ESG-Data Supply Chain

In this blog post, I want to talk about how companies can use an already existing management concept (the supply chain) to help them comply with new regulatory requirements, ultimately making them a more sustainable company overall using data.

What is the EU taxonomy?

The EU Taxonomy is a classification system allowing business activities to be ‘sustainable’ or ‘non-sustainable. It was introduced (and is not fully passed yet) as a means to achieve the objectives of the European Green Deal, including the EU’s climate and energy targets for 2030.

The EU taxonomy formulated six environmental objectives:

  1. Climate change mitigation
  2. Climate change adaptation
  3. Sustainable use and protection of water and marine resources
  4. Transition to a circular economy
  5. Pollution prevention and control
  6. Protection and restoration of biodiversity and ecosystems. 

From these objectives, criteria were derived that define the sustainability of activities. An activity is considered sustainable if it adheres to all of the following four criteria: 

  1. It contributes substantially to at least one of the six environmental objectives
  2. It causes no significant harm to any of the other five environmental objectives
  3. It adheres to minimum safeguards
  4. It is compliant with the EU commission’s technical screening criteria.

Consequently, the EU Taxonomy has a significant impact on organizations and their business activities. For example, Financial Services Firms are adjusting their product portfolio by offering ESG-funds and issuing sustainable corporate bonds to support a more sustainable economic transition. Additionally, the number of organizations publishing sustainability reports is constantly growing either due to new regulatory disclosures (e.g., Regulation (EU) 2019/2088) or by their own choice to improve reputation and attract customers.  

However, a more significant impact emerges from the backbone of any sustainability report, sustainable funds, green bonds, or measurement of economic activities – ESG data. Organizations must ensure that they have the correct data, know where it is located, and use it for classification and aggregation. It is now time for companies to strengthen their Data Management organization regarding ESG data. This is an opportunity for companies to gain a competitive advantage by implementing an ESG Data Framework effectively and efficiently. It is also an opportunity for companies to be more sustainable themselves and contribute significantly to global sustainability.

What is a data supply chain?

In order to gain momentum of an ever-increasing sustainability trend and the evolving customer dynamics, Financial Services firms are required to become data-driven organizations. Consequently, data is not solely a precious resource. It becomes a strategic asset of organizations that requires a clearly defined strategy, governance, and management to derive insights and ultimately produce value. Thus, data as a new asset class enables organizations to develop predictive capabilities for new business model opportunities, market strategies, customer needs, product development, and support risk and cost optimization.

So, suppose the growth, profitability, and efficiency of a financial services firm depends on data across all aspects of its strategy and operation. In that case, it must ensure to build a solid foundation for data. This goes beyond components like databases, data warehouses, and data lakes – essentially, it requires them to have a transparent “data supply chain” that is the backbone of the digital bank or insurance firm. 

Every company producing the even simplest product has a supply chain strategy – which ensures that a particular design can be produced in planned quantities and through a clearly defined production process with specified characteristics like quality and cost – using internal and external capabilities and components. 

Thus, a data supply chain strategy and supply chain strategies for physical products have some commonalities. They both ensure a continuous supply of high-quality inputs (datasets vs. physical parts) to produce/deliver consistently and combine different components from various sources to work seamlessly (e.g., open-source data vs. purchased manufactured parts). Moreover, since data and physical components can become obsolete over time, they need constant monitoring, management, and maintenance. Hence, a data supply chain is a concept to manage the lifecycle process of data regarding identification, selection, sourcing, transfer, quality assurance, storage, management, transformation, monitoring, and distribution of data across organizations.

How could it look like?

Whether organizations want to improve their sustainability reporting, transform their business operations into sustainable activities or even monetize their (ESG) data, the concept of a data supply chain is the perfect means to enable an organization to become a sustainable digital enterprise.In the following, I want to show you how an ESG data supply chain could look like and how it could transform a traditional company to being a sustainable and digital one: 

A sustainability report should disclose each of the three ESG dimensions, which are environmental, social, and governance aspects. In order to do so, organizations must at first assess their current data warehouse regarding the availability of ESG data, which we call the process of data screening. After identifying gaps and needs for further collection of ESG data, organizations can enrich their data warehouse by internal and external data sourcing. Since the EU taxonomy offers a transparent classification scheme of sustainable business activities, organizations can adjust their current data model concerning ESG criteria. Data aggregation is the next step in which ESG raw data can be gathered and presented in a summarized format. Due to data visualization, organizations can create their sustainability reports and express their contribution to a more sustainable economy internally and externally. Hence, the ESG data supply chain is the digital backbone of an effective sustainability strategy and transformation.

Conclusion

In my opinion, when it comes to solving digital or technological challenges, simplicity and structure can be more impactful than coming up with or implementing the newest and greatest technology. 

I used an already existing, well-established managerial concept and tried to make it ‘digitalization-proof’ by changing its components without losing the precise structure and guidelines it provides.

Let me know what you think of this approach, and if you can think of other concepts you could adapt!


https://www.sustainalytics.com/investor-solutions/esg-research/eu-sustainable-finance-action-plan-solutions/eu-taxonomy-solution

https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/eu-taxonomy-sustainable-activities_en

https://ec.europa.eu/sustainable-finance-taxonomy/

https://www.inetsoft.com/business/solutions/definition_of_data_supply_chain/

4 comments

  1. Hi Max, I’m a big fan and proponent of ESG. Since environmental, social, and governance are all large and broad categories with the occasional but not too often overlap, do you think that this model would process it all equally or give different values to each category. It can be easy to track the carbon emissions of a company but could be more difficult to collect data for LBTQA+ employees, do you think that this data supply chain would accommodate for that?

  2. Cool post and logical thought process being applied here. I do think considering which technological advancements would help Europe to reach its Green Deal objectives by 2030 would be good future topic for further exploration. For example, during my undergraduate degree I did a project abroad in Copenhagen studying the barriers to electric vehicle uptake in Denmark. Parallels can be drawn to the impact of the electric car industry to the reduction of carbon footprint, but I’d love to see the methodology you laid out in this post to describe other high impact factors.

  3. Thank you for the great insight into ESG’s, Max. I agree with your position in that improving the data supply chain can help organizations become more sustainable and efficient. Furthermore, I think by including data visualizations to help readers easily digest information can certainly help towards increasing the transparency of a firms progress to meet its goals. Finally, now that the United States is back in the Paris Climate Accord, I would like to see companies align their ESG strategies with the Paris Agreement to reduce carbon emissions and other factors causing climate change.

  4. ESG is something that I’ve heard of many times in the past year. Companies are moving towards green investments either because they are genuinely concerned with our future or simply because of new regulations or customers’ demands. Regardless it is often difficult to truly understand if a company is “green,” and what you explained in this post would solve data collection and transparency in such companies.

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