Data is the key to effective ESG risk management

Companies are receiving increasing requests from customers, investors and regulators to actively manage an extensive range of environmental, social and governance (ESG) risks.

Environmentalism, manufacturing disruption and global crises have collectively drawn attention to the people, activities and resources required to provide products or services, and how companies address ESG risks in their supply chains.

As investor and consumer understanding evolves, companies face pressure to demonstrate ESG risk management and performance with transparency and credibility.

In the first half of the year, the UK’s Financial Conduct Authority announced plans to regulate ESG ratings providers, while the USA’s Securities and Exchange Commission may also introduce rules on what information businesses need to share.

Carrying out the necessary activities to meet the growing demands of all these stakeholders is no small task, with a number of complex business problems making the right strategy difficult for organisations to define.

However, the right data, tools and technology enable companies to overcome these issues, streamline ESG and sustainability-related activities (such as meeting legislation), and ultimately reduce the burden on business resources.

Why the right data is a must-have for businesses

The supply chains that businesses operate within are often huge in scale and incredibly hard to gain full visibility of. As a result, ESG risks within them can vary across multiple areas, operations and industries. And yet stakeholders expect companies to know where components, products and services originate and understand the working conditions of their employees.

To make matters more complicated, ESG has yet to gain an agreed-upon definition, with a number of standards existing across a variety of rating providers, frameworks and financial services businesses. This multiplicity can make preparing for ESG requirements a big ask for businesses.

The answer can be found in gathering, accessing and analysing the right operational and supply chain data. This data creates the visibility and insight required to meet a wide variety of sustainability-related requirements, while facilitating other benefits, including more efficient energy use and the ability to better cope with supply chain disruption.

Getting the foundations righ

Some core areas and topics feature across various ESG frameworks. It’s likely a company will already have data on some, if not all, of these topics, especially if they conduct regular sustainability reporting. By taking a holistic approach to related activities, companies can identify which types of data are needed across the business and streamline efforts.

Environmental data, as an example, may include air emissions and physical waste, which companies may already collect as part of meeting commitments on climate. Social risk-related data can include injury rates, risks associated with forced labour, and the number, gender, age and nationality of workers. Collecting this data and bringing it together in one place for integrated analysis allows businesses to meet the various reporting demands from investors and regulators – and demonstrate transparency to consumers.

This data also informs further insights. For example through feeding into sophisticated tools to analyse ESG risks right across supply chains, this data supports businesses to make better-informed decisions. Sedex’s risk assessment tool provides 340,000 risk scores across countries and industries to facilitate an initial, high-level global risk assessment. Where companies have collected data on particular suppliers and work sites, the tool also integrates this to create individual risk scores for every facility, to reflect differences between sites.

Using data to prioritise focus

Using this insight, companies can make informed decisions about where to take action and address the most significant ESG risks. They can also show precisely how these decisions have been made, as evidence of effective risk management, and demonstrate progress on ESG issues to stakeholders.

Let’s look at a specific risk, the data needed to identify it, and how businesses can use this data to inform their next steps.

One issue which can be particularly difficult to identify is modern slavery. To help manage related risks, businesses need to obtain, collate and analyse data on “indicators” of forced labour that can occur in a workplace, as outlined by the International Labour Organization.

Indicators of forced labour can include excessive overtime, restriction of worker movements and withholding of worker ID documents. Tools to help businesses gather data on these circumstances in their supply chains include self-assessment questionnaires, social audits conducted by third parties, and anonymous feedback gathered by worker voice tools. Analysing combined information from these tools helps to draw deeper insights, building a more detailed picture of the people, practices and working conditions at individual sites.

Findings that indicate a higher risk of forced labour allow businesses to prioritise their next steps, such as carrying out deeper assessments at work sites to understand whether this increased risk is materialising as an exploitative situation. Depending on the outcomes of these assessments, companies can then act to address any mistreatment and protect workers.

Demonstrating outcomes

Just being knowledgeable about current ESG risks is no longer enough to meet the increasing demands of investors and regulators. These stakeholders expect companies to demonstrate proactive risk assessment, mitigate extreme risks, and act to address any issues they identify.

Data that reveals a company’s activities, suppliers, work sites and workers across the whole supply chain is imperative for doing this. It enables companies to identify and deal with ESG issues, drive social and environmental sustainability, and measure performance in a credible way.

Using the right data to build a better understanding of supply chains, manage ESG issues and show progress has the power to drive operational, reputational and financial benefits, alongside supporting long-term business sustainability and creating more resilient supply chains.

About the Author

Jessica McGoverne, Director of Policy and Corporate Affairs at Sedex. Sedex is one of the world’s leading ethical trade service providers, working to improve working conditions inglobal supply chains. We provide practical tools, services and a community network to help companies improvetheir responsible and sustainable business practices, and source responsibly.
Featured image: ©Immimargery