With new laws requiring greater validity of reporting and ongoing doubt about the credibility of carbon offsetting, there is an urgent need for more transparent, credible, and standards-aligned environmental reporting solutions. Key to meeting this need is robust, comparable data along with alignment to new financial reporting frameworks.
With over 600 environmental reporting frameworks and standards worldwide, according to Ernst & Young, the alphabet soup of reporting requirements can leave organisations needing clarification regarding the correct route to take in credible reporting.
Positive steps are being taken, with 97 per cent of large companies including Environmental, Social and Governance (ESG) in investment decisions and 79 per cent of CSOs already accounting to their boards, with 98 per cent doing more than legally required to reduce emissions, according to research by AiDash. But while many turn to offsetting and third-party reporting to meet compliance needs, a company’s practical action powered by its own data is the only way to ensure effective and verifiable efforts to tackle the climate crisis.
Solutions for environmental reporting
A range of data-driven solutions are available including employee carbon engagement platforms, financed emissions software, Internet of Things (IoT) emissions tracking solutions, renewable energy source tracking, satellite GHG data and data collection, Scope 3 emissions management software, GHG data collection, carbon and energy management software, carbon registries, continuous emissions monitoring systems, EHS software and predictive emissions monitoring systems.
IoT emissions tracking solutions can monitor and report on Scope 1 emissions in real time, which is particularly useful in detecting leaks and anomalies in carbon-intensive industries. Increasing demand for granular data is driving significant funding into IoT technologies that detect GHG emissions. Project Canary offers an IoT-based continuous emissions monitoring system. IoT solutions including software, sensors and automation can continuously monitor the entire value chain for manufacturers.
Renewable energy source tracking can collect and validate data from energy attribute certificates (EACs) and renewable energy certificates (RECs) to monitor Scope 2 emissions. Firms must provide information on the source of their purchased EACs and RECs and report Scope 2 emissions. Demand for time-based EACs is increasing, and several new vendors offer renewable energy source tracking, some offering 24/7 solutions to match energy production with consumption.
Carbon management software (CMS) is used at the enterprise level to collect and calculate data on Scope 1, 2 and 3 emissions and feed data into reporting frameworks such as CDP, GRI and SASB. CMS is growing, driven by regulatory pressures. New vendors such as Sweep offer functionalities to track carbon offset through the purchase of carbon credits, monitor progress towards net zero or even set an internal price on carbon.
Supply chain reporting
An ESG reporting tool needs to enable a company to assess the ESG risks in its supply chain and be able to quantify those risks. The inability to evaluate such risk can be devastating, as shown in the case of Boohoo in July 2020 following reports of poor working conditions at one of their garment manufacturers. The company lost over $1.5 billion in market value in just two days.
Solutions such as distributed ledger technology (DLT) and Blockchain can build trust in complex reporting by tracking supply chain assets and processes in real time from start to end of the cycle, enabling a company to track the data with complete transparency and accurately verify wider ESG criteria and carbon emissions involved across the entire process.
“ESG reporting is a data problem that requires a data-led solution,” says Levent Ergin, global chief ESG sustainability strategist at Informatica. “A self-serve model, where data collection from suppliers is automated rather than manually collected, can ensure consistent data quality. For example, optical character recognition can digitise key paper-based information in a structured format and input it into an ESG Master Data Governance solution. At the same time, data collection via PDF scrapers can also remove human error. Direct data from smart meters is another way to automate environmental data collection.”
ESG reporting solutions for SMEs
Most reporting solutions are designed for the needs of large companies. However, while many providers have started to offer services to SMEs, few are tailor-made for the SME market where the need is greatest, according to research by Dr Marc Lepere, head of ESG & sustainability education at King’s Business School in London.
“Europe has over 23 million SMEs whose total environmental impact may account for 70 per cent of industrial pollution in Europe,” Lepere says. “Collectively, this is a sector that represents the majority of the economy, yet a recent Joint Research Centre (JRC) report for the EU Commission cites a scarcity of ESG solutions for SMEs.”
Choosing the correct reporting method is critical as many small companies struggle with fundamental issues such as paper-based reporting and criteria used in data formatting, observes Heidi Karlsson, director Open Footprint Forum. “There is a major challenge in how data is stored and formatted. For example, if two systems use slightly different names for an emission category, or if one stores the value in grams while the other uses kilograms, the resulting discrepancies can require insurmountable amounts of manual correction to overcome.”
There are multiple data points in the social dimension of ESG that need collating, creating a massive data challenge, says Levent Ergin, global chief ESG sustainability strategist at Informatica. “Many companies use external ready-made ESG ratings, and much of this data is based on secondary sources which may be outdated or misinformed. Companies must look to technology to measure and control fragmented data sets so they can show how data was sourced and analysed. Only then can businesses report with credibility.”
New solutions such as Spherics, Ecologi, Giki Zero and Eevery are designed to meet small companies reporting needs. In contrast, solutions such as Net Zero Cloud, Brightest and Net Zero Score are aimed at larger companies and new corporate reporting standards. For food producers, DSM’s Sustell captures farm-level data to report the environmental impact of agriculture. Finally, at the higher end of data solutions, the Legal Entity Identifier (LEI) provides a standardised system for finding, comparing and reporting global ESG data. Based on ISO 17442 and used by large companies as part of their ESG reporting systems, OS-Climate uses LEI data as part of the Amazon Sustainability Data Initiative to accelerate the development of climate-aligned financial applications.
Reporting solutions must align with financial frameworks
Current environmental reporting solutions include tools that help to reduce complexity, but few are integrated with financial accounting, which will soon be the foundation of the entire ESG and non-financial reporting ecosystem.
“Data will increasingly drive ESG and non-financial reporting, and as mandatory reporting comes into effect, it has become clear that the finance function is key,” says Lepere. “To be effective and credible, ESG reporting solutions need to have the same standards of discipline, rigour and professionalism as financial reporting.”
To future-proof environmental reporting, companies should ensure that whatever solution they choose is aligned with major financial accounting frameworks such as Accounting For Sustainability, TCFD and, in particular, the new International Sustainability Standards Board (ISSB) standards that are set to become the global baseline for ESG reporting for use alongside any financial reporting model such as IFRS or US GAAP.
“ESG reporting goes above and beyond the chief sustainability officer or head of sustainability to the CFO,” Ergin concludes. “With climate-related disclosures now, an audited verifiable process like financial reporting getting ESG right is non-negotiable. Yet around 90 per cent of businesses rely on manual processes. This needs to change with scalable technology that efficiently manages the reporting process and ensures accuracy.”