It isn’t a surprise that sustainability emerged as the next buzzword across industries. But from a buzzword, it quickly becomes imperative with The Corporate Sustainability Reporting Directive (CSRD) that will gradually enter into force in 2024.
The legislation will affect approximately 50,000 companies doing business in the EU. The 2024 fiscal year requires the “first-phase” companies to publish their reports in 2025.
What is sustainability reporting?
A sustainability report outlines the environmental, social, and governance impact of a company’s operations. It also shows the company’s commitment to a sustainable global economy.
How CSRD regulations will alter sustainability reporting?
Unlike Global Reporting Initiative (GRI standards), CSRD requires more standardized and consistent Sustainability Reporting Standards (ESRS) among EU members.
Ultimately its goal is to cascade the Paris Agreement goals on a company level.Countries cannot achieve their pledges without the involvement of the businesses that are fundamental to their economies. CSRD will assist investors, stakeholders, and policymakers in making informed decisions and evaluating their sustainability performance.
On the other hand, CSRD builds with additional standards and frameworks on the Non-Financial Reporting Directive (NFRD). It also aims to assess how well big companies can handle economic crises and stay financially stable in the long term.
What will change?
- The directive introduces a significant change known as double materiality. Companies must evaluate their environmental impact (impact materiality). Then measure the financial consequences of their actions on global warming and other environmental changes (financial materiality).
- It demands a wide range of ESG metrics to be collected and reported with an emphasis on long-term planning.
- The data needs to be digitally tagged to be machine-readable, searchable, and comparative.
- EU companies will have to track not only their Scope 1 and 2 but their full Scope 3 emissions in their annual reports. This includes emissions throughout their operations, supply chain, and markets.
Organizations impacted by the EU’s CSRD introduction should pay attention, act, and prepare for future reporting and disclosure requirements. There are plenty of other regional standards for environmental social and governance (ESG) reporting that will come into force.
Sustainability and ESG reporting have some differences, but they face similar challenges that can be solved with digital solutions. The challenges that companies face can hinder the collection, management, analysis, and reporting of sustainability data. Therefore, it is essential for organizations to find effective solutions to overcome these obstacles on their path to sustainable development.
Top Challenges in Sustainability Reporting
Challenge 1:
Collaboration and Poor Data Quality
Companies face the initial hurdle of low-quality data and lack of coordination among different departments when reporting on sustainability. Various teams collaborate to create a single report and have it audited. These teams can include Finance, CSR/ESG, HSE, and Supply Chain Management/Procurement, etc. Usually, these teams haven’t worked together on such issues, and the new realities require new governance and collaboration models within the organization.
Data is often siloed within departments resulting in fragmented and inconsistent information. This makes it challenging to obtain accurate insights, track progress, and identify areas for improvement.
Until now, some organizations have gotten by with an ad hoc strategy. They gather data manually and use spreadsheets, which are often done in varying ways each year. Not only are these time-consuming and error-prone, but they also fail to yield consistent results and data.
To address this challenge, organizations need to deploy analytics and data management platforms to ingest information from various internal and external sources. To improve data quality and governance and provide internal visibility to operational units.
Challenge 2:
Lack of Data Standardization and Integration
Another hurdle is the lack of universal reporting standards and the integration of diverse data sources. Companies often struggle with multiple reporting frameworks, each with its own set of requirements and metrics. It’s difficult to decide what data to collect and how to analyze and present it due to the lack of standardization.
To overcome this challenge, companies can leverage off-the-shelf enterprise solutions designed to organize ESG data collection and registration. Many companies provide solutions for businesses using their own technology, which is often cloud-based. This includes well-known names like Microsoft, SAP, and Salesforce, as well as many startups.
The downside of this approach is that these enterprise solutions are still in their early phases. Vendors may need to navigate the regulatory labyrinth just as much as their clients. Though these solutions can be altered, they may not match the effectiveness of a tailored domain-specific solution.
For example, we recently helped a large software corporation lay the foundation of its sustainability reporting. Off-the-shelf solutions would have come with a lot of additional functionalities that they didn’t need and would be costly to customize. The needed data was not standardized and was spread among 20 different business units.
We created a tailored data-ingestion solution that met their needs and structured, stored, and tracked their data. You can read the whole case study on how we created a modern data analytics platform.
With so many new internal and external elements, norms, and practices, enterprises need to carefully evaluate each approach. Companies should select sustainability information systems that fit their specific business cases and provide visualizations and dashboards to their stakeholders.
Challenge 3:
Limited Visibility into the Supply Chain and Emissions Calculation
Companies often need help obtaining comprehensive visibility into their supply chain when reporting Scope 1 and 2 emissions. Add Scope 3 to the mix, and the equation turns into a technical and logistical headache. A major issue is the scientific-based emissions factors calculation along the three scopes.
Only one in 10 companies in 2022 had completely tracked their GHG emissions, including Scope 3 emissions associated with their business and value chain, according to the Boston Consulting Group.
While Scopes 1 and 2 may be simple to understand and calculate, Scope 3 calculations may be daunting. These emissions occur mostly outside of companies’ control, and scientifically quantifying them can be significantly more difficult. How will you measure emissions from your distributors’ logistics chain after your goods leave your production facilities? What happens when your distributors are outside of the EU and are not even a subject of the CSRD regulations?
Another hurdle is the actual calculation of the emission factors (what a certain fuel/activity produces in terms of various GHGs) and their scientific verification. Some of these factors must be proved and verified by a lab or scientific institution, which adds an additional level of complexity to the reporting process.
Emission factors can vary significantly depending on the type of fuel or activity involved, making it challenging to measure accurately. For instance, the emissions produced by burning coal can be vastly different from those produced by natural gas. Furthermore, a single activity, like manufacturing, can produce multiple types of GHGs, each with its own emissions factors. Such variability and complexity can make it difficult for companies to accurately report their emissions.
To overcome this challenge, organizations can leverage integrated digital systems that enable upstream and downstream materials traceability. By integrating data quality requirements with procurement processes and engaging suppliers, companies can improve the quality of their Scope 3 reporting. This enhances transparency and helps identify and mitigate risks along the supply chain, leading to more sustainable practices and resilient operations.
Sustainability reporting is tough for NFRD-regulated organizations as they must meet strict financial rules along with regular standards. This poses a unique challenge, and the need for accuracy is not just figurative but also literal. These organizations are obligated to trade their еmissions permits as part of their business planning. This makes having in place integrated reporting and auditing systems a business-critical function.
Conclusion
Ultimately, the benefits of sustainability reporting can help companies gain a foothold in the future economy. It leads to new and improved sustainable products, services, and business models. This, in turn, can attract more customers and improve financial performance.
At Scalefocus, we are actively working on developing digital solutions that not only address the immediate needs of organizations affected by the CSRD regulations but also prioritize future sustainability aspects. These solutions are designed as reusable components, allowing our clients to easily customize them according to their unique business case and future sustainability reporting requirements.
Do not hesitate to contact us and let’s have a chat about your sustainability goals.
