New ESG data recommendations by the UK’s accounting watchdog have been welcomed by leading data providers and users, who said the guidance provides a clear pathway to better sustainability disclosures.
The Financial Reporting Council’s FRC Lab said its guidance on the production of ESG data was necessary because the sustainability data space was “less mature” than that of financial data. It is important to ensure the data is of the highest quality to better inform companies’ decision-making processes, it added.
Market participants said the report brings clarity to an often opaque subject and that the equal weighting given to all three elements of ESG was encouraging. The challenge now will be to put those recommendations onto the statute books.
“The updated guidance is clearly a step in the right direction as it includes a thoughtful analysis of current ESG data-related challenges and steps toward their remediation,” Delta Capita chief sustainability officer Diane Eshleman told ESG Insight.
The report by London-based FRC Lab recommends companies follow a 12-step process of identifying what data they need to meet “business strategy, stakeholder and regulatory” obligations, collect and process data effectively and use data strategically. It’s based on findings from interviews and round-table meetings with “a diverse range of organisations across sectors and sizes”, which included “large listed companies, private companies and housing associations”.
“By keeping in mind at different stages of producing ESG data, its decision-usefulness and relevance to their strategy and their stakeholders, companies can report ESG data that works both for them and the wider investor, stakeholder and regulator community,” the report states.
Breaking down a company’s ESG data generation programme into three elements, it encourages market participants to identify their motivation for collecting data, the method of doing so and then to explore how the data can add value – or meaning – to their operations.
Collaboration
Financial digital solutions provider Broadridge praised the report’s focus on promoting deep engagement among all parts of the ESG value chain.
“The FRC’s guidance highlights the importance of coordination and collaboration to help achieve its goals, and that includes data and technology providers working in close partnership with companies and supervisory institutions to improve ESG data processing,” Broadridge head of ESG insights Jag Alexeyev said. “Given the vast complexity and volume of ESG information, fit for purpose technologies will prove valuable for streamlining workflows, reducing costs, and improving quality.”
The FRC Lab lays out a series of questions that corporate boards should ask stakeholders as they formulate their ESG data strategies. Among them are inquiries about how best to identify the data they need, what controls need to be put in place and how data can be embedded within an enterprise.
The top-to-bottom nature of the guidance is seen as particularly useful for small businesses that may not have the resources to pull together their own or third-party data.
“Smaller companies with limited resources face a daunting task in ESG data production, and the FRC’s guidance suggests a few preliminary positive actions smaller companies can take to address their unique challenges,” Broadridge’s Alexeyev told ESG Insight. “Beyond these internal steps, external partnerships and technology will help smaller companies to deliver on the ESG data needs of stakeholders.”
There was also positive comment on the report’s recognition that social and governance factors should be given equal weighting to environmental concerns as there is a growing demand from investors for S- and G-aligned products.
More Work
The FRC Lab report is the first fruit of a council project to examine the ESG data market following the publication of its “Statement of Intent on ESG Challenges” last year. Further studies on the distribution and consumption of data are expected to follow.
It’s hoped that reports like this will help regulators forge a comprehensive ESG reporting framework. Some participants in the financial industry have said the absence of such rules is hobbling development of the sustainable finance market and encouraging greenwashing.
Nevertheless, Delta Capita’s Eshleman warned the FRC findings were not enough to move the regulatory programme forward.
“More work is required to codify the suggested approaches before they are fully actionable,” she said.
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