As ESG becomes a major focus for regulators around the world, companies need to ensure they can cope with the regulatory requirements. One area that needs attention are sustainability reports, but how can firms improve their capabilities?
Sustainability reporting allows a company to analyse, measure and report on their performance and impacts on various sustainability topics, including environment, social and governance (ESG) metrics. These reports are designed to increase transparency around sustainability efforts and provide people with a better understanding of the efforts or failings of a company in regard to ESG. These reports also help to reassure consumers and shareholders and chart a path forward.
The US, UK, Singapore, Malaysia and Thailand are just some of the countries with mandatory sustainability reporting standards. The European Union also imposes an ESG reporting regulation on its members. As ESG efforts continue to expand, sustainability reporting will undoubtedly become a crucial process for businesses around the world.
While increased regulation around ESG is welcome, it is easily becoming one of the biggest challenges companies are face. Position Green chief product officer Jonas Bohlin said, “The growing wave of ESG regulation in the EU, UK and US is creating a complex system of overlapping frameworks that many businesses find hard to navigate.”
One recent development around sustainability regulations involved the EU. The European Commission recently unveiled a draft Delegated Act proposing alterations to the European Sustainability Reporting Standards (ESRS). The standards establish the rules and prerequisites for corporations to report on sustainability-related impacts, opportunities, and risks.
Under the changes, the commission suggests extending phase-in times for key sustainability factors such as Scope 3 value chain emissions. They also encourage firms to concentrate solely on material sustainability factors. As a result of these changes, the quantity of companies providing sustainability disclosures dramatically, from the current 12,000 to over 50,000 and they will demand a more comprehensive reporting of a firm’s impact.
The evolving regulatory landscape is a major reason why companies need to ensure their sustainability reporting processes are capable and scalable.
Stephen Jamieson, global head of circular economy solutions at SAP said, “Regulation around reporting is evolving fast and businesses must be compliant. The formation of the Department for Energy & Net Zero in the UK, the introduction of the Corporate Sustainability Reporting Directive in the EU, and the development of global compliance guidance with the United Nations’ Plastics Treaty are but a few developments that businesses should have on their radar. These are a gateway for more rigorous standards to come and so in preparing now, businesses can be more agile to taxes or sustainability commitments as they are announced.”
Key challenges with sustainability reporting
Aside from regulation, there are several other challenges firms are facing with their sustainability reporting processes.
A major problem is related to ESG data. Bohlin said, “Companies’ sustainability data tends to be spread out across multiple systems and organisations. Furthermore, the evolving complexities of ESG data management make it clear that general purpose software is no longer a viable option. In this space, innovation is key, with solutions that combine both leading tech and human expertise.”
Anne Huang, head of ESG at Dun & Bradstreet International, also highlighted data as a major challenge within sustainability reporting processes, notably the systems built to collect that data. Huang said, “Companies took decades to build up a management system to collect financial data, and now they need to collect a lot more non-financial data (which some are hard to quantify), that will require new systems, processes, and a governance structure to be put in place. At the same time, these sustainability reports are under increasing public scrutiny and higher audit and assurance standards.”
As ESG regulatory requirements increase, firms are under pressure to quickly scale their solutions and leverage more data, but this is not as simple as flipping a switch. FinTechs, like Position Green and Quantifying Nature, are helping businesses to improve their data collection through a structured manner so they can better utilise it for their reporting needs.
Businesses are desperately in need of ways to improve their ESG data. In fact, just 8% of UK businesses are completely satisfied with the quality of their data, according to a report from SAP.
The lack of access to quality ESG data directly correlates with another of the core challenges firms are facing with their sustainability reporting, which is measuring the impact of supply chains. That same report from SAP found that 40% of UK businesses rely solely upon assumptions and estimates to screen their supply chains. Jamieson warned this leaves them “vulnerable to accusations of greenwashing and unable to substantiate their eco-credentials.”
Jamieson added that the current economic crisis is putting a lot of companies under pressure to prove the return on investment through sustainability as they try to offset the economic uncertainty. “Often, businesses fail to understand the benefits of acting more sustainably, which disincentives investments into new frameworks that support sustainability reporting and drive engagement in the circular economy.”
While many might see pursuing sustainability as a cost, there are a lot of opportunities that come from enhanced data insights in environmental performance. For example, this information could improve decision-making, implement a targeted approach for internal investments, implement circularity principles, and bolster efficiency and agility, Jamieson said. “The long-term benefit is a reduction in costs and ultimately better business performance – helping prove ROI and gather support for sustainability action across the business.”
Why firms need to improve their processes
As mentioned, regulators are increasing their attention on the ESG space. Companies need to be prepared for this or risk falling behind. However, firms should not just see sustainability reporting as a checkbox that needs to be ticked to avoid a fine. It is something that can provide real value.
Mattie Yetta, sustainability officer at CGI UK, said, “The first UN Conference on Environment and Development held in Rio de Janeiro in 1992 marks the origin of sustainability as a concept. It was concluded in the meeting that discussing progress in development without considering the environment is not feasible. Therefore, implementing sustainability reporting can be beneficial for organisations looking to improve their overall performance.” For example, risk across the supply chain can be reduced and significant cost savings can be achieved by reducing waste. Yetta added that a result of this is sustainability becoming a major factor in a business’ success.
Another motivation for implementing stringent sustainability reporting workflows is for the benefit of the supply chain. Jamieson stated that it is critical to fostering collaboration with supply chain partners. By working with partners to collect and exchange sustainability data, they can better align commitments, work towards a shared goal and build better environmentally friendly products and services.
“This boosts the march towards a truly circular economy and encourages engagement with its principles. More sustainable processes such as these help to improve business resilience, meaning that all parties involved stand to benefit in both the long and short term.”
Finally, Haung outlines several other benefits sustainability reporting can have and why firms should care. She said, “Reporting is also a critical step of effective management that enables firms to enhance operational efficiency, identify sustainability risk and opportunities, gain a competitive advantage, drive innovation, and attract and retain talent. Selecting an appropriate reporting framework, collecting and managing data, engaging stakeholders, and communicating effectively can help firms achieve these goals and unlock the benefits of improved sustainability reporting.”
How technology can help
Despite the tough financial market that is making it harder for companies to raise funds, ESG FinTech companies are continuing to attract attention. While deal activity was down 5.5% in Q1 2023 compared to the same quarter last year, there were still 27 deals completed. A total of $130m was raised across these deals.
Companies continue to seek technology to help them cope with the rising demands of ESG compliance and be better prepared for the future. David Duffy, CEO and co-founder of the Corporate Governance Institute, explained that by correctly using technology a company can gather and analyse data more efficiently. “This will assist your sustainability reporting efforts from being an ad-hoc, catch-up campaign into a forward-thinking example for others to follow.”
He added, “Tech can make the road ahead clearer, help with decision-making, and better prepare you for unexpected forecast changes. Financial reporting systems have taken a long time to evolve, so will sustainability reporting systems, as they are more complex.”
Adding to this, Huang stated that digitalisation is the first step to facilitating data collection from all business functions. With this, they can automate and centralise data collection, streamline reporting, improve communication and engagement with internal and external stakeholders. “For instance, sensors and software automate data collection and generate compliant reports, while interactive dashboards and blockchain technology enhance communication and transparency.”
Yetta added that technology systems are vital, particularly for larger organisations that have traditionally relied on spreadsheets for gathering and evaluating ESG data. Attempting to maintain and analyse these spreadsheets is challenging, especially as datasets and regulatory requirements expand. Firms are better placed investing in advanced data management solutions that can quickly collate the information and provide it in digestible bites.
“Companies with a strategic approach to sustainability, setting targets, analysing supply chain emissions, and ensuring accurate data collection, will be better prepared to meet market expectations and comply with regulations. Sustainable technology is a way to reach these goals. Vastly streamlining the process, reducing errors, and ensuring accurate and consistent data.” Yetta added that advanced data analytics tools can also help firms analyse greater datasets, identify trends and extract meaningful insights.
Bohlin added that companies must integrate agile processes that help ensure regulatory compliance and drive value creation.
He said, “We are continuously developing full-cycle ESG Solutions that enable users to map, collect, analyse, benchmark and report sustainability data across multiple ESG domains and standards. The benchmarking features allow you to understand your performance in relation to industry peers by comparing specific data categories. At the same time, the growing number of companies and suppliers in the Position Green sphere provides opportunities for seamless benchmarking within the ecosystem.”
An example of this is its Connect strategy. As part of this Position Green partners with other platforms so customers can leverage Position Green as a data-sharing marketplace. Through an internal collaboration and data sharing between PortCos, funds and suppliers are able to build efficient data collection and monitoring, as well as use simulations to gain forecasting on where performance improvements can be made.
Another solution from Position Green is the newly announced AI Analyst. This enables users to get instant insights and analysis on all graphs and visualisations.
Is better data the first step?
Looking where to start with improving sustainability reporting can be daunting, but according to Huang the best place is by improving the ESG data. “Only with credible data can businesses portray a realistic view of their sustainability status and progress, and can withstand audit and third-party assurance standards, a practice that is becoming the norm.”
This sentiment was shared by Yetta, who stated that many firms lack a centralised ability to collect, analyst and report on ESG data. Firms need to combine datasets from across their business functions, otherwise their reporting will be incomplete. Without using a tool to aid with this will be far too time-consuming due to the depth and diversity of the data involved, so improving that data management capabilities is vital for the success of sustainability reporting. She added, “It is crucial to be meticulous and attentive during this process in order to guarantee the precision and dependability of the end data.”
On top of this, accurate data collection can ensure market expectations and regulatory requirements are met and identify carbon hotspots.
On a final note as to why firms should care about their sustainability reporting, Jamieson concluded, “Consumers are more environmentally conscious than ever, and well aware of the role business has to play in making a sustainable future possible. But greater awareness brings increased pressure and businesses now must live up to these expectations or face being held to account and suffer long term reputational damage. Consumers want to see results and this is reflected in the fact that many consider a company’s sustainability credentials before making purchases.
“That’s why we’re increasingly seeing a connection between sustainability and long-term profitability. Purposeful action, supported by the right reporting frameworks, can foster trust between businesses and their customers, and drive progress and positive outcomes. That’s why measurement should no longer be an afterthought – it needs to be a strategic priority for those businesses that want to stay ahead of the curve and continue to grow.”
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