Will the ESG metrics become as important as financial figures?

Sustainability has changed and will radically continue to change the business landscape of organizations and companies during this decade. Going forward, organizations will need to be able to consider the impact of their activities on the environment, people, and society more thoroughly.

The UN, the European Union, and many standardization organizations promote responsibility and ESG (environmental responsibility, social responsibility, and good governance) related regulation and standards through their own activities. For example, the EU taxonomy requires organizations to take steps to improve their sustainability agenda. It contributes to European environmental objectives and the green transition by channeling funding towards sustainable investments and projects.

More companies will be required to report on ESG

Today, ESG reporting requirements impact only a limited number of companies and organizations. For example, reporting obligations on other than financial information only apply to large companies and organizations. However, Björn Heir, Data & ESG Advisor at Tietoevry Tech Services, points out that the regulation will also affect smaller organizations in the coming years. As early as 2024, listed companies with more than 500 employees and, in 2025, unlisted and listed companies and organizations with more than 250 employees and revenues of more than €40 million will be covered by the EU's Corporate Sustainability Reporting Directive.

– As large players are required to consider the overall impact of their operations in ESG reporting, they are also starting to collect sustainability data from their suppliers. This means that even very small companies in subcontracting or production chains are required to be prepared to report their environmental impact.

In addition to regulation, the need to provide transparency will also be influenced to an increasing extent by public opinion regarding sustainability and consumer purchasing decisions. To compete successfully, many companies will need to publish sustainability figures, even if they are not directly bound by regulation.

– There are numerous mandatory regulatory requirements, but they are not the only drivers of ESG reporting. The actors' own genuine desire to act responsibly and the demands of stakeholders, such as customers, investors, and financiers also play a key role. Sustainability is also a growing business opportunity, and this can help accelerate the development of responsible business models.

Comparable to accounting

Heir has a long history in consulting on reporting topics for clients in various industries. He has seen how ESG-related topics have moved from the desks of corporate brand management and communications experts to the to-do lists of senior management and boards. This indicates that responsibility is increasingly embedded in the DNA of organizations.

– The change in the coming years will be enormous. The standards of accuracy and handling of ESG reporting figures and the requirements for verifiable data could be compared to corporate financial management and accounting. ESG reporting will be particularly important for companies with a significant impact on the environment and society, such as those in the forest and chemical industries.

A major challenge in ESG reporting is to identify valid and reliable sustainability metrics for all key business areas. Organizations need to collect, store, calculate, reconcile, combine and aggregate data from numerous sources into reports. In addition to internal data, reliable information needs to be obtained from a wide range of stakeholders, such as suppliers of materials and components, subcontractors, and logistics partners.

- The core requirement is the ability to manage data, and this can be a major challenge for many organizations. For ESG reporting, organizations need to acquire a whole new range of data, transform it into a comparable format, such as carbon dioxide equivalents, and perform the necessary calculations. They must also be able to demonstrate the origin and accuracy of the data, for example through external assurance, and present the data in formats required by different standards. It is essential that the company can in its sustainability reports describe the effects of its operations on the surrounding world.

ESG – The biggest change agenda of the decade requires data management capabilities to scale

Focus on data management capabilities

Tietoevry has been an advisor for its customers in their data management and ESG reporting development projects. According to Heir, Tietoevry's role is to support companies in improving their capabilities linked to ESG data. In practice, this means assessing the company's current situation around ESG data-related objectives, developing data acquisition and data governance skills, including the ESG data domain into the company's overall information architecture, and implementing the necessary data platforms and tools.

– Most customers who contact us have already collected a great deal of ESG data, but they have challenges to cope with the increase in data sources, the finer granularity and the increasing accuracy needs. As the amount of information grows, the opportunity to utilize data not only for reporting perhaps once a year, but for internal operational purposes increases. Companies should benefit from the insight of an external expert in developing the core data management capabilities.

Heir guides the customers and starts small in terms of development. The first and most important step is to understand the big picture – how the company's operations affect the world around it.

– In ESG reporting, it’s vital to understand what kind of information is needed, where it can be obtained and how it applied. Data processes and flows need to be transparent and their logic clear. The data collected and processed must give an undistorted picture of reality.

At the initial stage of developing the ESG processes, Heir also underlines how important it is to assign data owners who will carry the accountability for the data. These people must be backed up with adequate support from the data and IT departments.

–  Development should focus first on the areas which will become requirements for your company in the near future. Utilize the expertise of companies specializing in ESG data standardization. Do not think ‘tools’ or ‘solutions’ first, think ‘data’ first. Collaboration with companies in the same sector, even competitors, is advisable. It is smart to take advantage of best practices in the industry.

Tietoevry supports the development of society through responsible technology and offers expert services and solutions linked to cloud technology, data, and software. The company employs 24 000 specialists globally and has customers in more than 90 countries. Annual revenue is around three billion euros.

Exploring how visionaries are using data and AI solutions

In the Data Insiders Podcast, guest Björn Heir discusses the data-related challenges companies face in their sustainability endeavors.

Tietoevry's Data Insiders Podcast brings together visionaries from pioneering companies to discuss the potential of data in an easy-to-understand and entertaining way. One of the recent episodes of the podcast series focuses on the impact of AI and the role of data in corporate responsibility reporting.

During this season, we have already become acquainted with the data-based services developed by Vaisala and heard how artificial intelligence can help an insurance company's customers. The latest episodes discuss ChatGPT and the impact of artificial intelligence on knowledge work, as well as corporate social responsibility and the ‘S’ in ESG.

The new season of the Data Insiders Podcast can be found on Spotify and other popular podcast platforms. Listen in and get inspiration from the new opportunities data offers.