To Meet ESG Standards, Businesses Have Ditched Consultants for Software

Companies are having a hard time meeting the rules and regulations required to be considered ESG compliant, and traditional consultants are not cutting it. That’s why decision makers are turning to a solution which has proven effective in many other areas of business: software.

Software tools have practically overtaken the role of traditional consultants as the go-to solution for businesses determined to keep up with ESG standards. According to Thomson Reuters’ The 2023 State of Corporate ESG, between 55% and 59% of ESG-related spend across key areas is already going to software solutions, the vast majority of them coming from third-party providers.

Business leaders surveyed for the report stated that between 61% and 74% of their team already use software to manage ESG-related tasks across key areas, including keeping up to date with regulatory changes, streamlining operations, supply chain/vendor due diligence and ensuring adherence to government regulations. 

Thomson Reuters analysts expect these percentages to grow as compliance and the supporting datasets required for it become more common.

“While historically there has been high investment behind consultative support, spend is now shifting towards tools and software, particularly as ESG standards become more established and reporting more commonplace,” states the report. “Many companies are working with managed service providers to develop and manage ESG approaches in their businesses, [but] focus is increasingly turning to third-party software solutions.” 

Some decision makers and market analysts discarded ESG compliance as a passing trend and even a buzzword. Nevertheless, ESG standards have gained traction over the past couple years. Businesses feel the pressure coming from government regulators in a wide array of territories, and they pass it on to their suppliers and potential third-party partners.

“There are clients who say: you need to do carbon accounting or have emission reduction targets in place to win this business. That’s newer. Companies that don’t comply, for lack of a better word, are missing out on business opportunities,” commented Eliza Erskine, Principal at consulting firm Green Buoy Consulting.

In Thomson Reuters’ recent survey, 71% of respondents (C-suite level executives and “functional leaders”) agreed strongly that ESG’s role in corporate performance will grow in the future; 60% said their company is willing to invest on ESG to turn it into a competitive advantage; and 56% assured there’s a consensus across company leadership on the high value of ESG investment.

“We’ve witnessed a marked increase in the deployment of comprehensive ESG platforms, which are instrumental in facilitating real-time tracking and management of sustainability metrics,” said  Josh Prigge, sustainability consultant and owner of consulting firm Sustridge. “This enables precise reporting, and fosters informed decision-making, ultimately enhancing ESG performance.”

In other words: the market for digital tools that facilitate compliance is about to get bigger.

A large, expanding toolbox

The availability of ESG software solutions in the market mirrors the wideness and complexity of rules and regulations.

“As many problems and questions [about compliance] that there are, there are probably ten software platforms that can solve each of those,” commented Ms. Erskine.

Despite the wide availability of potential fixes to the compliance problem, decision makers seem to be partial to integrated end-to-end solutions that help them streamline operations and allow for greater connectedness and interoperability, according to Thomson Reuters’ report. Data has also gained a prominent role in compliance initiatives, leading to a wider adoption of AI and ML software. 

“Sustainability management software, particularly those employing AI, has proved essential,” said Mr. Prigge. “Digital dashboards are also pivotal, providing an integrated view of an organization’s ESG achievements and highlighting areas for improvement.”

With data being an underpinning element in many compliance initiatives, any software tool which allows for precise data collection and filtering is well positioned to attract the attention of decision makers. 

“Key features of such software include reliable data collection from various sources, benchmarking against industry standards, performance tracking, compliance management and emission monitoring,” commented Sunil Kansal, Head of Consulting and Valuation Services at consulting firm Shasat. “The benefits are significant, ranging from streamlined data capture and improved audit processes to enhanced decision-making and stakeholder engagement.”

A big-sized concern only?

The relative newness of ESG compliance has led small and medium-sized vendors to believe they are exempt from demands for alignment. That might have been true five years ago, but the terrain has changed.

Regulators are growing sharper teeth and claws in the US, and their reach is extending beyond the verticals which are traditionally considered to be highly overseen by government authorities, like telecommunications, health, national security and BFSI. 

The prevalence of digital services and data collection has made all companies with any sort of online presence worthy of the attention of regulators. There’s no shortage of businesses finding themselves on the wrong side of a lawsuit or government action due to a compliance hiccup. 

And it’s not only the US. Companies operating within the European Union usually have to navigate a stricter, more difficult compliance landscape due to the severity of EU rules and standards. 

The fact is that ESG compliance is “trickling down” to smaller companies who provide to US or EU-based organizations, pointed out Eliza Esrkine. While several of these suppliers are big multinational entities with a robust compliance infrastructure, many are SMBs who, for the most part, lack the resources and access to expertise that will allow them to align.

It must also be noted that compliance is not limited to companies operating within a specific territory. We’ve reported on the growing strictness of customers when drafting cross-border service contracts. Consultants, business lawyers and vendors have noted that some provisions related to environmental impact, diversity & inclusion and (most importantly) data security are non-negotiable in dealings with bigger, well established clients who might feel greater pressure to be ESG-compliant.

For nearshore vendors, or businesses leveraging nearshore advantages, this represents a wake-up call. They can’t let themselves lag behind.