Leverage digital tools to enhance sustainability reporting

In the quest for enhanced corporate sustainability, the integration of innovative technologies is ushering in a new era of reporting capability and transparency. Cutting-edge digital tools are enabling improved reporting functionality, fostering increased accountability around sustainability goals.  

One recent example of emerging sustainability reporting requirements can be found in California, which passed the Climate Corporate Data Accountability Act (California SB 253). The new legislation is the most comprehensive of its kind in the U.S. and will have significant impacts for many companies.

The Act requires public and private companies with annual revenue of more than $1 billion that conduct business in California to track and disclose greenhouse gas emissions. Those include emissions classified as Scope 1 (from assets that an organization owns or controls), Scope 2 (indirect emissions) and Scope 3 (from supply chain vendors).  While the capability around Scope 1 emissions is emerging, many companies are still struggling to move beyond that with more questions than answers on how to approach this effort.  

Companies must begin reporting Scope 1 and Scope 2 emissions in 2026 and Scope 3 emissions in 2027. Businesses must also provide attestation from an independent third-party auditor that has “significant experience in measuring, analyzing, reporting or attesting” to GHG emissions.

California’s law is just one example in an increasing number of approved and pending sustainability reporting regulations that will impact global companies regardless of where they are located, including:

Sustainable Finance Disclosure Regulation: SFDR is a European Union regulation that has been in effect since March 2021. The regulation mandates that financial institutions (banks, insurance companies, investment firms and other related businesses) report their environmental, social and governance policies, impact, performance and risks at the company and product levels, including GHG emissions.European Sustainability Reporting Standards: In July, the EU approved ESRS, another set of all-encompassing sustainability regulations. ESRS will impact businesses that have more than 250 employees and €40 million in revenue.U.S. Securities and Exchange reporting: The SEC is finalizing regulations for publicly traded companies to report GHG emissions and climate-related sustainability goals. If approved, reporting could be compulsory beginning in 2025, which implies data collection must start very soon.

How sustainability reporting will impact organizations

Put simply, noncompliance is not an option and could have significant consequences. Sustainability reporting errors and omissions likely will result in disciplinary action from regulators (including fines and other sanctions). Mistakes could also negatively impact the company’s reputation with consumers and current and prospective vendors and business partners.  Failure in this area could also call into question the accuracy of more basic financial reporting.  

Managing sustainability compliance, however, can be a challenge because it requires connecting sophisticated systems so users can quickly access, organize and analyze data across multiple departments. Those systems also will need to be integrated with the business’s supply chain partners.

Fortunately, a growing number of digital tools and enterprise-level platforms are making it easier to comply with the myriad of sustainability regulations. These compliance and  management platforms leverage cutting-edge technologies, such as artificial intelligence, machine learning and blockchain, to streamline data collection and verification. AI and machine learning algorithms help analyze vast datasets, while blockchain ensures the integrity and transparency of data across the value chain.

In our sustainability work around the world, Horvath has found that most businesses do not have a definitive roadmap and robust reporting solutions in place. That is not surprising because the reporting requirements are still being fine-tuned in many countries, but a “wait and see” approach is not necessarily a good approach given the speed at which these requirements are coming online. Because of the complexity of the reporting, we recommend focusing on these areas to start the process:

Begin with carbon emissions data collection and reporting

Given today’s GHG reporting regulations, companies must move beyond manual carbon accounting and automate the process of data collection and reporting. New tools on the market range from enterprise-level applications from software giants such as SAP, Microsoft, Salesforce and IBM, to newcomers like Diligent, Emitwise and Greenly.

Our company, for example, works closely with SAP and its Footprint Management platform, which helps companies track and analyze the environmental impact of their products throughout the product lifecycle. This solution, and others like it, allow businesses to collect data on the materials, energy and emissions associated with their products’ production, distribution, use and disposal. The technology provides decision-makers with analytics and reporting tools to help them make informed decisions about their sustainability initiatives.

Integrate ESG reporting and risk management

More regulators around the world are mandating that organizations report on a wide variety of ESG metrics. The data, they contend, is crucial to assess a business’s impact on society and the environment.

The largest technology companies have moved aggressively to launch enterprise-level solutions, including SAP, Microsoft and IBM, as well as smaller tech firms such as Goby, EthosData and Sphera. Financial players, such as S&P Global, Bloomberg and Refinitiv, have also launched integrated platforms, and risk management platforms like Archer have robust ESG reporting capability tied into the risk and compliance process.  

These ESG reporting applications use automated workflows and user-friendly interfaces to help businesses meet compliance regulations and monitor performance. The tools allow businesses to connect securely with existing systems, such as customer relationship management, accounting, human resources, production and distribution. The applications also feature technology that automates the process of verifying the accuracy, consistency and completeness of the data to improve including sustainability reporting, risk management, stakeholder engagement, goal setting, tracking and collaboration.

Companies must prioritize sustainability reporting from multiple perspectives to ensure long-term success, but they need robust reporting technology to help ensure organizational alignment while meeting complex reporting requirements. Leveraging today’s new digital tools will be vital so businesses can achieve their strategic goals, comply with regulations, and become a leader in sustainability.

As an initial step, assessing the current state and how it relates to emerging reporting and disclosure requirements is critical. Engaging a partner in this process to support assessments, checklists and workshops can be an effective and cost-effective way to understand the challenges and develop a comprehensive approach.