- Finance departments are driving push in ESG reporting software
- Robustness of the data is key
- Just 30% of companies have adopted ESG reporting software
As investors increasingly recognize Environmental, Social and Governance, or ESG, risks, financial markets play a crucial role in bringing their disclosure to the forefront. Investment research firm MSCI found that ESG characteristics have improved stock performance, with drawdowns at companies in the bottom fifth of the MSCI World Index 3x higher than those in the top fifth.
With greater emphasis on reputational and environmental risk, S&P Global Market Intelligence spoke with Adrian Fleming, CEO of ESG and sustainability software company Accuvio, to discuss organizations' efforts to automate and manage sustainable reporting.
S&P Global Market Intelligence: How has demand for ESG reporting software evolved over the years?
Adrian Fleming, CEO of software company Accuvio
Adrian Fleming: The profile of ESG reporting is growing and is definitely on people's radar now. Prior to this, it was simply nice to have. What we have noticed over the past 12 months in particular is that the type of people that are reaching out to us for assistance are CFOs and investor relations directors. Previously it would have been chief sustainability officers reaching out but now it is largely driven by the finance side of the house. The reason for that is that they are being asked probing questions around the robustness of the data that they're sending to the market, such as their greenhouse gas emissions and other corporate social responsibility metrics.
How much of an impact does ESG have on investment decisions?
For investors, reporting these metrics is partly an indicator of other attractive attributes such as an efficient management structure. Investors are increasingly using these nonfinancial indicators as a window into the ability of management to handle change. To demonstrate, an institutional investor recently told me that the availability of a Carbon Disclosure Project (CDP) score, for instance, shows that least the company is aware of this nonfinancial risk.
What sort of clients are adopting software to keep up with ESG reporting?
The bulk of our clients are FTSE 100 and FTSE 250 businesses, as well as Nasdaq and Dow Jones companies across a number of sectors. Often, the culture around reporting ESG metrics at these organizations is coming from the top down, including from the institutional investors such as BlackRock and Vanguard, who are signatories to the United Nations-supported Principles for Responsible Investment (UNPRI) and are looking out for these metrics in their investee companies, or potential investee companies.
What impact does this have on company behaviors and controls?
In terms of controls, C-suite individuals are typically horrified to find out that everything is spreadsheet-dependent. This comes up again and again. At present, spreadsheets are still 70% of the market. For some companies, the lack of an audit trail, transparency or assurance of the underlying calculations is where part of the risk lies and this leads to concern that what they are presenting to the market will have to be restated in years to come. There are also concerns that if they can't confidently stand behind the data they are presenting to the market, then it undermines the financial data that they're also presenting to the market. At the end of the day, the question always comes back to the robustness of data. It does not matter what field they are in. From financial services and manufacturing and industrial sectors, this is consistent across industries.
With just 30% of companies adopting ESG reporting software, how seriously does this suggest companies take these metrics?
Companies are at different stages of their journey. Many are still figuring things out. With organizations are increasingly being asked by their investors, customers and their employees for these standards, a lot are beginning to engage with their key stakeholders. Even if they reach out to a reporting software company like ourselves, they find it very difficult to sign off on a budget because it's a new line item for many of these businesses. So it can take time and can be quite onerous.
What sort of events would typically drive companies to take up ESG standards?
One event that would typically influence companies to adopt software-based is the inability to answer a questionnaire from an investor due to a lack of the necessary controls in place. This is the most common scenario. Secondly, a change of staff can sometimes lead to an overhaul in policy. Finally, in a competitive situation for a large contract in the construction or pharmaceutical industry, for example, ESG is a crucial part of any tender so not having the right controls in place could impact the wider business.