What is ESG reporting? How you can prepare your organization for it

With sustainability concerns on the rise, organizations are under scrutiny about their impact on the environment and the communities they operate in. As a result, governments and regulatory bodies worldwide are stepping in and creating new, broad regulations to advance sustainable business practices.

In addition to regulators, international-standard setting organizations are joining the ESG effort and developing frameworks and processes to consolidate the complex regulatory environment.

Keeping up with the latest developments in ESG reporting can become a challenge for any organization.

And that’s why we’re here to help. In this blog post, we’ll look at:

• What is ESG?
• Where does ESG come from?
• What is next in the ESG regulatory environment?
• How to navigate the ESG regulatory environment
• How to prepare for the next wave of ESG reporting
• How Prophix supports ESG

What is ESG?

Environmental, social, and governance (ESG) refers to a set of criteria considered when assessing the sustainability of companies and countries.

Where does ESG come from?

The UN began its work on sustainability back in the 80s with the publishing of the Brundtland Report, but most of the progress in the field of ESG has been made over the past decade. Research analyzing the World Business Council for Sustainable Development’s (WBCSD) Reporting Exchange platform, which covers more than 2,400 ESG regulations in over 80 jurisdictions worldwide, has concluded that regulations have increases 155% in the 10 years following 2011.

What is next in the ESG regulatory environment?

The ESG regulatory environment is a rich tapestry of local regulations, varying in scope and depth. There are several significant regulatory updates on the horizon for 2023. Among these new regulations are ESG laws in Germany, the Netherlands, the UK, India, the US, Hong Kong, and the upcoming ESG directive in the EU – the CSRD.

What is CSRD?

CSRD, or Corporate Sustainability Reporting Directive, marks a leap forward in global ESG regulation with its wide scope and breadth, and is expected to impact 75% of the EU economy. The CSRD is set to replace the NFRD (Non-financial Reporting Directive) in a phased approach, starting from FY 2024, eventually affecting approximately 49,000 business in the EU.

The CSRD introduces a few new concepts and disclosure requirements including:

• The double materiality concept
• The long-term environmental, social, and governance (ESG) objectives and policies
• The due diligence on operations and supply chain.

The latter extends the reach of the directive outside of the EU and over to any organization which falls into the value chain of an EU business.

The EU is set to amend the CSRD every 2 years, meaning that the scope and breadth of the directive is expected to change repeatedly in, what in regulatory reporting terms may call, a very short amount of time. Companies will need to learn to adapt quickly to new requirements and invest in sustainable solutions which will not only help them address the current challenge, but also face head on what is coming their way in the near future.

How to navigate the ESG regulatory environment

As we have seen, ESG disclosure requirements vary from country to country. Currently, only large enterprises (500+ employees) tend to fall in scope of mandatory disclosures such as the NFRD in the EU and the LLP Regulations in the UK. Large, listed companies tend to be most likely to engage in ESG reporting even though in a number of countries, like the US, China and Canada, mandatory disclosures are not in effect.

In many cases, specific industries become the first to be subject to ESG disclosure requirements – including financial services, construction, automotive, mining and the power generation sectors. One example is the OSFI guidance on federally regulated financial institutions in Canada which, as of 2024, mandates climate disclosures following the TCFD framework. While medium and small-sized companies do not generally fall under ESG reporting requirements, there is a growing need for transparency for stakeholders and investors which may ultimately push forward even more disclosure requirements in the future.

International ESG frameworks

In an effort to tackle the challenge of fragmented local regulations, a number of international organizations have stepped in and created global reporting frameworks and standards. Among these key organizations are the Task Force on Climate-related Financial Disclosures (TCFD), the Sustainability Accounting Standards Board (SASB), International Sustainability Standards Board (ISSB), the Global Reporting Initiative (GRI) and the Carbon Disclosure Project (CDP).

Most notable of the resulting frameworks and standards is the development of the IFRS S1 and S2 standards by the ISSB published in June 2023. The two standards cover a broad range of topics with S1 focusing on sustainability related risks and opportunities, while S2 on governance, strategy, risk management, and climate related metrics and targets. It is up to organizations to decide to adopt a given standard, a framework, or a combination.

How to prepare for the next wave of ESG reporting

While the number of companies publishing sustainability reports has been growing steadily, ESG reporting for smaller companies has lagged. The introduction of the CSRD is set to change that, requiring a level of data gathering and disclosure few can meet. In order to ensure compliance, organizations will need to gather, consolidate and report on information concerning their environmental impact including data on:

• Pollution, water and marine resources
• Biodiversity and ecosystems
• Resource use and the circular economy

A clearly defined compliance process combined with the right tools can enable organizations to remain compliant over time without the need for continuous investment in new technology and resources.

Adopting an ESG tool brings several benefits to organizations, key among which are:

• Consistent, reliable and transparent data
• Reduced risks
• Productivity gains and cost savings.

How Prophix supports ESG

The Prophix Financial Performance Platform supports the ESG reporting process in its entirety, from data gathering and consolidation to strategic planning and analysis:

Whether complying with the CSRD, the IFRS S1 and S2 standards, or other frameworks and regulations, organizations will likely need to combine information coming from various data sources and systems. The ability to seamlessly integrate and gather data in a single environment becomes a must-have for any successful ESG solution.

Let’s look at how Prophix can support your ESG reporting process:

• Data integration application connects with any source system (cloud or on-prem) for an automated, error-free flow of data that is consolidated for tracking against targets
• Model different numeric requirements, whether monetary or statistical (KPIs)

• Collaborate with end-users via dashboards, templates, and reports, and attach comments in a single source of truth
• Aggregate your data within models and combine with any commentary in report packs for a seamless reporting solution
• Tag your final report with disclosure requirements right in the platform
• Use advanced analytics and scenario planning so you can stay on top of your long-term sustainability plans

Regardless of the ESG regulation or framework you adhere to, the right solution will enable you to remain compliant in the face of shifting laws and reporting standards. Organizations that use ESG solutions are better positioned to align their ESG initiatives to business objectives, monitor progress, and reinforce stakeholder relationships.