Companies worldwide are adapting to a more sustainable future as the business playing field changes. One of the ways companies are adapting to these needs is by adopting ESG criteria
ESG stands for Environmental, Social and Governance, and refers to the three core factors in ensuring corporate sustainability. ESG reporting assesses how a company manages risks and opportunities that shifting market and non-market conditions create. These shifts include changes to environmental, social and economic systems. It is about the ability to develop and sustain long-term value in a rapidly changing world and managing the risks and opportunities associated with these changes. Assessing a business’s impact on its surroundings facilitates building foundations for doing business sustainably and profitably.
Organisations are often free to decide whether to report non-financial information, because ESG disclosure obligations aren’t standardised globally. But, there are many challenges involved in ESG data as a whole, primarily that it’s difficult to compare because data is optional and inconsistent. Organisations that comply can choose the standards to be accountable for, making reporting comparisons ineffective.
This inconsistency led Element 22, a leading UK-based data and analytics consultancy, to answer investors’ calls for transparency. By partnering with international software solutions company, BBD, to design and develop the ESGi platform, they’ve created an innovative technology solution sourcing attested, trusted ESG data for the investment industry.
Challenges involved in collecting ESG data
Organisations looking to comply with ESG reporting and disclosure requirements are presented with roadblocks along the way. Mark Davies, partner at Element 22, notes the following:
There are a growing number of reporting requirements
The number of mandatory and voluntary ESG reporting/disclosure requirements is multiplying. Standards are still evolving, and the result is significant variation in requirements across regulatory and rule-setting bodies, with much complexity to understand and comply with.
Data is predominantly unstructured and scarce for private companies
Most reporting requires a deep understanding of ESG data related to third parties – customers, supply chain and investees. Where available, this data is selectively published in unstructured documents, like annual reports, but it is particularly scarce for private companies.
ESG data tends to be expensive and opaque
A few data vendors specialise in collecting and normalising this data, and there is extensive variation in scoring approaches across these providers. The underlying logic used is often opaque and can rely heavily on estimations. Costs are also high due to the level of manual collection effort.
Data suffers from publication lag
Due to stale information, critical decisions that rely on this broken ESG data supply chain can become compromised. With much of the company data reported once a year at best, and then taking months to collect, normalise and report, the information is stale before it is ready for investment-making decisions or reporting.
The ESGi platform and how it works
The platform was developed specifically to support sustainable finance disclosure and is designed as an authoritative source with the objectives of requesting, publishing and challenging ESG data – which users can amend in real-time. As such, the platform builds trust through transparent, consistent business rules, and creates a community for firms to share their ESG data. BBD helped extend and optimise the system according to its evolving needs and requirements, resulting in a highly scalable and configurable application that can address any changes to regulation at a glance. Here’s what ESGi achieves:
- Trust: by grouping reporting data into portfolios; regulation-specific modelling, unambiguous data definitions and user-configurable models; multiple ESG use case reporting; and reporting to end consumers.
- Scalability: ESGi has a transparent rules engine to support reporting.
- Field overlaps or differences can be identified by completing a deep requirements analysis for each new regulation or report, which then drives aggregation rules and fills reporting templates.
- Consistency: by setting out input data attributes through the detailed analyses to be collected. ESG data on third parties is collected through direct invite and digital data capture, automation technology, and by allowing users to upload existing data collected about the company.
- Real-time assessments of corporates’ ESG performance. Timeous assessment addresses the issue of ESG data being retrospective and often out of date due to the lengthy timelines of corporate reporting.
BBD’s lead software engineer on the ESGi platform project, Andre van Zyl, says, “We always aim to collect ESG data at its most atomic level. We drive trust in ESG data through transparency.” This transparency is achieved since no blind index scores or ratings are produced in ESGi – just clearly defined digitised data, with separation between sources, the ability to flag any estimated values used, and evidence to back the data up.
Van Zyl notes that direct sourcing of ESG data from third parties also allows us to implement a direct channel so that users can request missing data directly, and challenge any data that appears incorrect. Any requests or changes made update in real time and trigger notifications. All system functionality is also supported by secure API.
The BBD approach
BBD started with an in-depth analysis of the existing POC solution, identifying gaps in functionality and technology. The BBD UX/UI team designed the application to be more intuitive and user friendly.
Through an Agile and distributed development approach, BBD delivered a highly scalable solution wherein key capabilities and processes include a dynamic rules engine for calculations, reporting functionality to investment firms, automatic sourcing of ESG data into the platform, and portfolio management. The application is fully configurable to handle any changes in regulation and/or financial calculations based on input.
On the BBD and Element 22 collaboration, Davies says, “The BBD development team took on all aspects of development and grasped what we wanted to achieve very quickly, even though the subject matter and ESG specific terminology was quite new. They were able to suggest smart solutions to the identified issues and present ideas back quickly as practical examples during the Agile Sprints.”
He adds that several components span any application – such as user management, API design and support and secure cloud hosting. “Relying on BBD to bring their expertise learnt from many other projects was a vital component that helped us achieve a huge amount over a short period,” says Davies.
BBD implemented the complete solution in the AWS cloud. As an AWS Advanced Services Partner with a dedicated cloud enablement team, industry best practices and standards were adhered to.
The real prize for clients as it pertains to ESG
ESGi is a brilliant example of how technology improves the ability to track and trace ESG initiatives. Since the platform provides access to more detailed ESG data, organisations have the opportunity to bolster their competitive advantage while simultaneously delivering positive environmental, societal and governance outcomes.
Davies says, “We believe that our main unique selling proposition is to remove the complexity behind the various ESG reporting and disclosure requirements. We take great effort to fully understand the reporting requirement (which could be a regulation), and then work backwards, identifying exactly what the data needs and transformation rules are. By tackling the major upcoming regulations and turning the reporting rules into system code, we can greatly reduce the burden for clients who need to comply. Today, a new regulation means financial institutions must start from the beginning. With ESGi, we are offering a modular solution, which means that only the delta of new information needs to be gathered each time, and the effort in analysing new requirements is much lighter.”
Where to from here?
Element 22 has a bold ambition with ESGi – to become the trusted data source for sustainable finance. By collecting digitised data at its most atomic level, providing full transparency to users into the data sources used for each calculation, supporting data with evidence and summarising all system transformation rules, they believe the model will deliver just that.
“Working with the BBD team has greatly advanced the market-readiness of ESGi. Within a few weeks, we had jointly taken the product from a prototype to full production readiness. We can now onboard clients, secure data and deliver comprehensive services, supporting our initial use case – SFDR – the EU’s Sustainable Finance Disclosure Regulation,” says Davies.
“The climate crisis matters to all of us, as the cost of getting this wrong will negatively impact future generations. We see a real frustration across the industry in understanding which corporations are making a difference versus just making empty promises. We hope that ESGi can play a small part in bringing much-needed transparency.”
BBD’s partnership with Element 22 led to developing an application that is a leader in its field. Says Van Zyl, “This collaboration accelerated BBD’s relationship with Element 22 from development partner to trusted advisor.” Find out more about Element 22 here, and click here to get in touch with BBD.