Why data is the missing ingredient for managing ESG risks

In this guest piece, Jessica McGoverne, Director of Policy and Corporate Affairs at Sedex explains the challenges businesses face when it comes to gathering ESG data and which data businesses need to make a difference.

Today, companies face increasing demands from customers, investors and regulators to proactively manage a wide range of environmental, social and governance (ESG) risks.

Earlier this year, the UK’s Financial Conduct Authority announced its intentions to regulate ESG ratings providers, while the USA’s Securities and Exchange Commission may introduce rules on ESG information. It’s incredibly important for businesses to respond to and manage ESG issues, though this can place increasing pressure on business resources.

Carrying out the activities to do this, and meeting stakeholders’ demands, is easier said than done, with a number of hurdles presenting particular challenges for companies.

The right data, tools and technology can help companies to negotiate these hurdles, streamline sustainability-related activities, and reduce the burden on business resources.

Understanding the challenges

The supply chains that support a business’s operations and production are often long and complex, and the risks within them vary across multiple continents and industries. It can be extremely difficult for companies to see where components, products and services originate, know who the workers are and what conditions they work in, and what environmental impacts suppliers’ activities have. This lack of visibility means that businesses are often unaware of the specific ESG risks linked to them.

Additionally, ESG itself lacks a common definition, with various standards existing across different ratings providers, frameworks and financial services companies even as the market grows. Analysts estimate that ESG investment will reach US $50 trillion in assets under management by 2025. This makes the world of ESG a crucial yet difficult one for businesses to navigate.

Common ESG frameworks include: the Global Reporting Initiative (GRI), an open-source framework used by the likes of Bloomberg; S&P Global’s Corporate Sustainability Assessment; and the Carbon Disclosure Project (CDP), a membership organisation and ESG framework focusing on environmental issues. Each requires slightly different information from a business.

This multiplicity can make it challenging to work out how to prepare for ESG requirements – especially when these cross over with other sustainability-related activities. Often, businesses must also meet supply chain and modern slavery legislation, respond to consumer demands, and drive their own sustainability initiatives.

The solution lies in having access to the right data – and the ability to analyse it. This is critical for building visibility of all suppliers, understanding where the greatest risks are, and responding accordingly. The right operational and supply chain data can feed into multiple sustainability requirements, while the visibility it brings enables other benefits, including energy efficiency and better-informed decision-making during times of disruption.

Gathering the right data

There are several core areas and topics that feature across ESG frameworks. Businesses can begin to prepare for ESG requirements by gathering data on these. It’s likely they will already have some of this information, particularly if a business produces annual modern slavery statements or sustainability reports. By taking a holistic approach to these sustainability activities, companies can identify the common data needs, streamline their efforts to gather this data, and store it on a single platform for integrated analysis.

Environmental data, for example, may include air emissions, water usage, and physical waste. Essential data relating to social risks includes information on workers, such as their genders and form of employment, accident and injury data, modern slavery risks, and data on the presence of independent trade unions at work sites. For managing governance risks, data requests will typically include the instances of corruption in a supply chain – something often required by law for a company’s own operations.

This data informs sophisticated tools for companies to analyse their supply chain risks at scale. Sedex’s risk assessment tool, for example, provides 340,000 risk scores for different countries and industries across 14 environmental and social sustainability risk areas.

Using data in practice

Acting on ESG risks enables companies to demonstrate progress and good performance against ESG requirements. As an example, let’s look at a specific risk, the data needed to address it, and the action that a business can take using insights from this data.

One issue that is extremely difficult to identify is modern slavery, which includes forced labour. Modern slavery is the severe exploitation of people for personal or commercial gain. To help manage modern slavery risks, businesses need to capture and analyse data on the operational circumstances and behaviours that are “indicators” of forced labour, as recognised by the International Labour Organization. These act as “red flags” – alert signs that there is an increased risk.

Indicators of forced labour can include: excessive overtime, restriction of worker movements, retaining worker ID documents, and withholding wages. Businesses can capture this information about their suppliers via self-assessment questionnaires, social audits conducted by third parties, and also by worker voice tools that gather anonymous feedback directly from workers. Having this data on a central platform enables integrated analysis that can highlight work sites where several indicators exist together – and where people may be vulnerable to modern slavery risks.

Jessica McGoverne

Jessica McGoverne

Findings that indicate a higher risk of forced labour allow businesses to conduct deeper assessments in regions or at work sites, to understand whether this increased risk translates into exploitative situations in reality.

Once a full investigation has been conducted, businesses can take steps to protect potential victims of forced labour, and work with the different stakeholders surrounding the situation to make corrections and changes that prevent exploitation from reoccurring. Local trade unions and charities operating in a region can provide valuable insight on what measures and processes will help businesses to address the issue.

Demonstrating clear, credible progress

Simply being aware of ESG risks is no longer enough to satisfy investors’, consumers’ and governments’ concerns. These stakeholders expect businesses to measure the severity of risks, prioritise business resources accordingly, and demonstrate proactive action in addressing the most significant concerns.

Data on a business’s operations, employees and supply chain is crucial for doing this. It enables companies to identify and tackle social and environmental sustainability issues, measure ESG performance, and evidence positive impact in a credible way. This data can even help companies to earn better ESG ratings by showing they are going beyond a framework’s minimum requirements.

Using the right data to build better visibility of supply chains, tackle ESG issues and show genuine progress can ultimately drive operational, reputational and financial benefits, while also supporting long-term business sustainability and supply chain resilience.