The Financial Reporting Council (FRC) published a report Tuesday on Improving ESG Data Production. The report — by the FRC Lab — focuses on how companies can improve the ways in which they collect and use environmental, social, and governance (ESG) data. The FRC also published a summary of the report's findings.
Companies can find it difficult to report ESG information effectively, and the systems used to produce this data are "significantly less sophisticated than for financial information" — as explained in the 2021 FRC Statement of Intent on Environmental, Social and Governance Challenges.
The production of ESG data was highlighted as one of the main challenges for ESG reporting in the 2021 statement from the FRC.
"High-quality data is critical to high-quality decision-making. Improving the systems and processes for the production of ESG data, as well as embedding a joined-up approach to data collection, will result in better decision-useful information," Josephine Jackson, chair of the FRC ESG and Climate Group, said in a news release from the regulator.
The FRC Lab report focuses on three key actions that help to produce high-quality ESG data.
Identify the motives for data collection
It is important for companies to be able to identify what data is needed to meet business strategy, stakeholder, and regulatory needs, the report said.
- Identify both current and future drivers for ESG data.
- Engage internal stakeholders in order to understand what is needed, what data has already been collected, and what is missing.
- Engage with key investors and other stakeholders to understand what data is important to them.
- Review regulation and framework requirements.
When companies collaborate with their peers through industry bodies, they will be able to identify metrics, methods, and sources relevant to their sector. The FRC also recommended that companies identify and encourage internal champions who can raise awareness about ESG data.
Assess the methods used to collect and process data
Once data has been collected, it must be assessed to determine its validity and accuracy. This process is done, the FRC said, through:
- Variance analysis: Comparison with prior periods, forecasts, and targets.
- A lines of defence approach: Application of controls, internal reviews, checklists, and sign offs.
- Internal audit: Review of methodologies, specific datasets, and KPIs.
- External assurance: Typically, limited assurance and mostly focused on environmental data.
Find the meaning behind data to inform strategy
Companies should consider training and educating the board and employees across the company on why ESG data is needed and its role in strategic decision-making.
ESG data should be incorporated into regular processes and embedded in the company's culture, the FRC recommended, in order to understand:
- Company performance and impact.
- Risks and opportunities.
- Progress against commitments.
- What action (including strategic change, capital allocation, and incentivisation) is necessary.
Companies should review the quality of existing data to evaluate if it supports strategic decision-making and whether investment in systems and other resources is needed.
— To comment on this article or to suggest an idea for another article, contact Steph Brown at Stephanie.Brown@aicpa-cima.com.