Alice is the CEO of a well-established telecommunications company. Last year, the board of directors decided unanimously that it was time to join the wave of companies making strong statements about their commitment to achieve net zero by 2030.
The truth is that making such statements can be daunting. While Alice was feeling excited and proud, deep down she was also stressed out and nervous.
A million questions were popping in her mind, “How can we actually achieve our ambitions? Can technology help us get there? If yes, how? And how will we show our progress?” At this point, she considered getting a paper bag in case she would start hyperventilating.
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And so, the company started to take their first steps. They established a number of Key Performance Indicators (KPIs) and metrics. But then they encountered a few challenges —the fact that, as they are a multinational company with different subsidiaries in different countries, they would have to meet both national and global requirements and needs.
This would require them to consolidate all the information from the different subsidiaries for the group report. Having high targets, growing expectations to report more and a strong desire to be a leader in that space, they realised they needed support.
Here enters Julien Melotte, a Partner at PwC Luxembourg, taking the lead on Sustainability, Assurance & Consulting for the Industry and Public Sector, and Julien Jacqué, a Director used to leading complex ESG transformation programmes and the lead for ESG data and technology services.
They support clients in their ESG transformation —from understanding the unique ESG ecosystem, to developing an ESG strategy with actionable roadmap, launching an ESG transformation and reporting with investor-grade non-financial disclosure capabilities.
In this blog, we will show you how companies will need to transform if they want to be part of the sustainability journey. Unlike digital transformation, ESG transformation is a must for any organisation.
Sustainability, ESG, CSR, taxonomy… What’s all that?
Julien Melotte and Julien Jacqué—let’s use their nicknames for distinction purposes, that is, Ju and JJ, respectively—met with Alice for the first time on a beautiful autumnal afternoon. They were taken to a meeting room, where they found Alice holding her head between her hands, a desperate look on her face.
“I’m utterly confused by all these terms,” she confessed to the just arrived duo. Ju, who’s a pragmatic person, reassured Alice and started to explain to her:
“In the context of business, sustainability is about creating value for shareholders while having a positive impact on the environment and society. On the other hand, ESG—first coined in a UN report in 2004—is a quantitative framework used to evaluate a company’s long-term performance of sustainability and views it as a proxy for long-term value creation.”
He added: “We are fully aware that it’s this broad scope of ESG that makes it challenging for companies like yours to wrestle with”.
“Let’s not even mention the new regulatory requirements…” intervened Alice with an apprehensive tone.
“That’s right,” said JJ. “Government intervention is rapidly accelerating, with Europe having already taken a strong stance to become the first climate-neutral continent with roll-outs of the EU Green Deal, Fit-for-55 package, EU Taxonomy, Corporate Sustainability Reporting Directive (CSRD), just to name a few.”
“The United States and the Securities and Exchange Commission (SEC) are following suit,” Ju added. “We expect government intervention to rapidly accelerate though. Experts point out that the current progress isn’t sufficient to limit the temperature increase to well below 2°C above pre-industrial levels. This will definitely further increase the pressure on business to transform and be disrupted by sustainability.”
“That’s why we need your guidance on this. How can our company transform and create value in the most efficient way?” asked Alice, hopeful.
“Firstly you need to be conscious that, similar to digital, ESG impacts all aspects of your business because it fundamentally redefines how you do business from strategy to measuring performance to reporting financial results,” replied Ju.
“This transformation will be primarily enabled through emerging technology and data that will—again, similarly to digital—rewrite business models and blur boundaries between industries to generate new waves of growth,” added JJ.
The duo went on to explain that a good structure for a transformation programme revolves around four main phases: assess (baselining), strategise, transform, and communicate. Let’s deep dive into each one of them.
Baselining: the first step in your sustainability transformation journey
It’s undeniable that sustainability will be embedded into organisations, and that requires a major transformation. To set the proper goals for the “E” in ESG, for instance, in terms of your carbon emissions or energy consumption reduction, and to report on the progress of your company over time, you will have to first assess where you stand today, what we call ‘baselining’.
We aren’t going to lie to you. To achieve this, you will need new or uncollected data that didn’t exist or that wasn’t being used in the past. If it gives you any consolation, you’re not alone though; this is a huge emerging challenge for all companies that can’t be underestimated.
We at PwC Luxembourg aren’t exempt from this. We recently stated, loud and clear, our own ambitions to become net zero by 2030 as a network. To do so, we first had to baseline our carbon emissions.
The Greenhouse Gas Protocol (GHG Protocol) divides emissions into three scopes: scope 1 —direct emissions from sources owned or controlled by a company; scope 2—indirect emissions from purchased electricity, steam, heat, and cooling; and scope 3—all other emissions associated with a company’s activities.
Being a service provider, scope 3 is the most relevant to us. It includes, for instance, emissions from employee commuting and business travel. Taking the commuting example, we need new data to baseline it precisely—that means knowing exactly where our employees live to know the exact number of kilometres between their homes and the office, the average number of days they spend at the office per week, the average carbon emissions of their vehicles, among others.
We don’t want to freak you out, but this is only the tip of the iceberg of what needs to be achieved in terms of non-financial reporting and setting targets for the “E” and the “S”.
Next step: strategise!
In this phase, we often begin our conversation with clients with two questions: “What is your carbon footprint today?” and “What are the biggest factors impacting it?”. These are data questions.
You want to set goals that are achievable, based on your baseline and the technology that currently exists and will support your transition. This also includes making sure you properly integrate your stakeholders’ expectations—investors, lenders, employees—as part of your strategy.
Plus, this is the right time to set up scenario modelling for risks—transitional and physical via the Task Force on Climate-related Financial Disclosures (TCFD)—or goals and opportunities.
For instance, if the temperature increases by two degrees, what would be the impact? This is especially important for multinational companies that are located close to the ocean or sea as they are very much exposed to physical risks in the short term, in addition to the transitional risks in terms of new ways of operating.
Moreover, as regulation evolves quickly, you will need to address the challenges that it brings head on during this phase. Once your ESG strategy is defined, you need to embed it into your company’s core strategy and move to the next phase.
Getting your hands dirty by transforming
Similar to the digital transformation, your company will have to transform its current processes and create new ones to support their non-financial reporting.
This transformation will, of course, be based on your strategy. You need to develop a roadmap that answers the question, “How do I make my ESG strategy actionable?”
Your main challenge will be to properly capture, store and compute the relevant data from the new data sources—as mentioned, such as average carbon emission of employees’ vehicles—until the end reporting. The strategy and goals you have set before, will largely determine the kind of data you will need to collect.
As usual, communication is key
We’re still at the point where non-financial reporting is mostly a marketing element, but it will soon become obvious that such reporting creates value for companies. To create value, you need to create a consistent story—something that makes sense to your company and to your activity, with relevant targets and KPIs.
The role of technology and data, explained
By now, we hope it’s clear-cut that technology and data, like for digital, are core enablers of the sustainability transformation. And as enablers, they are critical throughout all phases of the transformation.
Your business’ resilience will be driven by your ability to harness and implement both emerging technology and data solutions. Actually, it’s our view that each plays distinguished roles—providing both a pathway to transition and the ability to monitor and report.
On one side, emerging technologies, like the ‘families’ below, will drive the transition to net zero by providing alternatives to carbon-heavy activities, energy consumption and/or the usage of finite resources.
Climate technology families and examples (Illustration: PwC):
Data solutions, on the other hand, enable transparency for both external and internal stakeholders. It allows companies to baseline their current greenhouse gas footprint and activities, but also develop future required investor-grade non-financial SOX style reporting as regulators enforce auditing of non-financial reports—as recently announced for the Corporate Sustainability Reporting Directive (CSRD) or the SEC Climate Disclosures.
To achieve transparency, you need to think about enterprise and data architecture. That means identifying the systems and processes around data and technology that you have internally, and what might need to be updated in the future to deal with the strategy that you have set.
We know this looks very complex—and it can be—but our approach is very pragmatic:
- We look at the existing architecture and capabilities, or the process management strategy of the business;
- Then, we design in collaboration with you the future target architecture—or, as we call it, the TO-BE—based on the business and ESG strategies and the specific “use cases” you want or have to report on;
- Next, we compare the two—capabilities of today and the future ones—and identify the gaps between the current process management strategy and the TO-BE;
- Afterwards, we perform a scenario analysis to identify the best way to “close” the gap via build, buy, or a hybrid solution, also considering IT architecture principles, technology solutions, among others;
- Finally, we define a solution roadmap with a horizon view (short-medium-long) on what actions need to be taken to close the gap because you can’t tackle everything at the same time—you have to make decisions on what’s most important.
Remember! As technology will heavily evolve in the coming years, you will have to adapt your strategies and processes accordingly.
Not convinced yet?
“To conclude —and apologies if we bore you at some point with our technical jargon— here’s what we can do for you, Alice: we will support your company in upgrading your non-financial processes, controls and reporting systems into the investor-grade non-financial SOX style,” said Ju.
“Indeed,” interjected JJ. “We’ll help you to combine your financial reporting with your non-financial reporting side, which will enable you to be transparent to your stakeholders and build the credibility behind the numbers.”
What we think
Sustainability is disrupting how organisations do business today and will be the major factor in deciding the winners and losers of tomorrow’s global economy. Companies that launch a successful sustainability transformation journey focusing on long-term value creation across ESG are well poised to build a competitive advantage, expand shareholder value and build a better future.
This is a big challenge, not only for our clients but our Firm, as we are also making very strong commitments. All in all, it’s an exciting journey that opens many opportunities for us and our clients to stand out and do well, but also to do good.