CSRD | Data & Tech

06/04/23

The CSRD requires better ESG data and supporting IT

The European Green Deal and the Green Deal Industrial Plan aim to make the EU the world's most sustainable economic continent in the near future. EU companies play a central role in achieving that ambition. The European Commission therefore considers it essential that companies raise the quality of their sustainability or ESG reporting to the same level as their financial reporting. To achieve this, the Corporate Sustainability Reporting Directive (CSRD), will come into force from 2024. For almost every company covered by the CSRD, it means requirements on the scope and quality of non-financial reporting will increase significantly.

As such, the CSRD is a key driver for improving ESG reporting. But CSRD compliance, however important, is not the end in itself. The impact of ESG on companies is growing and becoming an increasingly important source of risks and opportunities. In this therefore, lies the real importance of all efforts to take ESG reporting, both internal and external, to the next level. ESG reporting and the insights it generates must be good and reliable enough to serve as input for the strategic decisions needed to develop a sustainable business model that maintains the company's right to exist and remains relevant and profitable in the longer term.

To deliver high quality and reliable ESG reporting, data and technology are essential.

"In many companies, we see that reporting requirements create an undue pressure. Data is purchased, collected and reported without a clear purpose."

Lex Huis in het Veld,director

ESG data: the ingredient for relevant reporting towards stakeholders

To comply with the CSRD, companies need to collect, process, assess and ultimately report on more detailed as well as new data. The CSRD includes 12 standards and 82 reporting requirements that together lead to about 500 KPIs and an estimated 10,000+ underlying data points. Besides the large amount of ESG data, there are more challenges around the CSRD and data. We list the four most important ones.

"The key advice: 'think big, act small'. Keep the strategic importance in mind, but start pragmatic and small. At least make a start."

Mark Tesselaar,senior director

The scope of the reporting requirements is being increased in several ways.
- Companies have to report not only on their own entity but on the entire value chain.
- ESG reporting must look back as well as forward to the short and longer term.
- The ESG reporting requirements are both quantitative and qualitative. The reporting must provide insight into the impact, risks and opportunities that each of the (material) standards entails for the own organisation and its the value chain.
Data points are not always available internally and/or cannot be generated independently. This means a dependence on suppliers, customers and other chain partners, data providers and other stakeholders in reporting.
ESG data sources are generally not of the same quality as financial information yet, in terms of completeness, reliability and transparency . In many cases, they are still 'best estimates', i.e. data mixed with methodology. There is also an imbalance; Environmental data is generally more available and of higher quality than data on Social and Governance aspects.
The nature of ESG data is inherently more complex and diverse than financial information which is mainly transactional in nature.

The way forward: using ESG data journey to get into action

It becomes clear that a manual or separate process for the collection, processing and final reporting of ESG data under the CSRD is not practical. ESG is no longer an isolated topic reported on once a year, but an integral part of strategy, and therefore of management reporting and external reporting. As is the case for financial information, ESG reporting needs to be embedded in existing processes, controls and governance structures, and supported by tools and systems embedded in the IT landscape. This is also reflected in PwC's CEO survey.

Our ESG data journey leads to this situation in several steps.

Step 1: Clarify what data is needed, and most importantly, what it is being used for
Step 2: Operationalise the data collection
Step 3: Integrate ESG into existing data architecture
Step 4: Organise quality, integrity and governance of ESG data

Step 1: Clarify what data is needed, and most importantly, what it is being used for

At this stage, it is essential to keep in mind that while CSRD compliance is important, it is not the main goal. Data needs are driven by strategy, not the other way around. Recent changes to the CSRD make this step more manageable.

No longer is every reporting standard material for every company a priori. What is material now follows from the 'double materiality assessment' that every company has to make and which is fed by its strategy. That materiality assessment and the link to the strategy also help set priorities. Not all ESG reporting needs to be perfect from the moment the CSRD comes into force, there is room to focus on the most material topics and, where necessary, show what plans are in place to bring reporting on the other standards up to standard. Check out the CSRD Quick Scan.

Step 2: Operationalise the data collection

The common argument that there is a lack of ESG data does not hold true as far as we are concerned. Rather, there is an abundance of data. The main question is exactly what data is needed and how to make it available. For this, (new) internal and, in many cases, also external data sources will have to be accessed and converted into a usable format.

As indicated, this will require alignment and cooperation with supply chain partners, other stakeholders or, for example, industry organisations. Specialised data providers, and increasingly software and IT suppliers that integrate part of the data collection and structuring in their products, play a role in this respect.

Step 3: Integrate ESG into existing data architecture

Try to accommodate the collection, storage, transformation, aggregation and analysis of ESG data within the current data architecture. Where necessary, this can be extended with specialist tools for e.g. calculations or dashboarding. Despite IT and software vendors claiming to have 'the ESG solution' - we estimate that over 500 ESG tools are available on the market already - the one solution does not exist. What is 'THE solution' depends heavily on what is material to the company and its stakeholders, and on the state of legacy systems.

A focus mainly on CSRD compliance can lead to sub-optimal short-term solutions. Deciding on new tools and systems remains a matter of sticking plasters on the most acute hurdles. The better option is to decide on adjustments or redesign of the IT landscape on an architectural sketch that also supports the chosen strategy and the future, sustainable business model in the longer term.

Step 4: Organise quality, integrity and governance of ESG data

The same diligence used in financial reporting should also be applied in ESG reporting. ESG data management is much more than tooling, it also comes down to 'capabilities, skills & knowledge'.

Implement multiple preventive and detective management measures to enhance data quality. Data quality is the responsibility of the company, even if the data comes from external sources.
CSRD requires assurance from an external auditor on ESG reporting, involving them in setting up quality controls.
Clarify about ownership and responsibilities for different elements of ESG data and ESG reporting.
Build qualities to also be able to interpret data and translate it into insights.

The approach: be pragmatic, start small ánd act multidisciplinary

The most important advice is to at least make a start. The motto 'think big, act small' applies here: keep the strategic importance in mind, but start pragmatically and small. For instance, by working on (one of) the most material requirements at first, or on the requirements under 'Climate Change'; this needs to be reported on in any case and a lot of data is already available for this.

It is also important to start with representatives of the organisational units involved. CSRD forces companies to stop approaching ESG as a separate topic and start treating it as a full and integral part of strategy, core processes and reporting. Consequently, ESG cannot remain the domain of a few specialists in a sustainability team or the reporting department. This also applies to ESG reporting, which is why it is important to have the business owners and all disciplines involved at the table from the start of the data journey.