Firms Face Double Trouble from Disclosure Rules

Shift to mandatory sustainability disclosure standards presents challenges for companies and their ESG reporting tool providers.  

Sustainability reporting by corporates is nearing the completion of its journey into the mainstream. After decades as a ‘nice to have’, it has gradually grown in ubiquity and today – with mandatory disclosures on the horizon is well on its way to a ‘must have’.  

While reporting is becoming more standardised, it is no less complex and difficult for the chief sustainability officer to navigate, due in part to the expanding scope and scale of the information involved.  

Help is at hand though, with providers of corporate sustainability reporting tools rapidly innovating to offer potential solutions to handle the data and capitalise on the revenue opportunities in the market.  

From next year, the Corporate Sustainability Reporting Directive (CSRD) is expected to impact as many as 50,000 entities across Europe that did not previously have to report on ESG risks.  

The International Sustainability Standards Board’s (ISSB) inaugural standards also launched in June, covering climate and general sustainability disclosures, which are expected to act as a global baseline for national corporate reporting requirements around the world, with the UK’s recently unveiled Sustainability Disclosure Standards (SDS) leveraging the ISSB’s standards. 

Many large corporates are already familiar with the process of using standards from the Global Reporting Initiative and the Sustainability Accounting Standards Board to provide stakeholders with sustainability insights on a voluntary basis.  

But new mandatory standards further stress the importance of accurate underlying data – across a widening range of activities and processes – which will be required to comply efficiently with disclosure requirements. The ability of corporates to comply is critical to investors, who will increasingly rely on the new standards to make sustainable investments.  

Jessica Pransky, Principal Analyst at research and advisory firm Verdantix, tells ESG Investor that one of the biggest challenges faced by firms is the “volume of data” and how they are able to handle it. To tackle this expanse of data, corporate ESG reporting tools will need to simplify the disclosure process.  

The ESG reporting and data management software market is forecast to surpass US$4.3 billion by 2027, according to Pransky, with the range and number of tools constantly expanding.  

She says that it is “imperative” for vendors in this market to “proactively stay ahead and remain competitive”. 

Ralf Gärtner, Senior Vice President at Wolters Kluwer, says that the “greatest challenge” for any large business is managing “high volumes of unstructured, heterogeneous, granular sustainability and ESG data with a standard, harmonised, auditable process”. 

Sue Armstrong-Brown, Global Director for Environmental Standards and Thought Leadership at global non-profit disclosure platform CDP, also notes that a “key barrier” to the provision of high-quality disclosures is the level of data required. 

“Dynamic and fast-moving 

The market for corporate sustainability reporting tools is “crowded right now”, according to Pransky, with lots of vendors from lots of different backgrounds that offer or are beginning to offer functionality to help companies meet ESG reporting challenges. 

She says that there is a “breadth of offerings” available to corporates covering “so many different facets to ESG reporting”. This variety includes tools to prepare voluntary reports, complying with a “wide” array of regulations, and using data to drive performance management.  

Verdantix has noted providers utilising “varied levels of services”, with some possessing “strong” in-house consulting branches to assist their customers with both implementation and more complex functionality, such as strategy development and materiality assessments. Other vendors have strong partnerships with services firms to further expand their offerings. 

Pransky said that vendors have had to adjust their product offerings as sustainability reporting has increasingly shifted to ’must have’ status. 

The corporate ESG reporting tools market is an “incredibly dynamic and fast-moving market” that benefits from “constant innovation and improvements”.  

“In terms of competition, I think it’s driving vendors to innovate faster to be able to gain market share,” she adds.  

Inna Amesheva, Director of ESG Regulatory Research at data and technology provider ESG Book, underlines the need for a variety of ESG reporting tools.  

“ESG is huge, it’s hundreds of topics falling under one umbrella,” she says. “It’s very difficult to claim that there’s one organisation that can solve it all. 

“You need a lot of expertise and you need a lot of technical solutions to actually help companies to make sense of it, so I would say that a diversity of solutions is welcome. 

Amesheva argues that the competition created by the number of tools and providers is “great because it makes you better”, as well as demonstrating depth of demand.  

ESG Book’s solutions focus on the connection between corporates and financial markets to “enable the efficient flow of capital towards sustainable finance”.  

Pransky also notes the growing prevalence of artificial intelligence (AI) in the market, with the technology being used by an increasing number of vendors, a trend she expects to continue.  

She adds that one of the biggest use cases of AI seen by Verdantix for reporting tools is in data quality enhancement and improvement.  

With reporting requirements reaching more firms, Pransky suggests that there is an opportunity for tool vendors among smaller companies that have “less mature” ESG strategies that could benefit from being offered “basic packages with basic functionalities to understand and collect their data”.  

Amesheva says that the introduction of mandatory standards such as CSRD and standards that could become mandatory like the ISSB – will see lots of smaller companies having to look at sustainability disclosures for the first time.  

According to Sasja Beslik, Data Analytics Senior Advisor at SaaS-based ESG solutions provider Rimm, around 70% of businesses globally are small- and mid-cap companies illustrating the scale of the potential opportunity for vendors.  

Andie Wood, Vice President of Regulatory Strategy at reporting compliance platform Workiva, says some entities will need to undertake double materiality assessments for the first time. 

“As corporates are starting to get ready to report in line with CSRD they’re needing to make sure that the software vendor they’re selecting has the functionality that need, including being able to help them on double materiality assessments,” Pransky says.  

Under double materiality, companies must report both on how their business is impacted by sustainability issues and how their activities impact society and the environment. 

Pransky adds that evaluating materiality is one of the “big capabilities” being developed at present.  

“CSRD will require double materiality and I think firms are going to need to look for vendors that can help them in that process either directly through the software or through a partnership with a services firm,” she says.  

“The majority of vendors do not have a ton of capabilities in the area of double materiality.” 

Voluntary to mandatory 

To date, the majority of corporates have only faced voluntary requirements for ESG and sustainability-related disclosures. This is set to change, however.  

“We’re seeing a lot of corporates shifting their mindset and incorporating mandatory frameworks into their priorities,” Pransky says.  

The CSRD is expected to affect up to 50,000 entities not currently required to report under the EU’s Non-Financial Reporting Directive, meaning that they will have to make ESG disclosures in annual reports for the 2024 financial year onwards.  

They must disclose sustainability-related information in line with European Sustainability Reporting Standards (ESRS), which underpin the CSRD to reflect users’ growing needs for comparable, relevant and reliable information. 

Four in five of respondents to Workiva’s recent ‘Annual Reporting Barometer 2023: Facing up to the CSRD’ report said they will be complying with the directive in the future, and 94% of the European firms surveyed are working to become compliant by 2024. However, the report warned that EU firms are “running out of time”. 

Beslik says that mandatory reporting creates more trustworthy data”, as well as much better insight on how companies at the corporate conduct level report the key material issues relevant for the business. 

He suggests that while in general transparency will increase, this transparency “does not mean that companies are changing their business model”.  

“The regulation in Europe is increasing disclosure, but it’s not increasing the push on companies to shift their underlying business model,” he adds. 

Despite last-minute amendments, the ESRS delegated act recently adopted by the European Commission has been criticised for moving away from all key disclosure indicators being reported on a mandatory basis under CSRD.  

Amesheva tells ESG Investor that there was an “opportunity missed” with ESRS failing to introduce mandatory disclosures that would help alignment with the Sustainable Finance Disclosure Regulation (SFDR). 

“There was a lot of disappointment in the industry, specifically among investors, who were hoping that the EU would make at least some of the SFDR metrics mandatory, which was not the case,” she adds. 

Regulatory challenges 

A recent report by Sustainable Fitch flagged that increasing regulatory requirements are prompting “rising levels of regulatory and compliance fatigue among corporates and investors”, as well as highlighting “persistent concerns” about the “interoperability of an ever-greater number of taxonomies introduced”. 

Beslik says that corporates are “struggling” to handle the new reporting requirements and lack resources. 

ESG Book’s Amesheva notes that the proliferation of standards and frameworks means it can be “a burdensome process to actually figure out what the reporting requirements are”. 

Renaud Bettin, Vice President of Climate Action at carbon and ESG data management platform Sweep, says corporates have not been helped by the fact that CSRD’s standards have only recently being released, with further guidance under development.  

“In the case of the ESRS, reporting sustainability indicators will hinge on a materiality assessment by the reporting entity. It’s not yet clear how this will look in practice,” he adds. “This uncertainty makes it difficult for them to get ready and for us, as software providers, to develop the necessary tools and resources to support them.” 

Kristian Rönn, CEO at carbon accounting software provider Normative, also suggests that the introduction of mandatory regulations is happening in a “somewhat reverse manner”.  

He argues that without there being standardised accounting practices, as there is the case for financial reporting, non-comparability issues between different entities may arise. This lack of comparability could risk “eroding trust in the broader ESG initiative”.  

“It would be more effective if regulators take a step back and focus on standardising the accounting methods that drive these disclosures,” Rönn tells ESG Investor. “This would ensure comprehensive coverage and address accuracy gaps.” 

Double trouble 

While the sustainability reporting difficulties facing corporates are many, one looms largest.  

Pransky describes double materiality as “extremely complex”, noting that “getting everything together in one place and synthesising that data is a big challenge”. 

Workiva’s Wood says that companies are undertaking “readiness steps” for reporting under double materiality. This requires “a lot of data preparation”, including what firms already have, what is missing, and if they are going to be able to “connect to existing systems to pull in structured data”, she adds. 

Wolters Kluwer’s Gärtner says that for the first time in history, companies are being required to report on both financial and non-financial data. He describes this as “possibly the biggest change in regulatory reporting since the invention of double-entry book-keeping 500 years ago”. 

More than 80% of respondents to Verdantix’s global corporate survey said their sustainability strategies should be based on double materiality.  

“We’re seeing a greater number of corporates really prioritise incorporating both financial materiality and impact materiality, not just into their reporting, but into their strategies going forward,” Pransky says.  

CDP’s Armstrong-Brown suggests that a “harmonised set” of reporting standards could help support corporates to disclose in the most meaningful and relevant ways and decision-makers to access the most impactful data.  

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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