The U.K. Financial Reporting Council (FRC) released guidance on how companies can collect and use environmental, social, and governance (ESG) data to inform better decision-making.
The corporate governance regulator has long had concerns over the way companies and boards fail to identify and use nonfinancial information to understand long-term risks to business, as well as potential opportunities.
Last year, the FRC said the methods companies use to produce, distribute, and leverage ESG data are less mature than those used for financial information, with inadequate, meaningless boilerplate disclosures being commonplace.
The FRC Lab’s “Improving ESG Data Production” report, published in August, provides boards with best practices regarding the collection and analysis of key data. The report sets out what the regulator believes are the three key elements of ESG data production:
- Motivation: What motivates the company to collect ESG data? How does it identify what is needed?
- Method: How is ESG data collected?
- Meaning: How is ESG data used within the company? How does it impact decision-making?
The report lists 12 actions companies can take to improve ESG data collection:
- Understand what ESG topics and data are relevant to the company by identifying both current and future drivers for ESG data, determining what information is available (and what is missing), talking to investors and key stakeholders to find out what details are important to them, and checking what information regulators want/need.
- Work with peers through industry bodies to identify sector-relevant metrics, methods, and sources.
- Identify and encourage “internal champions” who can raise awareness.
- Identify who is involved in—and responsible for—gathering data within the organization.
- Identify the internal and external sources for the data and set out a method about how it should be collected, as well as how frequently.
- Ask finance and internal audit teams to apply controls over the data, including evidence trails, reviews, and sign-offs.
- Assess which data should be subject to internal and external assurance.
- Document responsibilities and processes for knowledge retention.
- Share lessons learned with teams and subsidiaries where approaches might have been different previously.
- Consider training and education for the board and across the company on why ESG data is needed and how it can be used for strategic decision-making.
- Integrate ESG data into regular processes and embed it into the company’s culture to understand performance and impact, risks and opportunities, progress against commitments, and what further strategic/operational action is necessary.
- Review whether existing data and data quality is supporting strategic decision-making and question whether further investment in systems and resources is needed.
“High-quality data is critical to high-quality decision-making,” said Josephine Jackson, chair of the FRC ESG and Climate Group, in a press release. “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. In turn, this will lead to more relevant and reliable disclosures for all users who rely on companies for clear reporting of ongoing performance and future prospects.”