ESG (Environmental, social and governance) extends far beyond a simple acronym. It is a paradigm shift with far reaching impacts. ESG is about everything that companies do which impacts on, or is impacted by the environment in which they operate. ESG essentially requires organisations to consider themselves not just as standalone entities who are responsible only for themselves with a purpose of maximising shareholder value, but rather as parts of a whole. Their actions have real consequences on people and the environment, which can expose financial and non-financial risks.
At its heart, ESG is about how companies govern those impacts and manage those risks. This paradigm shift has been under way for a long time, but is now accelerating, particularly as the associated financial risks and rewards for companies are increasingly recognised.
Most think of ESG as managing impacts of climate change but ESG is much more than this – it goes well beyond considerations of environmental sustainability to also cover considerations of natural capital, human rights, modern slavery, diversity and inclusion, among others things.
Joao Segorbe, Partner ESG consulting
Technology streamlines ESG risk management and can help drive sustainable growth
The changing landscape requires organisations to adapt and meet new and evolving expectations for instance, by:
- Continually monitoring ESG performance for compliance and public interest purposes, tracking progress against commitments and using that information in a purposeful way to achieve continual improvement;
- Collating widely dispersed data from various sources within an organisation and reporting that data in-line with compliance requirements;
- Maintaining a responsible supply chain and operations and undertaking due diligence to identify and manage risks transparently to meet compliance and public demands;
- Publishing mandated sustainability and nature-related financial disclosures; and
- Tackling the risks and opportunities presented by ESG, which requires effective collaboration, planning and execution from legal and regulatory, risk management, sustainability and technology teams.
Failing to meet expectations can incur substantial costs, including financial (e.g., fines and litigation) and non-financial (e.g., negative media, reduced shareholder confidence, reputational damage or even Directors and Manager careers) consequences. Against this backdrop, on a per capita basis, Australia is the global leader in 'climate-related litigation', and also the centre of some of the largest ESG-driven corporate moves (e.g., AGL's failed demerger or Rio Tinto's Juukan Gorge crisis). This signals that the spotlight is now fixed on how organisations are managing ESG risks.
As organisations grapple with these fast-evolving ESG challenges and opportunities, technology has emerged to play a key role in meeting compliance and stakeholder expectations effectively, at pace and at scale.
Linking ESG and technology for effective ESG risk management
The linkage between ESG and technology is evident in various aspects of business operations, from data collection and analysis to stakeholder engagement and reporting. Emerging technologies like artificial intelligence (AI) and blockchain are enabling more precise tracking and transparency in reporting of environmental and social impacts.
For example, MinterEllison has recently worked with an Australian wind farm that leverages AI as control to monitor and reduce nature risks related to the operation of wind turbines. Specifically, AI was used as a control to identify endangered bird species at risk of collision with the turbines.
Navigating ESG strategy and compliance without flexible and insightful technology is problematically high risk. Technology is critical to enable clear decisions in the face of uncertainty, while providing a path to reduce that uncertainty over time.
Jonathan Blackford, Partner Technology Consulting
How can organisations leverage technology to improve ESG risk management? Next we discuss what they need to know now about:
- Reporting and disclosures;
- Responsible supply chain management; and
- ESG performance monitoring and optimisation.
Regulatory reporting and disclosure in ESG
The landscape of sustainability reporting and disclosure in Australia is rapidly evolving, driven in part by global initiatives and frameworks like the International Sustainability Standards Board (ISSB), which will soon be mandatory in Australia and was examined in our article Step change in sustainability reporting: First two ISSB standards released.
In June 2023, the ISSB unveiled its inaugural disclosure rules, which are poised to become the global benchmark for climate and sustainability reporting. Alongside this, the emergence of the Task Force on Nature-related Financial Disclosures (TNFD) reporting requirements has further heightened the importance of robust and comprehensive reporting practices, outlined in Preparing your business for TNFD nature-related disclosure.
The ISSB's introduction of standardised disclosure rules marks a significant shift in the field of sustainability reporting. While these new reporting requirements are aimed at enhancing broad ESG practices and transparency, for some organisations, the requirements may be onerous and drain valuable resources. Technology can be used to reduce this burden. Organisations can leverage technology to assist with the following functions:
- Automation and standardisation
The ISSB's disclosure rules emphasise the need for standardised reporting. Technology solutions such as reporting software can automate the generation of reports, ensuring compliance with the ISSB's guidelines. This reduces the manual effort required and minimises the risk of errors.
Technology can streamline the process of data collection, collating data from various sources, both internal and external. For instance, financial data, energy consumption, emissions, and social impact metrics can be automatically collected and integrated into reporting systems.
Technology offers advanced data validation and verification tools, reducing errors and ensuring the accuracy of reported information. This is crucial for maintaining trust with stakeholders.
Stakeholder expectations are evolving at a rapid pace, and organisations of all sizes in Australia are facing a new reality where ESG considerations are no longer voluntary commitments or compliance with new rules, but have become a fundamental driver of success and resilience.
Joao Segorbe, Partner ESG Consulting
Responsible supply chains through ESG risk mitigation
Supply chain and responsible sourcing are important for Australian organisations. Modern Slavery legislation, heightened stakeholder expectations for ethical practices, and the importance of mitigating risks associated with ESG factors within the supply chain are all driving organisations to improve their business practices. As many organisations have hundreds or thousands of suppliers, working with spreadsheets and simple financial tracking no longer cuts it. It needs to go further, and technology can help.
Here are some ways in which technology can help improve supply chain and responsible sourcing practices:
- Supply chain provenance transparency
Blockchain, Internet of Things (IoT), and data analytics solutions enable organisations to establish important end-to-end supply chain transparency. This transparency will be required and technology helps companies dealing with the fact that they are becoming liable not only for their own performance but also for the whole value chain from an ESG standpoint.
- Supply chain risk identification and mitigation
Advanced analytics and predictive modelling powered by technology help in identifying potential supply chain and governance risks. These risks may encompass environmental factors, human rights violations, or disruptions in the supply chain. Proactive risk mitigation measures can then be implemented to ensure mitigation of risk is performed at the standard expected of contemporary stakeholder groups.
- Supplier evaluation and scorecards
Technology solutions can enable more sophisticated supplier evaluation and ratings processes, tailored to the interests of diverse groups of stakeholders. By collecting and analysing data related to supplier practices, organisations can monitor how their suppliers adhere to ESG standards. Real-time supplier assessments can help organisations make informed decisions and better support procurement partners throughout the lifecycle of their commercial relationships.
ESG performance monitoring and optimisation
For most organisations, technology is an important tool for effective and commercially responsible performance monitoring, enabling organisations to track their impact now and into the future. One example of a requirement for organisations to track ESG performance targets. Historically, Long-Term Incentives (LTIs) and Short-Term Incentives (STIs) have predominantly relied on financial information and a handful of operational metrics.
However, as ESG criteria increasingly influence performance targets, there is a growing need for the same level of data robustness and management that has been associated with financial controls for a long time. Unlike the well-established frameworks of financial reporting, the taxonomy of ESG information is relatively immature - yet the demand for its integration is immediate. This situation calls for organisations to be creative in identifying appropriate ESG metrics and developing effective methods to measure them.
In this context, the role of technology is significant, yet it must be approached with pragmatism. Data collection in the realm of ESG is complex; data can only ever provide an indicative snapshot of reality, constrained within certain bounds of likelihood. This necessitates technology solutions in the ESG space to be explicitly designed to recognise and account for the inherent limitations and potential biases of data.
All data, whether social, commercial, or regulatory, is subject to flaws. Ignoring these aspects can lead to the risk of aggregated errors, resulting in misleading outcomes. Therefore, technology employed for ESG monitoring and reporting must be sophisticated enough to discern these nuances, ensuring that the data it helps gather and analyse is as accurate and reflective of reality as possible, within its inherent limitations.
Some of the key capabilities of technology relating to ESG performance monitoring and optimisation:
- Real-time data monitoring and optimisation
Sustainability reporting is not a one-time event; it's an ongoing process. Technology allows organisations to monitor their ESG data in real-time so that better decisions can be made faster. This means that companies can continually assess their performance, identify emerging trends, and adjust their strategies accordingly.
- Trend analysis and predictive insights
Advanced analytics within technology solutions can help organisations analyse trends in their ESG performance data. It can also facilitate valuable but otherwise challenging benchmarking by comparing an organisation's ESG performance against industry peers or global standards. This includes identifying patterns, correlations, and potential future risks and opportunities, facilitating informed decision-making.
Navigate growing ESG risk and unlock value
An increasing number of organisations are looking for ways to navigate growing ESG risk and to unlock ESG value against the backdrop of increasing legislative and regulatory requirements, as well as fast evolving societal expectations.
While technology is not a silver bullet, it has an important role to play in assessing, managing and reporting on ESG risks and opportunities. Organisations must start by understanding their ESG obligations, assessing current practices and identifying areas where technology can be used to make a difference.
Knowing who to turn to and who to trust for advice is critical.
With combined multidisciplinary, ESG-specific legal and consulting expertise, we help organisations navigate their ESG related risks, identifying and sourcing technology to managing their specific ESG requirements.
