business geographies (such as units of measurement), supply-chain optimisation requirements, and overall data harmonisation make it increasingly difficult for businesses to manage large amounts of data. In parallel, there are specific requirements around ESG as part of investors’ disclosures for equity and quasi-equity positions assumed by them, such as talking about financed emissions as part of the GHG protocol.

It is thus quite evident that the level of sophistication required in disclosures mandates transparency, consistency, and compatibility. This triggers the need to consider digital support— for not just to ease pressure on data custodians as these platforms offer a real-time, simultaneous working environment across geographies, but also to balance between data custodians, data verifiers or the power users, and leaders or decision makers in the company. The platforms also offer a streamlined approach towards the assurance/attestation requirements introduced recently. It is therefore important for companies to use this opportunity window to look at their business requirements and disclosure obligations. If the situation warrants deployment of digital platforms, the same can be explored, evaluated, and implemented.

Access to finance is always important for growth and sustenance of businesses.
A well-crafted digital platform facilitates availability of non-financial performance data based on the quarterly disclosure requirements. Listed companies have started disclosing non-financial information as part of quarterly disclosures wherein stock markets as well as market analysts have been provided with both financial and non-financial performance data. This has resulted in a favourable response through appreciated stock price and positive sentiments of shareholders and investors. To further enhance the quality of disclosures, companies are moving away from gate-to-gate approach to a more inclusive cradle-to-gate approach, thereby making it equally important for their vendors and supply-chain partners to provide additional information on some of the key ESG indicators. A large number of MSMEs are thus expected to provide such information to their downstream value-chain partners. This may require capacity building across the MSME ecosystem. It is thus possible to use extended digital platforms with access to vendors and suppliers of large companies to cohort information collection, calibration, and dissemination.

Digital platforms also support businesses in applying “internal carbon pricing” to facilitate growth and investments. Simultaneously, several platforms can provide assistance on choosing a preferred vendor and value-chain partner by offering the application of the platform over the entire supply-chain. Industries such as automotives with OEM and hundreds of ancillaries are expected to optimise their ESG performance through digitisation. Digital platforms for ESG data are equally helpful in B2B play with multiple sourcing and sales entities, ensuring that the traceability of the source is available to large institutional buyers. For example, if a large FMCG player is sourcing coffee from a B2B intermediary, it can find the actual geographical source, its GPS location, the farmer involved, as well as the time between the plucking of coffee beans and delivery in India within minutes.

Digital ESG platforms are evolving and have started offering tangible outputs to not just the stakeholders but also to the businesses. It is thus not just an investment to meet disclosure requirements, it is also an assurance that both
the board and the functional and operational leadership within a business can remain on top of ESG KPIs and take corrective actions in a proactive manner instead of just being reactive.

Inderjeet Singh, Partner, Deloitte India

The original article was published in Financial Express on 16th May 2023.