How ESG is driving the development of enterprise software today

Christian Pedersen Chief Product Officer at IFS, spoke to Business Leader about how ESG is now being placed as one of the determining factor in access to capital in the decisions made by consumers.

In 1970, economist Milton Friedman published a famous article in The New York Times, entitled “A Friedman Doctrine: The Social Responsibility of Business is to Increase its Profits”. It was a model that underpinned the business world for the best part of 50 years. Now, however, its power is fading as businesses increasingly decide to embrace other forms of social responsibility, most notably those enshrined with fast-emerging environmental, social and governance (ESG) models.

The reality is companies that have embraced ESG models are simply providing what many of their customers, investors, shareholders and employees now want. Issues like climate change and social injustice are at the forefront of many people’s minds. As a result, buying from, investing in or working for socially-conscious companies ties in with their personal values more closely.

In fact, a recent report from Natixis Investment Managers found 83% of millennials, 82% of Gen X, 80% of Boomers and 74% of the Silent Generation said they wanted their investments to match their values. Lenders also offer more favourable interest rates on business loans based on ESG scores. The Bank of England and the European Central Bank have started to stress-test their positions not just against climate-related financial risks in addition to traditional financial risk. The study from Natixis Investment Managers mentioned above found asset managers launched 196 new ESG investment funds in 2020 — a record.

This type of investing — as well as similarly named strategies — has exploded in recent years. In 2020, roughly $51.1 billion flowed into funds that employ environmental, social and governance principles, more than double the $21 billion in 2019, according to Morningstar.

So, with the influence of ESG growing, it is becoming increasingly important that ESG measures  make their way into auditable systems of record like enterprise resource planning (ERP) software.

How Enterprise Software can be used for ESG

Executive teams today are likely to find business applications are evolving quickly to satisfy ESG-related demands. They should look for particular types of capabilities to make certain they’re prepared to measure and manage not just by financial value, but environmental and social impact.

Key considerations include:

  • Artificial intelligence. Managing cost, revenue and the environmental impacts of product, services or operations can rapidly become too fast-moving a scenario for the human mind. AI can help here, for example, by optimising the scheduling and routes of field service technicians to decrease the number of miles driven or reduce fuel consumption.
  • Circularity. Management of a circular product lifecycle to minimise waste should not only encompass data needed to manufacture a product, but also include a carefully-constructed plan for decisions and costs associated with reuse, recycling, remanufacturing, lifecycle extension or disposal.
  • Consider the whole business. Too often, a company will simply implement an ERP system’s financial module, but sustainability requirements mean they also need to consider the supply chain and HR modules to document sourcing and labour practices in an auditable environment.

This helps handle the S and G in ESG by capturing a company’s operations or suppliers’ labour practices, exposure to corruption, community development or human rights. Equally, it allows management teams to comply with modern slavery legislation and global frameworks like ISO 26000. Reaching ESG goals is an ongoing learning process, and, as noted by Workiva, there are typically two key challenges in ensuring high-quality data governance for ESG data:

  1. Navigating the range of ESG measurement methods, frameworks, guidance, protocols, rankings, indices and standards that are disconnected from the reporting process – This can be a steep learning curve, but regulatory authoritative reporting frameworks are available to help businesses report with greater accuracy and confidence.
  2. The fragmented ESG reporting data ecosystem – Workiva notes the challenge in trying to generate a single source of truth that can be linked to multiple disclosures and views in the ESG data ecosystem. Adopting composable software that comprises highly-integrated and interconnected modules is key in integrating disparate data sources.

Beyond ERP

To meet ESG goals, ERP software should be accompanied by sound organisational structure and processes. By communicating information clearly enterprise-wide employees are more likely to acquire the skills and knowledge required and have a single version of the truth to work from.

It is also worth considering peripheral technologies your business might adopt to supplement ERP and bring you closer to meeting ESG goals. Think about how you might link your ERP with other solutions or external data sources as part of a composable architecture. Enterprise software should share data and orchestrate processes seamlessly with operating equipment through third party emissions calculators the internet of things (IoT), and trading partners’ systems.

Looking ahead

It is regarded as completely normal to measure every pound and penny that contributes to financial performance. The same approach needs to be taken in measuring ESG performance. This may add new layers and complexity, and creates new requirements for ERP. But standards are fast emerging for measuring and managing non-financial performance metrics, and both customers and funders are demanding “show, don’t tell” data to create credibility.