FinanceApril 22, 2021

What is ESG Software?

ESG is a hot topic today for sustainability, finance, and investment professionals. But what is ESG, why is it important, and how can ESG software help? This blog post answers all these questions for you. 

What is ESG?

Environmental, Social, and Corporate Governance (ESG) factors are used to measure the sustainability and societal impact of an investment in a company or business. The analysis of the three criteria provides an indication of the future financial performance of a company, including return and risk.

Stakeholders are interested in the ESG performance of an organization to see if it adheres by sustainability and social responsibility principles, and if the company is accurately identifying and addressing risks associated with climate change (stranded assets, supply chain disruptions, operational impacts from severe weather, etc.).

For organizations, this means they have to track and manage ESG data, and engage in ESG reporting in line with the main disclosure frameworks (SASB, TCFD, UN SDGs) and sustainability standards (GRI, CDP, DJSI).

Why is ESG Important?

The importance of ESG rose significantly during the COVID-19 pandemic. Corporate sustainability and ESG were already on the rise before the pandemic. But COVID-19 accelerated the trend. This is because the pandemic showed us how vulnerable companies can be to a global crisis. COVID-19 impacts included supply chain disruptions, operational shutdowns, lower productivity, inventory problems, unforeseen organizational changes (remote work), etc.

But as much as COVID-19 was a major crisis, its impacts may pale in comparison to the impacts of climate change, which is a greater crisis that must be faced. Therefore, companies came under greater scrutiny regarding their environmental impact, and how they’re addressing risks, including climate risk, reputational risk, financial risk, etc.

And that’s not all. Over the decades, there has been an evolution in the S&P 500’s market value. In 1975, tangible assets accounted for 83% of the S&P 500’s total assets, while intangible assets accounted for 17%. Tangible assets include buildings and equipment, cash and bonds, inventory, and land. Intangible assets are divided into two categories: intellectual property and goodwill. They include patents, brand value, customer data, and software.

And that’s not all. Over the decades, there has been an evolution in the S&P 500’s market value. In 1975, tangible assets accounted for 83% of the S&P 500’s total assets, while intangible assets accounted for 17%. Tangible assets include buildings and equipment, cash and bonds, inventory, and land. Intangible assets are divided into two categories: intellectual property and goodwill. They include patents, brand value, customer data, and software.

But a big shift occurred between 1985 and 1995. In 2020, the situation was completely reversed. Tangible assets accounted for only 10% of the S&P 500’s total assets, while intangible assets accounted for 90%!

According to a GreenBiz article, this fueled the rise of ESG and made it more important for CFOs. Today, corporate reputation is a bigger asset than a plant or headquarters. In the 1970s, a company had to manage its plants, labor, and equipment to get shareholder returns. Today, companies get more value from managing their reputation, brands, and data.

And intangibles are much more sensitive to environmental and social risks, which makes ESG issues more important, the GreenBiz article says. As a result, financial and sustainability goals started to merge.

How ESG Software Helps

Effective data management is key to maintain a high level of ESG performance. This starts with data collection, tracking, management, and reporting on key indicators such as: energy usage, water usage, waste generation, greenhouse gas emissions, workplace safety and health metrics, compliance metrics, etc.

Data must also be used to generate insights into current risks and future trends, in order to implement corrective and preventive actions if things are headed in the wrong direction. Leading ESG software leverage artificial intelligence to identify high-risk areas and suggest specific actions.

With ESG management software, the entire process from start to finish is automated, thus saving valuable time and effort, and reducing the risk of human error. Data is collected either from users through desktop or mobile applications, or from connected assets, sensors, drones, and other IoT devices.

The same data is then aggregated and available to be viewed on dashboards and reports in order to inform decision-making. The data is also used to create disclosures according to the ESG framework of your choice.

Choosing the Right ESG Software

When evaluating ESG solutions, it’s easy to fall into the trap of looking for software that simply tracks environmental metrics (i.e., the “E” part of ESG, such as greenhouse gas emissions, water use), and produces a report with the data. But this is sustainability reporting software. ESG software is completely different.

There are two extra elements to look for when choosing the right ESG software for your organization. First, ESG software should also cover the “S” and “G” parts by measuring:

  • The success of initiatives that help local communities where your organization operates, i.e., your social impact.
  • Workplace safety and health (incident rates, employee wellness, etc.)
  • Compliance activities (audits, inspections, compliance tasks completed, etc.)

Second, and this is the most important, connections between ESG performance and risk management. ESG software must also have a risk management component where ESG risks are identified, evaluated, and addressed. ESG software should be used to protect brand and company reputation by mitigating ESG risks. It should also help to identify the impacts of climate change on company value.

In conclusion, ESG software is a comprehensive solution composed of many modules used for EHS (Environment, Health, and Safety), Risk Management, Regulatory Compliance, and Sustainability Management. 

Jean-Grégoire Manoukian
CONTENT THOUGHT LEADER - WOLTERS KLUWER | ENABLON