ESG Automation: Picking the Right Solution

Michael Volkov
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The Volkov Law Group

The ESG bandwagon continues to roll – investors, companies and business media are all touting the importance of ESG for corporate success.  Right behind are a number of ESG vendors, who are providing automated platforms to manage ESG criteria, measurement and reporting.  The new gold rush has begun and continues to gain momentum. 

Companies interested in ESG have to define their program, the criteria for measurement, the collection of data and information related to the criteria, and then develop a reporting system to promote ESG transparency.  As part of the organization and implementation of an ESG program, automated solutions are an important part of every ESG program.

One difficult issue for ESG program design is the existence of ESG frameworks.  While there is no set standard in this area, there are plenty of ESG frameworks available in the global ESG movement.  Some of the important ESG program frameworks include: (1) The Global Reporting Initiative (which was started in 1997) (GRI”); (2) Carbon Disclosure Project (CDP); (3) United Nations Sustainable Development Goals (UNSDG); (4) The Sustainability Accounting Standards Board (SASB); and (5) Workforce Disclosure Initiative (WDI).

The development of ESG frameworks has been complicated by the use of different methodologies,  and scoring systems.  In the absence of standardization and data quality, the ESG industry risks growing in disparate ways and not meeting company needs for transparency.

With the variety of published ESG frameworks in the market, companies face challenges in the selection and application to specific industries.  In most cases, companies have to build their own framework by using portions of available systems to tailor to specific objectives.  Companies have to make sure that whatever framework is used that it covers all of the priorities and objectives, given the size of the company.  For public companies, the SEC is heading toward adoption of certain criteria and guidance.  The SEC’s action will have a significant impact of development of the ESG industry.

Before selecting an automated platform, it is important to understand the ESG frameworks, the criteria and how to maximize ESG factors, definition, criteria, measurement and reporting.  Three important areas includes environmental impact reporting (e.g. carbon impact), supply chain management, and conflict minerals management.  For example, supply chain management requires responsible sourcing, increased insight into vendors and suppliers, and improved supply chain efficiency.

ESG automated platforms provide opportunities to apply established ESG factors, and tailor the ESG program to environmental, social, supply chain and other factors.  An automated solution defines data sources for collection and measurement.  To support the operation, an automated tool permits the company to document its ESG program, maintain important records and then keep auditable records needed to test and monitor the ESG program. 

The most important benefit for a company from an ESG automated platform is the standardization of a company’s criteria, measurement and reporting on its system.  Until there is greater definition in this area from the SEC and other regulators, companies have to develop a consistent reporting framework, transparency into its ESG criteria and consistent disclosures of performance.  Companies that commit to this approach will gain trust from investors, regulators, and other key stakeholders.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

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