B 4 ESG

The need to budget

In the rapidly changing corporate sustainability landscape towards regulated, standardized, audited, and digitized disclosures, more and more companies are coming to realize that they will need to do something – or more of it – to manage and disclose on their material sustainability-related issues. But as I said in a previous article, this is a relatively new field, there is very little institutionalized knowledge about corporate environmental, social, and governance (ESG) and sustainability related issues, and best practices are evolving at the speed of light. As a result, most companies lack the information, expertise, and skills internally to effectively tackle sustainability reporting on their own at first.

Understanding why this paradigm shift in reporting is happening is essential, and I believe the starting point to any initiative. It’s actually fairly straightforward and ‘easy’ to do, requiring a mix of curiosity, interest, mindspace, and time. In other words, acquiring knowledge is not very expensive to do — a mindset shift may be required, but this is not something money can buy.

However, knowing what to do and then actually doing it requires resources — in advice, people, and tools (technology) -– all of which require money. With finite available resources, choices need to be made. After all, even in sustainability money doesn’t grow on trees.

At any given point in time, companies have many competing priorities for the best use of available funds, and they also have to manage themselves in such a way that they can continue to remain in business (i.e., cash flow positive). So they need to budget.

As we all know, a budget is a way for companies to plan their spending in order to achieve their strategic objectives, based on their income and expenses. It is a forward-looking tool enabling management to set priorities and make decisions with some degree of confidence while managing risks. It stands to reason, then, that the first place companies need to integrate sustainability considerations is in their budget.

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What to budget for

As mentioned above, ESG and sustainability reporting is a new field, it’s complex and evolving very rapidly. So it does make sense to first get advice on how to go about implementing or improving your reporting process. This advice will tell you what to do, and maybe even how to do it. Key benefits include learning more quickly, reducing trial and error, and reducing the risk of being so disappointed with the outcomes that you lose the benefits of embracing sustainability. Advisory services of this nature may comprise several separate mandates conducted over time and can vary widely in cost depending on the size and complexity of the company. A rough ballpark figure for an average size company would be $20K to $100K.  By the way, we all know the sky’s the limit for the very large companies, where advisory mandates can run in the seven figures, but for most companies that’s neither a reality nor an imperative.

Once you know what to do, you need people to do it. Best practice in integrating sustainability is to have functions with clear, explicit responsibilities and accountability, whether it’s in sustainability strategy or ESG reporting. While this responsibility can sometimes be assigned to existing Board directors, executives, or managers, you will almost always need additional dedicated staff. Two of the key benefits are making sure things get done and objectives are achieved, as well as internalizing knowledge and building organizational memory. Here again, a full-time position can vary widely in cost (I prefer the term investment) depending on the size of the company, its geographic location, and the position’s seniority level. A rough ballpark figure for a mid-level position would be $75K to $150K. The individual’s experience and expertise level will also be a key differentiator. More on this later.

In addition to people, the technological revolution underway is introducing technology-based tools to increase efficiency and productivity of people. Other key benefits include reducing critical dependencies and implementing solid data management and internal control processes, as well as building organizational memory. The cost (literally investment in this case) will vary depending on what the tool does, whether it’s used once or on an ongoing basis, and how many people need to use it. A rough ballpark figure for a software-as-a-service tool would be $50K to $150K. 

It’s not either/or

Most companies will need a combination of the three – advice, people, and tools – to different degrees, at different times, to achieve different objectives.

Even if you’re not sure yet what you need or want to do in terms of ESG and sustainability reporting, you should budget an amount, annually for the next few years, that you can then choose to allocate between advice, people, and tools. 

In the end, embracing the paradigm shift and building up your ESG and sustainability reporting practices takes effort and work. There’s no magical solution (not even with AI!), and there’s no one advisor, one person, or one tool that can do it all. 

In fact, companies often make the mistake of believing that people and technology are interchangeable, and that if they acquire new software they won’t need to hire any staff. While technology tools can be great efficiency gains, to get those benefits you still need people to use them properly. Similarly, you can get the best advice from outside experts, but if you have no one internally to act on that advice, you won’t get the real benefits you intended from seeking the advice in the first place.

Conversely, hiring outside experts can prove to be an ideal complement to hiring a less experienced employee, allowing for rapidly transferring knowledge, internalizing the expertise, and building experience — especially given the very real and drastic shortage of highly experienced professionals in the ESG and sustainability space, simply because the scale of it is still so new. 

Sustainability is a brave new world for most of us. It’s not about being perfect, and certainly not a once-and-done exercise. It’s a mindset driven paradigm shift, and a continuous improvement process that will require resources in advice, people, tools, and time.

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