Corporate spending on ESG reporting and compliance is expected to grow as the need for companies to be transparent regarding their environmental impact, exposure, and risks also increases. This is both what top executives anticipate and what research firms are forecasting.
Companies with ESG policies and reporting requirements typically spend on the collection, analysis, and reporting of their ESG data, as well as on software solutions that can help them promote their sustainability goals. Many companies turn to law firms and other service providers to help them in data gathering and the development of disclosure reports required by regulators and investors. They spend on consultants and advisory and research firms to help them develop and implement ESG strategies.
Publicly listed companies spend an average of $220,000 to $480,000 annually on sustainability ratings, according to Reuters. The companies use the ratings, which reflect their ESG performance, to satisfy investor demand.
Corporate issuers allot an average of more than $675,000 annually on climate-related disclosures, while institutional investors spend about $1.4 million on average to collect, analyze, and report climate data, according to another survey.
The amount spent by companies on ESG compliance is likely to grow as more jurisdictions either mandate or recommend sustainability activities.
In a survey conducted by Bloomberg and Adox Research in March 2023, 92% of executives said they plan to increase their spending on ESG data by more than 10% this year. Eighteen percent of survey participants expected to increase their ESG data spending by 50% or more.
Asked about their priority areas in ESG data, 24% said company-reported data and indices, 19% said company-reported factors, and 17% said ESG scores.
“While firms seek to obtain more ESG data, they are also contending with how to best manage it. Over 70% of firms report taking an ad hoc or decentralized approach to acquiring and managing their ESG data,” according to the researchers.
ESG Spending Growth Forecast
A report by International Data Corporation (IDC) is projecting that spending on ESG business services will rise from $37.7 billion this year to about $65 billion in 2027.
The IDC forecast focuses on purpose-built ESG professional services designed to drive sustainability-related outcomes for users. These services include ESG strategy development and implementation, sustainable operations consulting, ESG reporting services, circularity consulting, green IT implementation services, and managed sustainability performance services.
While compliance drives most companies to spend on ESG programs, proactive businesses see an opportunity beyond compliance. They see sustainability as a means for increasing their competitiveness. “Operationalizing ESG is the next maturity step for organizations’ sustainability journey and requires a technology-enabled infusion of ESG into every part of the organization,” said IDC, a global provider of market intelligence and advisory services. It tracks the rising importance of ESG for corporates.
IDC predicts that “ESG performance will become a standard component for third-party risk assessment with 20% of organizations placing greater weight on these risks than security, financial, or operational risks.”
IDC’s sustainability forecasts include:
- By 2025, more than 60% of organizations will require data center providers to disclose to them their energy usage, use of renewable energy sources, and recyclable IT equipment.
- By 2026, ESG performance will be viewed as a top three decision factor for IT equipment purchases, and over 50% of RFPs will include metrics regarding carbon emissions, material use, and labor conditions.
- By 2026, circularity will become a key component of PLM and 60% of organizations will require their IT equipment vendors and partners to provide end-to-end visibility of their sustainability process.
In a similar vein, the research firm Verdantix found that spending on ESG and sustainability consulting totaled $6 billion in 2021. The firm is forecasting the amount to reach $16 billion by 2027, representing a compound annual growth of 17%.
It’s no surprise that businesses are spending more on ESG programs, reporting, and compliance. Regulations and consumer and investor demand for transparency are driving the need for more formal and stringent reporting processes. Checking off boxes in forms is no longer enough today.
What’s surprising is the lack of cohesiveness in most companies’ approach to ESG compliance. The survey by Bloomberg and Adox Research showed that 53% of participants have a decentralized approach to ESG data management, meaning individual business units acquired and managed their own data. Eighteen percent didn’t have a formal ESG process in place but merely responded to individual requests for ESG data.
A good way to unify and standardize an ESG program is by adopting a third-party risk management platform such as Ethixbase360, which provides the essential structure for conducting due diligence for the entire value chain. Unethical and unmonitored supply chains can easily jeopardize ESG compliance.
Given an increase in regulatory and reporting requirements, an automated platform makes reporting and compliance easier so keeping up with additional requirements will be faster.
If you need help streamlining your due diligence and reporting processes necessary for compliance with laws such as Australia’s Modern Slavery Act 2018, UK’s Modern Slavery Act, and Germany’s Supply Chain Due Diligence Act, we can help. Contact us for more information.