By Jaco Maritz, Chief Executive Officer, SYSPRO
Environmental, Social and Governance – known as ESG – has become a top priority for organisations worldwide. All stakeholders, from customers to staff, regulators, shareholders and investors, are demanding that companies contribute to society, treat their workers fairly and care for the planet.
ESG criteria are standards for a company’s operations – broad guidelines for an organisation to do better and be accountable in environmental impact, social responsibility and organisational governance. In a manufacturing business, measuring ESG standards comes down to tracking internal and external Environmental, Social and Corporate Governance standards.
But it goes beyond that. ESG has become a determining factor in access to capital and in the decisions made by consumers and B2B customers. This is underpinned by a Bloomberg report which indicates that global ESG assets are on track to exceed R920 trillion, representing more than one-third of the R2 455 trillion in projected assets under management.
So, it’s not surprising that leaders are taking ESG seriously. EY’s 2022 CEO Outlook indicates that 97% of CEOs say their company has a sustainability strategy. What’s more, 28% believe they will gain valuable competitive advantage by becoming leaders in sustainability.
However, before CIOs, CFOs and boards consider technology investment, they should be fully aware of the growing role of ESG in reporting and in boosting corporate performance. As corporate strategy rapidly incorporates ESG, digital strategies must align accordingly.
For example, a manufacturing company may commit to improvements in water usage in production processes, carbon emissions, the proportion of its products that are recyclable, and wages and working conditions of employees and contractors. Without a technology strategy that supports the collection of high-quality data along the entire value chain, companies will not be able to report data or demonstrate progress against these commitments.
ESG in the supply chain
Speaking of the value chain, supply chain sustainability shifts the focus from short-term financial considerations to long-term value creation as well as managing the ESG performance of suppliers. By taking these factors into account, sustainable supply chain management not only benefits the environment but also reduces risks, mitigate impacts and realises reputational and financial benefits such as cost savings, brand goodwill and customer loyalty.
Companies with strong ESG performance typically have robust governance frameworks, manage social and environmental risks well and have stronger relationships with suppliers. Prioritising supply chain sustainability can reduce general risks for corporations, including minimising operational disruptions caused by environmental and regulatory risks as well as reducing reputational risks posed by labour issues.
Weak ESG performance, on the other hand, can translate into a financial or environmental cost, harmful social or reputational exposure and financial damage to the bottom line and, ultimately, the shareholders.
Getting to grips with ESG reporting
The time and effort needed to produce an annual sustainability report has increased dramatically. Internal and external demands for ESG data continue to rise, compelling companies to do more than put a spreadsheet together once a year.
Instead, they need to embark on a journey which will involve evaluating the data needed to track ESG performance, identifying how and where to source it from, understanding local and global compliance requirements and implementing systems to enable existing, amended and new processes.
A great deal of the information is generated by or managed in disparate systems, requiring immense manual effort to produce a consistent format suitable for consolidated regulatory and financial reporting. Robust enterprise-wide solutions are a must.
The role of ERP in ESG reporting
ERP has a critical role to play. Without a centralised ERP system, compliance and visibility can be manual, tedious and costly, even resulting in penalties. Supply chain visibility leads to many advantages for today’s global and agile businesses. It allows them to reduce complexity, improve communication throughout the organisation, stay nimble and keep up with a complex regulatory landscape regarding ethically and sustainably sourced goods.
By providing organisations with visibility into relevant data across the business, ERP enables the insights required to comply with regulations, meet stakeholder and customer expectations, cut costs, optimise processes and improve overall efficiencies to meet ESG standards.
Technology solutions like Artificial Intelligence (AI), Machine Learning (ML) and Big Data analytics enabled by an ERP system can also assist with managing environmental impacts. For example, this technology can help organisations identify the fastest, cheapest and most sustainable shipping routes.
Using an ERP system, manufacturers can make their supply chains more efficient, for example by tracing every product from raw material to finished product to ensure it is sustainable while reducing waste. Integrating governance, risk and compliance with your ERP platform makes the process of regulatory compliance and reporting so much simpler – and safer.
Instead of a siloed approach, strategy, risk, performance, and sustainability are on a centralised platform for a single view. Manufacturers can make informed and better business decisions through accurate real-time data.
In conclusion, measuring every Rand and Cent that contributes to financial performance is standard practice, and the same must happen for measuring ESG performance. Yes, this adds new layers and complexity and creates new requirements for ERP. But standards are emerging for measuring and managing non-financial performance metrics, and both customers and funders are demanding ‘show, don’t tell’ data to create credibility.