The need for a digital approach to ESG reporting is growing rapidly. What was previously viewed as a tiresome IT department topic is quickly becoming a top priority for ESG managers and the companies they work for. Many organizations are now realizing that digital solutions are vital to executing well-rounded data management processes, complying with regulations and successfully implementing ESG strategies.
What Is Driving the Need for Digital ESG Solutions?
The main players driving this shift toward digital ESG solutions are regulators, auditors, investors and ESG managers. Investors are increasingly choosing to support companies that make sustainability a priority. Companies that future-proof their operations against climate-related risk are much more attractive long-term investments than those that don’t.
After all, the world needs to invest in greater sustainability in order to achieve net-zero emissions by 2050, as the Intergovernmental Panel on Climate Change (IPCC) recommends. Working to mitigate climate change now will allow us to reap the benefits in the future: Meeting climate targets is expected to grow the size of the world economy by $43 trillion by 2070.
However, for those looking to invest in sustainable companies and products, greenwashing is a topic of concern. Greenwashing occurs when companies market their products or services as being more sustainable than they actually are. As a result, investors are becoming increasingly interested in a data-based approach when choosing which companies to invest in. Investors, auditors and regulators are scrutinizing ESG reports, demanding auditable data to support them.
This need for accurate, defensible data on companies’ climate risk and greenhouse gas (GHG) emissions is what underlies the proposed regulations from the U.S. Securities and Exchange Commission (SEC) and the new European disclosure rules under the Corporate Sustainability Reporting Directive (CSRD). Both sets of regulations require companies to report on their Scope 1, Scope 2 and Scope 3 GHG emissions.
With the SEC’s rule set to come into effect for large, publicly traded companies in 2023 (and with more regulations from others sure to follow), companies will need the right software to produce the ESG data regulators and investors require. Additionally, the ESG managers generating and using these reports do not want to use manual, non-digitized systems.
Digital solutions take a lot of the pressure off these managers by eliminating user error and streamlining data collection and providing them with more time to analyze and implement ESG strategies.
Why Digital Solutions Are Important for ESG Reporting: Mind the Gap
Current manual data collection and entry come with concerns such as user error, inaccurate collection and outdated information, which create gaps in data collection and management. Digital solutions can automate data collection, validating that data at the point of entry.
Many organizations currently employ exhaustive efforts to collect the necessary emissions data for their ESG reports. If the initial data isn’t right, the equation is inaccurate and the results are unusable. Using outdated and incorrect spend-based data could mean that a company’s emissions reduction strategies will be ineffective.
Furthermore, Scope 3 emissions, or the emissions that originate from a company’s supply chain, often account for the majority of a company’s GHG emissions. Through a life cycle assessment (LCA) automation solution, companies can conduct a life cycle assessment on their full product portfolios and capture their environmental impacts more accurately.
This process paints a more complete picture of a company’s Scope 3 emissions than solely relying on spend-based data. Tracking emissions data accurately will be key to avoiding greenwashing and effectively communicating ESG performance to investors and regulators.
Ensuring Accurate Data Reporting with Digital ESG Solutions
Regulators and investors are demanding more decision-useful ESG data from companies. As a result, investing in digital ESG solutions that enable accurate data collection and reporting is essential. Digital solutions can help streamline these processes, eliminating manual processes for ESG managers and providing more high quality data for regulators, auditors and investors.
This blog was adapted from a data integration keynote from Sandy Smith, Ph.D., Sphera’s vice president of EMEA / APAC EHS&S sales, on developing robust data management systems, which took place at Reuters Sustainability Reporting & Communications Europe on November 22, 2022. Interested in hearing more about how you can start collecting and reporting accurate ESG data? Contact us to learn more.