The Credible Way to become a Sustainable Enterprise

Our Society is relentlessly evolving. Social and business orthodoxies are, rightfully so, being challenged and questioned by stakeholders. Sustainability and Environmental, Social, and Governance (ESG) issues have increasingly taken center stage. It is part of an enterprise’s identity and directly affects the results.

The era of just publishing some numbers or statements on ESG and Sustainability has completely faded. Enterprises are under pressure to demonstrate and deliver on their stated commitments to sustainable practices and be transparent and accountable for their impact on the environment and society. According to a 2020 survey by Deloitte, 87% of consumers expect enterprises to take a stand on social and environmental issues. Additionally, a report by BlackRock found that more than half of enterprises in the S&P 500 now disclose ESG information, up from 20% in 2010.

The need for enterprises to address sustainability and ESG issues is further underscored by increasing awareness of today's environmental and social challenges. Climate change, deforestation, water scarcity, and inequality are a few pressing issues that enterprises must consider in their operations and strategies. A United Nations report states that the world will require at least $90 trillion in infrastructure investments by 2030 to meet the Sustainable Development Goals (SDGs) and the Paris Agreement on climate change.

To effectively address sustainability and ESG issues, enterprises must have access to accurate, trustworthy, and reliable data and insights. This information is essential for enterprises to understand their impact on the environment and society and to make informed decisions about their operations and strategies. However, data collection and management can be challenging. Enterprises must ensure that the information they use is credible and trustworthy and supports the claims and disclosures they make toward the regulators and many other stakeholders they interact with.

ESG and Sustainability

Before starting, it is necessary to understand how Sustainability and ESG relate, as they are often considered interchangeable concepts. However, they have distinct meanings and implications for enterprises.

Sustainability refers to the ability to meet the needs of the present without compromising the ability of future generations to meet their own needs. It encompasses environmental, social, and economic aspects and is often associated with the United Nations' Sustainable Development Goals (SDGs). Enterprises focusing on sustainability strive to minimize their negative impact on the environment and society to create long-term value for their stakeholders.

ESG, on the other hand, is a frame that investors, stakeholders, and enterprises use to evaluate an enterprise's social and environmental performance. It comprises three dimensions of financial and business materiality: Environmental, Social, and Governance. The first, Environmental, refers to an enterprise’s environmental impact. The second, Social, refers to the enterprise’s impact on society, and the third, Governance, refers to the enterprise's internal management and decision-making processes. Enterprises focusing on ESG strive to reduce risks, have access to new business models, and enhance opportunities related to environmental and social issues and corporate governance.

The Importance of Trusted Data and Insights

Ecosystem data and subsequent hindsight, insight, and foresight are essential for enterprises to understand, and address, their impact on the environment and society created by their end-to-end upstream and downstream value chain. They help enterprises identify areas of improvement, set goals and targets, measure progress, communicate their sustainability performance to stakeholders, and ultimately make better decisions. However, data collection, verification, tracing, and management can be challenging. Enterprises must ensure that the information they use is accurate, reliable, and verifiable by stakeholders, including the internal organization and the overall ecosystem in which an enterprise operates.

One of the challenges of data in complex ecosystems is undoubtedly the need for more standardization. Different enterprises and organizations use other metrics and methodologies to measure and report their sustainability performance, making it difficult to compare and benchmark performance across different sectors and industries. Additionally, enterprises often rely on self-reported or self-certified data, which can be subject to bias and manipulation. To overcome these challenges, enterprises must invest in robust data collection, traceability, and management systems and implement internationally recognized standards and guidelines such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), the International Financial Reporting Standards (IFRS), and the European Sustainability Reporting Standards (ESRS) from EFRAG.

1. The GRI is an independent international organization that has developed a comprehensive framework for sustainability reporting. The GRI Standards provide a flexible, modular framework for enterprises to report on various sustainability topics, including environmental, social, and governance issues.
2. The SASB develops and maintains industry-specific sustainability accounting standards. The SASB standards provide enterprises with a consistent and comparable set of metrics to report sustainability performance and respond to investors’ and stakeholders’ information needs.
3. IFRS is an independent, not-for-profit organization that develops International Financial Reporting Standards (IFRSs). IFRS Standards establish principles for financial reporting and provide a framework for presenting financial information. The IFRS Standards help enterprises prepare their financial and converging non-financial statements and help investors and other stakeholders understand and compare financial data and insights.
4. The ESRS from EFRAG is a set of standards developed by the European Financial Reporting Advisory Group (EFRAG) based on the Corporate Sustainability Reporting Directive (CSRD) to guide enterprises in reporting their sustainability performance. The ESRS provides a framework for enterprises to report on environmental, social, and governance (ESG) issues and align with the IFRS ISSB standards.

Enterprises should also be aware of some of the local regulations and laws related to ESG and Sustainability reporting. For example, the European Union's Corporate Sustainability Reporting Directive (CSRD) requires large public-interest enterprises to disclose information on their environmental and social performance and diversity on their board of directors.

Enterprises can leverage technology such as blockchain to increase transparency and credibility of sustainability and ESG data. Blockchain technology can ensure the authenticity of data and metadata by creating a tamper-proof record of transactions and can be used to track and trace the origin of products and materials throughout the value chain. It also proves what happens with the data. Do note that it is not because of data or insight being on the blockchain, it is automatically true. Verification mechanisms always have a role to play.

Ecosystems and Value Chain Considerations

When assessing an enterprise's ESG and sustainability performance, it is essential to consider the entire value chain, from sourcing raw materials to disposing of products at the end of their life (“circularity”). An enterprise's impact on the environment and society is not limited to its operations but also extends to the activities of its suppliers and customers (“upstream” and “downstream”). For example, deforestation caused by an enterprise's suppliers can significantly affect the enterprise's sustainability performance.

An example of this is palm oil production. Palm oil is an ingredient in many consumer goods, such as soaps, cosmetics, and food. However, palm oil cultivation has been linked to deforestation, habitat loss, and human rights abuses. Enterprises that use this ingredient in their products are responsible for ensuring that their palm oil is produced sustainably. Many enterprises have implemented policies to trace the origin of the palm oil they use and to ensure that it is made in compliance with sustainable production standards. According to a report by the Roundtable on Sustainable Palm Oil (RSPO), in 2019, 24% of the palm oil traded globally was certified as sustainable.

Another example is the use of water in manufacturing operations. Water scarcity is a significant concern in many regions of the world, and enterprises must ensure that their operations do not contribute to the depletion of water resources. Enterprises can implement water recycling, rainwater harvesting, and efficient irrigation systems to reduce water usage and minimize their impact on water resources. According to the United Nations, by 2025, half of the world's population will live in water-stressed areas.

In addition, enterprises must also consider the impact of their products on ecosystems and biodiversity. For example, an enterprise that produces pesticides should consider the impact of its products on pollinators and other beneficial insects. Enterprises can implement strategies such as integrated pest management, which involves using a combination of different pest control methods to minimize the impact of pests while preserving biodiversity. According to a report by the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), 1 million species are at risk of extinction due to human activities.

In summary, enterprises must take a holistic approach and consider the entire value chain and ecosystems they operate to address sustainability and ESG issues effectively. By understanding and managing the impact of their activities on the environment and society, enterprises can set goals and targets, measure progress and communicate their sustainability performance to stakeholders.

The Role of Technology in Creating Trusted Data and Insights

Technology can play a crucial role in helping enterprises improve data collection, analysis, and reporting and increase transparency and accountability in their sustainability practices. From data management systems to blockchain and artificial intelligence, technology can help enterprises overcome the challenges of data collection and management and ensure the accuracy and reliability of their sustainability data.

Sensors and IoT devices are examples of technology used to improve data collection and management. These devices can collect real-time data on various sustainability-related metrics, such as energy consumption, water usage, and emissions. This data can then be analyzed and used to identify areas of improvement and set goals and targets. According to a report by the International Energy Agency (IEA), the number of IoT devices connected to the Internet is projected to reach 75 billion by 2025, increasing the amount of data available for analysis.

Another example of technology being used to increase the transparency and credibility of sustainability data is the use of blockchain. Blockchain technology can ensure the authenticity of data by creating a tamper-proof record of transactions and can be used to track and trace the origin and the entire journey of products and materials throughout the value chain. It can help enterprises ensure that their products are produced sustainably and in compliance with social and environmental standards. According to a World Economic Forum (WEF) report, by 2027, 10% of the global GDP will be stored on blockchain technology.

Additionally, artificial intelligence can analyze large amounts of data and identify patterns and trends that can inform decision-making and strategy. For example, machine learning algorithms can identify energy consumption data patterns and predict future demand, allowing enterprises to optimize energy usage and reduce costs. According to a report by MarketsandMarkets, artificial intelligence in the energy market is projected to grow from USD 2.1 billion in 2020 to USD 8.8 billion by 2025, at a CAGR of 33.2% during the forecast period.

In summary, technology is crucial in creating trusted data and insights for enterprises to address sustainability and ESG issues effectively. From data management systems to blockchain and artificial intelligence, technology can help enterprises improve data collection, analysis, and reporting and increase transparency and accountability in their sustainability practices. By leveraging technology, enterprises can ensure the accuracy and reliability of their sustainability data and make informed decisions about their operations and strategies.

Recommendations

Enterprises serious about addressing sustainability and Environmental, Social, and Governance (ESG) issues should take a comprehensive and holistic approach. It can include:

1. Investing in resilient data collection and management systems: enterprises should implement data management systems designed to collect, analyze, and report on sustainability-related data. This will help them ensure their sustainability data's accuracy and reliability.
2. Implementing internationally recognized standards and guidelines: enterprises should implement standards and guidelines such as the Global Reporting Initiative (GRI), European Sustainability Reporting Standards (ESRS), or the Sustainability Accounting Standards Board (SASB) to ensure their sustainability data is comparable and benchmarkable.
3. Leveraging technology such as blockchain: enterprises should explore the use of blockchain technology to increase transparency, traceability, and credibility of sustainability data. Blockchain can track and trace the origin of products and materials throughout the value chain and ensure data authenticity and insight sharing.
4. Taking a holistic approach and considering the entire value chain and ecosystems: enterprises should consider the whole value chain and ecosystems in which they operate to understand and manage the impact of their activities on the environment and society.
5. Setting measurable goals and targets: enterprises should set quantifiable goals and targets that align with international standards, such as the Science Based Targets initiative, to help them track progress and communicate their sustainability performance to stakeholders.

Enterprises can create more trusted data and insights by taking these steps and effectively addressing sustainability and ESG issues.

Sustainability and Environmental, Social, and Governance (ESG) issues are increasingly important in today's business world. Enterprises will remain under pressure to demonstrate their commitment to sustainable practices and to be transparent and accountable for their impact on the environment and society. Enterprises must therefore prioritize creating trusted data and shared insights in their ecosystem to address sustainability and ESG issues and identify opportunities effectively. By taking a holistic approach and leveraging technology, enterprises can increase transparency, accountability, and credibility in their sustainability performance. This will help them meet stakeholder expectations and capitalize on business opportunities.

Sources:

• Deloitte, "2020 Global Sustainability Survey," 2020
• BlackRock, "Sustainability Year in Review," 2020
• United Nations, "Investing in the SDGs: A guide for policy makers," 2020
• Global Reporting Initiative (GRI), "GRI Standards," 2020
• Sustainability Accounting Standards Board (SASB), "SASB Standards," 2020
• World Business Council for Sustainable Development (WBCSD), "Science-based targets," 2020
• Roundtable on Sustainable Palm Oil (RSPO), "Sustainability in the Palm Oil Industry," 2020
• United Nations, "Water scarcity and challenges," 2020
• World Wildlife Fund (WWF), "Water scarcity," 2020
• Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), "Global Assessment Report on Biodiversity and Ecosystem Services," 2019
• International Energy Agency (IEA), "Internet of Things (IoT) - The future of energy," 2020
• World Economic Forum (WEF), "Blockchain Beyond the Hype: What is the Strategic Business Value? " 2018
• MarketsandMarkets, "Artificial Intelligence in Energy Market by Component, Technology, Application, and Geography- Global Forecast to 2025," 2020
• Global Reporting Initiative (GRI), "GRI Standards," 2020
• Sustainability Accounting Standards Board (SASB), "SASB Standards," 2020
• World Business Council for Sustainable Development (WBCSD), "Science-based targets," 2020
• Global Sustainable Investment Alliance (GSIA), "Sustainable Investing: Estimating the Size and Growth of the Global
• International Financial Reporting Standards (IFRS), "IFRS Standards" 2020
• European Financial Reporting Advisory Group (EFRAG), "European Sustainability Reporting Standards" 2020
• European Union, "Corporate Sustainability Reporting Directive (CSRD)" 2020
• International Financial Reporting Standards (IFRS) Sustainability Standards Board (ISSB), "IFRS ISSB Standards" 2020