ESG Reporting - Key Jobs to be Done

Dear Readers,

2024 will be remembered as the year when corporate sustainability and wider Environmental, Social and Governance (ESG) reporting went mainstream. In January 2023, the Corporate Sustainability Reporting Directive (CSRD) came into force in the European Union (EU). CSRD mandated social and environmental disclosure for large swathe of companies working in EU. Later in July 2023, the EU commission adopted the European Sustainability Reporting Standards (ESRS) as the common standards for companies under the purview of CSRD. There are twelve topical ESRS, of which two are cross cutting, five for Environment (E1-E5), four for social (S1-S4) and one for Governance (G1). The infographic below shows which companies need to follow the directive and from when.

Majority of large multinationals will need to provide consolidated sustainability statements in line with the above twelve standards starting from FY 2024. Quoting the EU Commission "EU law requires all large companies and all listed companies (except listed micro-enterprises) to disclose information on what they see as the risks and opportunities arising from social and environmental issues, and on the impact of their activities on people and the environment."?

Simply put, these companies need to report metrics across E, S and G with the same rigor, auditability, and controls as their annual financial reporting. It is daunting task for any organization. Sustainability, Finance, Corporate Reporting, and Technology (and some other) functions, in companies complying with ESRS in 2024, have surely been hard at work. Leaders accountable for compliance must wrestle the novelty of the regulations with the broad expanse of coverage. Very few, if any companies would have undertaken a voluntary reporting exercise which covers all the twelve standards under ESRS. Companies with strong voluntary reporting regime will take comfort in existing processes covering many of the topical standards, partially or fully. But for companies undertaking such a reporting exercise for the first time will face challenges across people, process, and technology.

In this edition of the Practitioners' Guide to ESG regulations, I am covering the key jobs to be done to broadly meet the needs of any sustainability reporting mandate - be it voluntary or regulatory. I approach this from a system design perspective, identifying the "needs" across these standards. By focusing on the individual standards in a mutually exclusive way, companies can end up repeating the key jobs in multiple places. This redundancy can lead to inefficiencies and increased costs. I posit that companies should focus on the jobs to be done to meet these regulations. These jobs are agnostic to the regulations. Collectively these key jobs, will help ensure that companies are well placed to meet all their voluntary and regulatory ESG compliance needs.

4C Sustainability Framework

I came up with the "4C Sustainability Framework " to help simplify and elevate the key jobs done by technology applications for ESG reporting. The four Cs in this framework identify the four key jobs to be done. These are

1. Collect
2. Compute
3. Communicate
4. Comply

This is a Mutually Exclusive and Collectively Exhaustive (MECE) framework, which creates an effective and consistent work breakdown structure. Each of the Environmental, Social and Governance topical standards can be broken into these four tasks. Many of these tasks across the topics need engagement with the same set of internal and external stakeholders. For example, E1 - Climate, E4- Biodiversity and ecosystems, E5- Resource use and circular economy, S2- Workers in the value chain, will need engagement with the same set of suppliers. Creating bespoke interface for individual sustainability metrics for the same set of stakeholders creates friction and introduces costs. Providing a common and consistent interface to the stakeholders is critical for success.

It also helps reduce the complexity and costs for the processes and the technology. The framework works for any sustainability regulations, like the European Union Deforestation Regulation (EUDR) and the Carbon Border Adjustment Mechanism (CBAM). The framework eliminates the needs to create custom applications for these individual regulations. The "4C Sustainability Framework" can deliver a cohesive technology and data strategy and architecture, for companies to avoid duplication, and bring synergies between all the sustainability efforts across the organization. What the regulations bring to the fore is the need for auditability and controls in the processes and applications delivering the metrics. Each additional process is an additional point of cost, failure, audit and controls. This framework reduces the time, resources and capital spent in deploying and running the sustainability stack. I will use Carbon Footprint as an example to elaborate on the key jobs to be done.

COLLECT

The first job to be done by the processes and (technology) application(s) supporting ESG reporting is to Collect one or several sustainability attributes for every activity in the company. The primary examples of transactions are Procurement, Manufacturing, Warehousing & Storage, Logistics & Distribution, Customer and Consumer engagement(s). Some examples of sustainability attributes to be collected are Product Carbon Footprint Data, Energy Usage, Recycled Plastic Usage, Fair Wages paid etc. Accurate and comprehensive data collection is critical for all corporate sustainability needs.

?These attributes need to be Collected from two types of stakeholders:

Internal - These are internal team members within the companies. In the carbon footprint example, these stakeholders are responsible mainly (but not limited to) for the Scope 1 and 2 carbon emissions for any company. Building on the carbon footprint example, carbon footprint of manufacturing, warehousing, and running offices needs to be collected. In the ideal case carbon footprint of manufacturing should be collected at a manufacturing lot/batch level.

External - Suppliers of goods and services are the biggest upstream external stakeholders in most large corporates. These suppliers are broadly responsible for the Scope 3 emissions for most large corporates. These suppliers will span the 15 categories within Scope 3 emissions. The key ones being raw materials, packaging materials, direct services - like third party manufacturing and distribution, indirect services. In the carbon footprint example, the carbon footprint of raw materials and packaging materials need be collected from each supplier. In the ideal scenario, this information should be collected for every delivery.

Creating a coherent and comprehensive "Collect" system will help create the right foundation for the sustainability reporting strategy. It is also vital to link the collected attributes to their respective transactions. This will help create a library of sustainability attributes. Particularly for large multinationals, the biggest chunk of Environmental and Social risks is associated with their upstream supply chain. An effective mechanism to "Collect" these metrics is critical for accurate reporting of the baseline and then the progress against them.

COMPUTE

The next key jobs to be done is to Compute granular or aggregated sustainability KPIs for the company. This job would likely sit with the data and technology functions in the organisation. The sustainability attributes Collected in the previous step are used with the transactional data sets to COMPUTE the ESG KPIs. A number of ESG KPIs can share the same underlying transactional data sets. These KPIs provide a quantitative measure of the company’s sustainability performance. By analyzing these metrics, companies can find areas where they are performing well and areas where improvements are needed.

Using the carbon footprint example, this job will Compute the carbon footprint of individual SKUs (products made), using the carbon footprint of the ingredients and packaging included in the bill of materials (as per their percentage composition). The same ingredient specific footprint can be used to calculate the aggregated carbon footprint for procurement function, which would fall under Category 1 of Scope 3.

In both these examples the underlying ingredient carbon footprint is the same. The same Collect job brings in this attribute. By designing the Compute job efficiently, companies and teams can eliminate redundancies and associated costs. Another great benefit of consolidating Compute jobs is during the audit and assurance process of the KPIs computed. Elimination of redundant processes greatly reduces the risk of inconsistent metrics, and the cost associated with audit and assurance of multiple compute processes.

COMMUNICATE

The next key job is to Communicate the computed KPIs with relevant stakeholders. Like collect, the Communicate task needs to cater to both internal and external stakeholders. It is also important to incorporate the needs of the Communicate job in the Compute process. This will ensure that the right granularity, privacy and traceability of computation is maintained.

Internal - These are the teams within the company that need to know about the sustainability KPIs for their products, portfolios, teams, functions, countries or the full corporate. This involves creating a unified interface and experience for the internal users. It is important to ensure that all stakeholders have access to the same information and that this information is presented in a clear and understandable way.

The most common way to communicate the KPIs with the wider teams is through business intelligence dashboards. Creating a unified dashboard, will create a single source of truth and can significantly improve the usage of metrics. Eliminating bespoke dashboards created for individual KPIs will also help with cost and efficiency.

In the carbon footprint example, the Communicate job delivers the product specific carbon footprint at a finished product level. The same underlying data should be used to Communicate the carbon footprint for the function, team, country, and business unit. This also gives the opportunity for teams to review and find any errors and gaps in the metrics.

External - In addition to internal communication, companies also need to communicate their sustainability KPIs and progress against metrics to external stakeholders. This includes customers, consumers, investors. In our product carbon footprint example, companies need to Communicate the specific product carbon footprint of the SKU, on the pack or through digital means to the consumers. Similarly, customers are increasingly seeking the product footprint data for all finished goods sold through them.

COMPLY

The final job to be done is to Comply with the applicable sustainability regulations. In order to Comply, the computed KPIs need to strictly adhere to the prescribed frameworks and the timelines. These frameworks often mandate a narrative alongside the quantitative metrics. The narrative might need to provide details around the policy in place to follow the regulation, highlight areas of progress and potential risks. Inability to Comply with the norms can bring significant reputational and financial risks to the organisation.

The Comply job involves reviewing the

• Calculations against the Methodology
• Traceability to source systems
• Governance and Controls
• Sign off process for the metrics and narratives.
• Audit & Assurances

Cross functional teams should verify and corroborated these metrics, with strict maker checker principles in place. Simply put, Sustainability compliance needs to follow the same rigor and controls as that of financial reporting and compliance. For large companies, the job to Comply, is all about extending the financial reporting process to include all the relevant sustainability metrics like Carbon, Water, Human Rights etc.

A key activity within the Comply job is the readiness for audit and assurance. Again, think of this as an extension of the existing financial audits and assurance process.

Another complexity in the Comply job is to align the disclosures being made across different geographies or jurisdictions. Large companies will fall under the remit of multiple regulations. For example, any large European business will need to comply with ESRS. If they have a listed subsidiary in India, they also need to comply with the Indian market regulator, SEBI's Business Responsibility and Sustainability Reporting (#BRSR) standards. Many of the KPIs required across these regulations are very similar. Alignment between the disclosures made at a local and the global level are critical.

Continuing the carbon footprint example, to comply with ESRS, teams need to provide the carbon related metrics and narratives for the ESRS 2 general disclosure and the nine subsections of E1 from E1-1 to E1-9. Extending the carbon example, the company would also need to comply with the Carbon Border Adjustment Mechanism (CBAM).

Conclusion

To conclude, I am proposing the 4C Sustainability Framework, with four key jobs to be done - Collect, Compute, Communicate, Comply. By focusing on these key jobs, sustainability leaders can ensure that their companies are well prepared to meet sustainability regulations and achieve their sustainability goals.

By focusing on these four Key Jobs to be done, companies can reduce duplication, complexity and points of failure. The 4C Sustainability Framework also delivers a lean architecture, improves auditability and controls and delivers a significantly lower total cost of ownership for the ESG reporting technology stack.

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