The European Sustainability Reporting Standards (ESRS), which came into effect at the start of the year, brings significant changes to Environment, Social and Governance (ESG) related reports. The regulation brings new reporting requirements that can easily become complex if not using the right tools. The question is, what are the hallmarks of a good ESRS tool?
What makes the ESRS update so challenging is that it expands the current scope of sustainability reporting. The update initially has 12 standards that outline the reporting requirements of the Corporate Sustainability Reporting Directive (CSRD). Two of these standards focus on the general requirements that apply to all topics within CSRD and the remaining ten focus on specific areas, including climate change, pollution, water and marine resources, biodiversity, workers in the value chain, business conduct and more.
Firms are currently in the process of assessing the scope of ESRS and determining which parts of their business are impacted by the initial stages or later phase-in dates. Victor Friberg, AI Lead at ESG management platform Position Green, explained that firms are currently navigating the regulatory landscape, collecting accurate and traceable data and ensuring they are meeting compliance.
Efficiently collecting data is vital for completing the reports. One of the biggest aspects of ESRS are the double materiality assessments, which assess the impact materiality and financial materiality of a firm. The impact materiality examines the positive or negative impacts that a firm’s operations and value chain have on people or the environment. Whereas, the financial materiality highlights how a sustainability matter would impact a firm’s financial performance. Completing these assessments requires easy access to data from across the business. Minimising the time to collate that information can be a gamechanger for compliance.
Friberg said, “Your ESRS solution should automate anything that can be automated, and drastically cut down on manual labour associated with reporting. It should also deliver pre-configured ESG frameworks and best practices straight out of the box, and cover all stages of the ESRS reporting process from the double materiality assessment (DMA) to sustainability statements. With all of this, you can focus more on impact, not admin.”
There are a number of providers in the market that will be able to help a firm automate data capture for ESRS, but that doesn’t necessarily mean they are all viable options. Every company is different and has their own set of requirements and legacy technology, and while a solution might look perfect, it could turn out to be the wrong option. As such, Friberg urges firms to consider a handful of aspects when engaging with a vendor.
The first of these is whether the solution is capable of data integrations. If possible, assess how easy the integration process is and whether it is traceable and transparent? Friberg noted that integrations for all data is essential, as well as the need to input custom reporting matters into the DMA.
Another aspect to consider is the value of an off-the-shelf solution that is built specifically for ESRS reporting. While these bring immediate value, having customisability can allow a firm to adapt the solution to better meet their needs. “Selecting a platform that is flexible enough to reflect your organisational structure and reporting cycles is massively beneficial – it’s often a combination of both.”
Finally, Friberg noted that firms should be on the lookout for expertise. The ESRS landscape is only just starting and things are likely to get more complex in the coming years, as such, a software provider that has serious in-house sustainability expertise will ensure updates are quickly and correctly translated into the software.
What to look for and what to avoid
To help firms with their decision process, Friberg offered a number of capabilities to also look for. This includes ensuring everything is traceable and convenient for auditors, whether the software is easy to use when making DMA revisions and updating material for subsequent years, if the software can connect between the DMA and disclosure reporting to ensure its clear what is actually material to report on, and whether the software can handle disclosure reporting on both lower levels in the organisation, and top level depending on the different data types.
To help firms make this decision, Friberg offered some advice. He said, “Think ahead. There are, of course, some immediate challenges companies face when initiating the ESRS reporting process, but the importance of sustainability reporting will only continue to grow and any associated data must be embedded across the organisation. Companies need a solution that allows them to easily share their ESRS data wherever they need it, and at the same time allow them to automatically pull in relevant data from other systems and providers, for example financial systems, so they can get all their data in one place and always see the bigger picture.”
Friberg finished off by highlighting some of the warning signs a firm should watch out for. He said, “If the software is primarily done for other purposes than ESG reporting, then it’s likely that ESRS will be too complex and niche and will require that the software has its own separate module tailored for ESRS.” Other warning signs are if the reporting takes more time to complete with the software than without it, if the solution doesn’t allow multiple reporters and organisational or business units, and if it is not traceable and transparent.
Keep up with all the latest FinTech news here.
Copyright © 2024 FinTech Global
