Sustainability reporting is fast becoming an imperative in many parts of the world. However, the ever-changing landscape for sustainability reporting is presenting businesses with more questions than answers.
What’s clear is that businesses will increasingly rely on digital technologies like Internet of Things, blockchain and data analytics platforms, among others, to manage their sustainability data, meet new legislative mandates and navigate the current reporting landscape. By doing, so they will not only achieve their sustainability goals but also become more resilient to the unprecedented challenges of climate change itself.
The increasingly digital approach to sustainability reporting can be seen in the European Union’s Corporate Sustainability Reporting Directive (CSRD), which comes into effect in January 2023. The CSRD requires close to 50,000 EU companies to report on environmental and social impacts, both in terms of their risk to the business (inward impact) and how they impact the world (external impact). The reported information will need to include a “digital tag” so it can be fed into the European single access-point database for both transparency and comparison purposes.
At the same time, investors are increasingly demanding non-financial disclosures on environment, social and governance (ESG) issues from companies. Although there are nuanced differences between sustainability reporting and ESG reporting, they both face similar challenges that may be overcome by digital solutions.
Overcoming top challenges to sustainability reporting
Here are the three top challenges businesses need to overcome as they strive to meet this and other reporting directives and mitigate the various market, operational, legal and business risks they face.
- Challenge 1: The lack of universal reporting standards has led to too many requirements
Reporting fatigue is one of the main bottlenecks companies face as they grapple with the many goals, principles, frameworks and regulations that have emerged, all with varying and continuously evolving data requirements.
With the lack of consensus on what, how and where to report, companies struggle to identify which data needs to be collected and how it should be analyzed and presented, especially with limited resources.
While the big five reporting frameworks (CDP, SASB, CDSB, GRI and IIRC) have stated their intention to integrate reporting requirements, there are concerns regarding their potential to completely overlap each other, given their different purposes, reporting forms, audiences and focus.
Solution: Companies could leverage off-the-shelf digital solutions designed to organize ESG data collection and registration from suppliers or their own operations. Some of these solutions also provide data management and lineage capabilities to help meet legislative requirements and improve auditability.
Most of the available solutions also organize reporting according to the chosen standards, and create visualizations and dashboards for stakeholders, which can help monitor progress in ESG initiatives.
For example, we recently advised a large life sciences company that was seeking an ESG data management solution for its Scope 3 reporting. To identify the best system for the organization’s specific needs, we assessed various off-the shelf solutions on their functional, technical, commercial and implementation readiness parameters and benchmarked these solutions against the business’s key performance indicators (KPIs), supporting data models and scalability criteria.
- Challenge 2: It’s difficult to get quality data from cross-functional units
Quality data sits at the heart of sustainability reporting. It improves companies’ legitimacy and is the foundation for their ESG baselines and their SMART (specific, measurable, attainable, relevant, and time-based) targets. Quality data also gives companies better insights into their operational performance, how well they’re progressing toward their ESG goals and what their biggest areas for improvement are.
However, with poor coordination among business functions such as operations, procurement, human resources, finance and legal, as well as varying data quality from each unit, chief sustainability officers often receive siloed data, which makes obtaining insights labor-intensive and time-consuming. The data is often piecemeal and unverifiable.
It is essential to break down these silos by collecting and analyzing data from functional units to provide a centralized overview of the performance of diverse sustainability targets.
Solution: Deploying data and analytics platforms that can ingest information from various internal and external sources not only improves data quality and governance but also reduces the overhead associated with sustainability data management processes, visualization, reporting, auditing and even tracking and managing a portfolio of initiatives.
These analytics platforms also provide internal visibility to the operational units, enabling them to take corrective action in a timely manner. They can also support external audits because historically obtained, analyzed and stored data can be verified and authenticated swiftly.
- Challenge 3: There’s not enough visibility into the supply chain
While many companies report their Scope 1 and Scope 2 emissions, they struggle with reporting Scope 3 emissions from both downstream and upstream activities. Scope 3 reporting entails having high-quality data on emissions associated with the extraction, manufacturing and processing of all raw materials in the supply chain, including disposing off the product.
Despite having established IT departments, many companies still collect suppliers' data using manual spreadsheets, which may no longer be feasible with the increased data demand for Scope 3 reporting.
Solution: One way that companies can improve the quality of their Scope 3 reporting is by not only collecting, analyzing and reporting high-quality data, but also integrating the data quality requirements with their procurement processes and suppliers. By doing so, businesses can identify and mitigate existing and potential risks along the supply chain, while also improving traceability.
In addition to tracking ESG data, integrated digital systems ensure business continuity by enabling the traceability and visibility of raw materials and products back to specific suppliers or batches should anything go wrong.
With the ability to do both upstream and downstream materials traceability, businesses can also streamline communication between suppliers, buyers and end consumers, hence reducing data sharing overhead. Eventually, this may also lead to carbon labeling on the products themselves, which creates awareness and builds brand trust for the end consumer.
With the changing sustainability reporting landscape, companies need to embrace digital solutions to increase consistency in the quality of data collected and presented to diverse stakeholders, thereby improving transparency. The improved data insights will lead to not only impactful sustainability reporting and progress toward ESG goals, but it will also ensure business continuity in the face of ongoing change.