ESG Management Software is Essential for Efficient Compliance

Enterprises have been investing in software to manage their environmental, social and governance (ESG) objectives and compliance requirements. The need to account for these considerations in parallel with financial accounting began growing early in the century and accelerated as governments and regulatory authorities began to require companies to measure and document activities and outcomes. Meanwhile, software providers have been offering products to address the needs of those subject to these requirements. To assist, ISG Software Research will inaugurate an ESG Software Buyers Guide later this year.

I’m focusing here on the environmental aspects of ESG compliance because they are the most challenging, especially in the data collection and analysis. Most of the data for the social elements are brought together and can be reported in existing systems, especially human capital management. Corporate governance software has been a fixture since the passage of the Sarbanes-Oxley Act in 2002, which mandated more reliable corporate disclosures on governance issues. General purpose legal and regulatory compliance software has been around for decades and is capable of dealing with paperwork necessary for social and governance requirements.

Software designed specifically to support compliance with environmental reporting laws and regulations includes one or more of the following five categories:

• Sustainability Management: Applications used to manage sustainability practices to achieve compliance and objectives, such as reducing carbon footprint or improving resource efficiency.
• Compliance Management: Tools that assist in achieving efficient compliance, manage related processes, track status and generate mandated reports.
• Risk Management: Software to help identify, assess and mitigate ESG-related risks.
• Benchmarking: These tools allow organizations to compare their ESG performance against industry standards or competitors. They provide insights into areas for improvement and best practices.
• Analytics: Software that helps enterprises to collect, analyze and report data related to their ESG activities.

Compliance with environmental reporting laws is challenging for at least four reasons. At the top of the list is data collection, because gathering accurate data on various environmental metrics, such as carbon emissions, water usage and waste management, can be quite difficult. In the case of emissions, simply capturing and gathering accurate and verifiable data that are owned or controlled by an enterprise (referred to as Scope 1 metrics) requires that the sources of those emissions are properly instrumented to measure them. This is not a given. Scope 2 metrics, that refer to indirect sources of emissions (such as electricity, supply chain transportation and business travel), are more difficult to gather. For example, while airlines provide GHG emission data to customers, electrical utilities do not always make this information available, often because they themselves are not set up to track emissions data. The power supplied to a customer may be sourced from multiple suppliers that can vary hour to hour, each with their own energy source or sources. Scope 3 emissions from the supply chain are harder still because they are that much more removed from objective calculation. Moreover, to avoid double counting, a novel form of emissions accounting is likely necessary. In addition, because different industries have their own flavors of metrics and standards, there is an ongoing build-out of this aspect of the capabilities of each software provider.

Another challenge is the regulatory landscape, which has been constantly changing, with new laws and standards being introduced regularly. Keeping up with these changes and ensuring compliance can be difficult and costly. A third, related challenge for enterprises operating across multiple regions and countries is dealing with different environmental regulations and reporting frameworks across jurisdictions, which adds another layer of difficulty.

And beyond the technical requirements, there are serious organizational ones. Enterprise-level environmental objectives are not by themselves actionable, so responsibility for meeting them must devolve to individual business units, executives and managers. Moreover, there can be trade-offs between environmental and financial goals, and yet few, if any, ESG applications can optimize these trade-offs where they exist. ISG Software Research asserts that by 2027, almost all providers of ESG management software will incorporate cost, as well as environmental impact data, to enable enterprises to optimize trade-offs in achieving sustainability goals.

Thousands of midsize and larger enterprises need to assemble and report accurate and verifiable environmental data to be compliant with relevant laws and regulations. Those that operate in multiple countries or legal jurisdictions have an even more complex compliance task. I recommend that enterprises that are affected by ESG mandates use dedicated software to reduce the time spent by staff on this administrative task, as well as ensure full compliance and verifiability with the least amount of effort.

Regards,

Robert Kugel