As the global economy shifts towards sustainability, ESG considerations are becoming increasingly embedded into the due diligence considerations of organizations, whether due to shareholder and investor demand or regulatory compliance.
However, current due diligence processes often suffer from high labor and time costs due to process bottlenecks. Below, we explore 5 of the most common bottlenecks that organizations face in implementing effective sustainable due diligence, and how Carbon Impact’s automated solutions can help. If your organization is running into these problems, you are definitely not alone:
1. Data Availability and Quality
One of the most significant challenges is the lack of reliable and comprehensive ESG data. Many companies do not disclose sufficient information, and when they do, it often lacks standardization. This inconsistency makes it difficult for financial institutions to assess the sustainability risks and opportunities associated with potential investments.
- Data Gaps: Many companies either do not collect relevant ESG metrics, or do not use the collected data to properly calculate common benchmark KPI’s such as emissions, energy usage, and waste generation. For example, even among large companies listed in the S&P Global Broad Market Index, just over half (58%) disclosed Scope 1 and 2 emissions in 2022. Of these, only 32% of companies reported Scope 1 emissions comprehensively, without need for further adjustment or supplementing.
- Standardization Issues: Different reporting frameworks and regulations (e.g., CSRD, GHGRP, GRI, SASB, TCFD) can lead to inconsistencies in data reporting, especially if source data gaps existed in the first place.
2. Integration into Existing Processes
Integrating ESG factors into traditional financial due diligence processes is challenging. Many institutions struggle to adapt their existing frameworks to incorporate these new considerations effectively.
- Resource Constraints: Implementing new processes requires time, expertise, and financial resources that may be scarce.
- Lack of Available Tools: As a relatively new dimension when it comes to investment decisions, the market of tools for processing and integrating ESG data is not as well developed as that of traditional financial information. A survey of US companies by KPMG in 2024 found that half of major firms still used excel as their primary ESG data management system.
3. Technological Limitations
While technology can aid in ESG data collection and analysis, many financial institutions lack the necessary tools and systems to manage this efficiently.
- Legacy Systems: Older IT systems may not support the integration of new ESG data analytics tools.
- Data Management: Handling large volumes of ESG data which may also be variable in availability and quality requires robust data management systems that many organizations have yet to develop, especially for the types of KPIs commonly seen in ESG datasets.
4. Risk Assessment Complexity
Assessing ESG risks involves a high degree of complexity and uncertainty. Unlike traditional financial risks, ESG risks can be more qualitative and long-term in nature.
- Qualitative Factors: ESG risks often involve qualitative judgments, making them harder to quantify. This can be seen in the high variation among ratings from ESG ratings providers (as examined in multiple academic reviews including https://doi.org/10.1093/rof/rfac033) as compared to traditional financial credit ratings.
- Interconnectedness: ESG issues are often interconnected, requiring a holistic approach to risk assessment. For example, a company’s GHG emissions are directly tied to multiple aspects of the organization including its primary industry, key product design, energy usage, supply chains, logistics, and more.
5. Capacity Building and Expertise
There is a shortage of skilled professionals who can effectively integrate ESG considerations into financial analysis and decision-making.
- Training Needs: Staff require training to understand and implement ESG criteria effectively.
- Expertise Shortage: The rapid growth in demand for ESG expertise has outpaced supply, especially as demand for experienced professionals in the relatively new field has grown exponentially. Among respondents to EY’s 2024 Global Corporate Reporting Survey, only 43% reported employing full-time sustainability analysts.
Overcoming the Bottlenecks with Carbon Impact
- Automated data processing: Carbon Impact’s bespoke data processing solutions leverage the latest in AI-enabled features to improve efficiency and reduce costs, with options for human checks to ensure data fidelity and accuracy. Input data can be in the form of invoices, bills, and other readily available company data which will be ingested and, after automated calculations, output as useful environmental KPIs
- Seamless Integration Tools: Carbon Impact offers tools that integrate ESG considerations into existing due diligence processes, while helping to cut down the amount of time and labour required. Solutions are designed to work with legacy systems, minimizing disruption and facilitating smoother transitions.
- Advanced Technological Capabilities: With cutting-edge analytics and data management systems, Carbon Impact HQ enables institutions to handle large volumes of ESG data efficiently. Options for downstream data processing including export, visualization, and audit enable further integration with existing processes.
- Multi-Dimensional Platform: Carbon Impact enables decision-making by hosting all the different dimensions of sustainability within one integrated platform, helping to reduce the complexity of decisions by putting all the pertinent KPIs together in one source of truth.
- External Expertise: Carbon Impact’s software leverages the expertise of its in-house sustainability experts to deliver the latest and most accurate information and best practices regarding regulatory reporting requirements, data processing and calculation procedures, and much more.
Final Thoughts
While the path to integrating sustainable due diligence is challenging, technology solutions such as Carbon Impact can significantly cut time and labour costs while improving data accuracy and availability. Contact us today for more information about how our bespoke solutions can help your organization with sustainability due diligence.