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Perspectives

Getting ambitious with ESG

Operationalizing ESG with a reliable sustainability reporting model

Controllers are being asked to incorporate environmental, social, and governance (ESG) information under their financial reporting discipline. Given the complexity of data sources, regulatory timing, and ESG advancements, companies should assess their ESG reporting strategies and design an operating model that encompasses a multifunctional reporting process and enables realized ESG ambitions.

September 18, 2024

A blog post by Beth Kaplan, Katie Glynn, David Cutbill, Robert Kerr, Tim Raschle, and Alex Chitticks

Controllers—in the current regulatory environment and the emergence of the environmental, social, and governance (ESG) landscape—are tasked with the crucial role of incorporating ESG information into their external financial reporting discipline. This task is not without its challenges, given the complexity around the variety of data and how it is sourced, computed, and validated. In light of regulatory timing, recent ESG advancements, and other drivers of complexities, it may be time for companies to rethink the capabilities that support both the complex ESG landscape and their strategic sustainability ambitions.

After exploring some of these drivers of ESG advancement and regulatory timing affecting the ESG landscape, we take a look at the necessity of designing an ESG operating model encompassing a multifunctional reporting process that prioritizes data, aligns with strategy, and enables organizations to realize their ESG ambitions.

Drivers of ESG advancement

First, let’s explore some current drivers of ESG advancement fueled by the rapid pace of change and shift from voluntary to authoritative ESG and climate disclosure. At the helm are the standard setters wielding significant influence. There has been a rapid move toward acceptance of reporting initiatives of authoritative climate-related and ESG standard setters. Corporations, with their ambitious commitments and enhanced climate and other ESG disclosures, are also driving advancement. Investors, accelerating action and requests for transparency on the financial impacts of climate and ESG, are another powerful force. Finally, regulators—driving advancement with the rulemaking taking shape around required climate and other ESG disclosures.

Another significant driver of current ESG advancement is the movement to global reporting. The global ESG reporting landscape includes the illustrative actions and timeline for Corporate Sustainability Reporting Directive (CSRD) and Securities and Exchange Commission (SEC) readiness.

Defining ESG strategy and ambitions

A leading practice when formulating an operational plan is to define your organization’s ambitions. This is usually the first step in the process. These ambitions will be different for every organization and often may include more than one defining goal driving an ESG strategy. Examine your primary ambitions and any secondary ambitions, if they are applicable, as follows:

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Managing compliance and transparency as the primary motivation means compliance with external expectations. This posture is supported by an ESG data and systems strategy that drives ESG transparency, reporting, and compliance commitments.

A primary motivation for shaping the industry is to bolster industry leadership by “setting the standard” in ESG. This strategy may include ESG leaders engaging the payment ecosystem to influence the sector’s direction, role, and standards.

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Managing risk is the motivation to protect business value by avoiding the most material sustainability risks. An ESG data and systems strategy may include integrating ESG reporting into back-office processes and systems to enable environmental, climate, social, and governance risk management.

A motivation to capture opportunities prioritizes identifying and capturing new value-generation opportunities, often by integrating ESG into new and existing businesses. This ESG data and reporting strategy would include identifying, designing, and pricing market and product opportunities.

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Operationalizing ESG reporting

At the foundation of an ESG operating model that supports an organization’s ESG strategy and ambitions is data. Data is everything. Organizations should develop a unified global data model at the foundation of an ESG operating model and reporting structure.

Data is the narrative foundation

Take, for example, the European Sustainability Reporting Standards’ (ESRS) standards and subtopics scope of coverage. It includes four categories, 12 standards, and more than 1,100 data points. Viewed as one of the most granular standards currently in the marketplace, a framework that accounts for this can set up an organization with a well-structured ESG operating model.

With a unified model, it is imperative to use an integrated reporting platform. An integrated reporting solution within your existing infrastructure could simplify reporting by sourcing the data once for all reports. What does a unified and integrated platform look like? First and foremost, it puts data front and center. The operating model can be broken down into four main buckets:

Data sourcing: Defined ESG requirements and source data that enable an ESG framework and reporting standards. This includes collecting and organizing structured and unstructured data into a centralized hub and validating data.

Data transformation: Data enrichment, shifting data, calculations, and pivot tables require controls as well as automation. Automation tools and controls built into a centralized hub also enable reporting templates within the integrated solution that can set up end-state presentations.

Reporting: With emerging technology platforms, organizations can utilize technology to simplify and standardize reporting through the integrated platform.

Analysis: The centralized data platform should be able to take robust data points and offer end-state reports and additional analysis for the organization.

Configuring ESG operations

As organizations navigate through their sustainability transformation, the configuration of their sustainability capability will evolve over time, moving through different structures based on the organization’s imperatives and maturity. The configuration can be divided into three main types.

We hypothesize that an organization may begin its sustainability journey in a centralized structure. The organization can move to an embedded model as the culture, ethos, and accountability disperse throughout the process. However, there is no one-size-fits-all organization structure. Various considerations exist that are specific to each organization when selecting the most appropriate structure to support ESG and sustainability goals.

To explore some of these considerations for designing an integrated ESG operating model and insights into the current complexities around the ESG reporting landscape, listen to our Dbriefs webcast: Revisiting ESG ambitions: Building a reliable sustainability reporting model

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