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Using IBM Planning Analytics for ESG Reporting and Performance Management

By Ann-Grete Tan posted Mon October 09, 2023 08:30 AM

  

If you already use IBM Planning Analytics (TM1) and are wondering whether it can also be used for ESG (Environmental, Social, Governance) reporting and target setting, the answer is YES!

The world of ESG reporting (often used as a synonym for Sustainability reporting) can be daunting to navigate when you are new to it so let’s start by relating it to something most IBM Planning Analytics users are familiar with: financial reporting.

Then we’ll finish up by outlining the unique value that IBM Planning Analytics adds by transforming ESG reporting from a compliance issue into a driver of business growth and innovation.

1)    How ESG Reporting is similar to Financial Reporting

Most ESG reporting today involves spreadsheets. The most common ESG metric tracked by companies is green house gas (GHG) emissions. The GHG Protocol which governs GHG emissions reporting and accounting defines how companies can track their inventory of seven GHGs (carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride and nitrogen trifluoride) from direct operations, purchased electricity, and their value chain (among others). When reporting, emissions are “translated” into carbon dioxide equivalents (CO2-e), so they can be added up into consolidated reports. This is important, because the whole point of ESG reporting is to be able to compare the performance of different companies, and to measure how they are doing over time against targets in a consistent way.

This should sound very familiar, since the purpose of financial reporting standards is pretty much the same. Just as a global company performs a financial consolidation by translating its financials into a standard reporting currency according to pre-defined rules, GHG emissions are also consolidated with the help of emission factors which play a similar role to currency exchange rates in financial reporting.

Spreadsheets are a natural first tool for GHG emissions reporting, because they enable you to organize data and to “do the math” to convert your emissions into CO2-e and then creating a nicely-formatted consolidated report. Emission factors can be downloaded for free from (for example) the Environmental Protection Agency (EPA) GHG Emissions Factors Hub. The EPA has even put together an Excel spreadsheet tool that a company can also download and use to calculate their GHG emissions.

Of course, just as for financial reporting, spreadsheets involve a lot of manual work, are error-prone and difficult to audit, and do not scale well. IBM Planning Analytics addresses all these problems for ESG reporting, just as it does for financial reporting.

2)    How ESG Reporting is different from Financial Reporting

There are two important ways ESG reporting and financial reporting differ today:

  • Market Maturity & Clarity of Requirements
  • Ownership & Availability of Data

Read on to find out more about these differences!        i

Market Maturity and Clarity of Requirements

Most companies understand exactly what is required in their financial reports, whether they are publicly traded companies reporting to regulators like the US Securities and Exchange Commission (SEC), or whether they are privately-held companies reporting to their owners. If there is anything one is unsure of there are armies of accounting and auditing experts all around the world to can consult with to get definitive, actionable answers.

The Sustainability world is much fuzzier, though a lot of work is being done to (1) make the many competing and complementary standards out there consistent with each other, and (2) create clear connections between financial reporting and sustainability reporting standards. As the best exampel of this, several major standards have consolidated under the IFRS which now oversees both the IASB (International Accounting Standards Board) as well as the ISSB (International Sustainability Standards Board).

While this is helpful, ESG is a very broad topic and there are many areas where the underlying science is still evolving. Even GHG emissions reporting, arguably the most well-developed area within the “E” environmental category (but still only one part or “E”), continues to develop. The challenge for standards setters is to incorporate enough flexibility to allow for evolution and to serve different industries and business models, while still making the standards practical and useful.

Furthermore, regulators around the world are beginning to mandate ESG reporting, but they are incorporating available standards at different rates and in varying ways. Notably the European Union’s CSRD is to take effect in January 2024 (and includes “E”, “S” and “G” components), while in the US the SEC is expected to finalize its new climate-disclosures rule in 2023 (“E” only).

If you are curious as to why there are so many different standards and what they are, check out this blog post.

Ownership and Availability of Data

Most data needed for financial reporting originates from a company’s ERP (Enterprise Resource Planning) system(s). If you are lucky enough to have deployed a powerful tool like IBM Planning Analytics to bring consolidated Actual and Plan data together, it’s relatively straightforward. These systems are usually all owned by the Office of Finance and fall under the aegis of the CFO.

The data needed for ESG reporting can come from every corner of the enterprise, including from Finance. Some ESG data, for example Scope 3 GHG emissions data, mostly comes from outside the organization. The systems that contain the data are similarly owned and managed in different silos, and some data may not reside in any formal system at all. Examples include:

  • Employee demographic data for social equity reporting (“S” Social category), typically owned by Human Resources (HR)
  • Property/location data for Scope 2 emissions reporting, which may be owned by Facilities Management
  • Vendor data for Scope 3 emissions data collection and reporting. Procurement can help you know who your vendors are, but probably do not have data on their emissions, so a program may be needed to collect that data.
  • Many companies have already produced sustainability reports on a voluntary or (in the case of GHG emissions) mandatory basis for several years. These Sustainability Reporting teams typically reside in their own silo and may have their own systems but often rely heavily on spreadsheets.

Ultimately an ESG reporting effort cannot be successful without collaboration and coordination across business functions which in turn requires strong top-level leadership commitment to the effort. As regulators require sustainability metrics to be included in a company’s audited financial statements (complete with CFO sign-off), this issue will need to be tackled head-on.

3)    Using IBM Planning Analytics to Transform ESG into a Growth Driver

Most organizations that embrace IBM Planning Analytics use it for much more than just reporting. IBM Planning Analytics combines secure scalable data management with powerful real-time modeling, and a variety of user experience options which makes it ideal for any use-case related to planning and forecasting (workforce planning, revenue planning, expense planning etc), allocations (customer profitability modeling, departmental P&L modeling etc), and extended planning & analysis (demand planning, procurement planning, sales planning etc).

While some companies view ESG reporting as a mere compliance exercise, others see tremendous opportunity. ESG reporting is a response to very real market and investor concerns. Consumers want to buy from companies that are seen as good stewards of the planet, while workers prefer employers that are good corporate citizens. Investors meanwhile want to know that companies are measuring long-term risks to their businesses, and what their plans are to mitigate those risks. All these factors are elaborated on here.

Here are three ways IBM Planning Analytics can help a forward-looking company use ESG data to their advantage:

Integrate financial and ESG models to drive better business decisions

Examples:

  • If you already use IBM Planning Analytics for Workforce Planning, you can incorporate social metrics such as turnover rates, replacement costs, and opportunity cost due to lost capacity to understand the true value to the business of employee retention, and find ways to improve on this front.
  • If you already use IBM Planning Analytics for demand planning by geography, you can model GHG emissions on an intensity basis (e.g. CO2-e/unit or CO2-e/dollar), and use the model to explore scenarios to minimize total emissions produced.

In short, you can extend your existing financial models and what-if-scenario planning to incorporate relevant operational data that deepens your understanding of your business.

As a central ESG data collection tool and repository

Some companies may choose to invest in a specialized ESG reporting tool like IBM Envizi. The advantages are that all the GHG emissions calculations are already built-in along with predefined report templates for all the major ESG reporting standards and frameworks.

Even when such a tool is in play, IBM Planning Analytics can still play an important role in the overall solution architecture:

  • For setting ESG targets, what-if scenario planning, and ESG forecast projections
  • For collecting diverse data directly into a secure database from internal and external parties
    • This capability will be especially valuable for Scope 3 emissions data collection, for example in combination with partner tools such as ReportWORQ Input Forms capability
  • For preparing data in the specific formats required for upload to the specialized ESG reporting tool
  • To lay flexible foundations for a changing and rapidly evolving compliance and business landscape

To lay foundations for leveraging AI and Optimization techniques

You can think of “sustainable business” as a proxy for “better business”. The goal of all the frameworks, standards and compliance regulations is to push companies to look at their impact and risk profiles more holistically, and over a longer period of time. Gathering and organizing ESG data has led to companies saving money (for example by switching to renewable energy sources) and increasing their supply chain resilience (for example by being able to evaluate vendors on factors beyond price). Having this data creates new opportunities to increase business resilience and agility using AI and optimization techniques.

IBM Planning Analytics has much to offer as an integrated platform for ESG and financial data, including:

  • Flexibility: the only thing we know for sure about sustainability data is that it will evolve, expand, and change, as will the models needed to forecast, project and predict.
  • Scalability: data volumes and varieties are guaranteed to only go up.
  • Business accessibility: data is most valuable in the hands of the people who can operationalize it – which are those on the front lines of the business

In short, when faced with an evolving business and data landscape, the adaptability and scale of IBM Planning Analytics is hard to beat. At minimum, it’s a very “safe bet”!

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Mon October 16, 2023 03:04 PM

@Steffen Wittenauer - thank you very much for your comment. I am certainly familiar with the R6 Sustainability accelerator that I believe you created a couple of years ago (which was very good), and also the Scope 3 Sustainability accelerator from the partner in Spain. It's exciting to see all the other accelerators that have come since then - I'll check them out. At this point we are working on developing a couple of standard model ideas, which I hope we can roll out before the end of the year, possibly as BP Solution offerings. As for customers, we have built some custom PoCs in PA using customer data which have been very well-received (and proves that we are on the right track). Our goal is to be able to talk more about these soon. The other exciting area we are exploring is integrating PA with Envizi, which opens up additional (and fun) opportunities.

All in all it's a very exciting space to be in, and I am happy to talk about it any time!

Thu October 12, 2023 01:49 PM

Ann-Grete, thanks for ttis perfect summary of this so important business topic. It fits perfect to PA because it is a planning like "any" other business-planning topic of our clients - especially if they already run PA for other use cases.

We as IBM offer "accelerators" to adress & support the business topic of "Sustainability Planning". Most of the models were created by me and you (and any client or BP) can find here the current overview of the co-created models: https://ibm.box.com/s/8ynoew10dwihoea65ugbp9i2erykiu40

Do you offer models? Any reference clients that we can share here?

Best regards

Steffen

Thu October 12, 2023 12:51 AM

Thank you for a very insightful article.