Heatwaves, floods, declining biodiversity – due to the myriad negative effects of global climate change, policymakers, companies, and society at large have been focusing more and more on the topic of sustainability in recent years. To accelerate the necessary transition to a sustainable economy, flows of capital are to be guided toward companies that operate responsibly with regard to environmental, social, and governance aspects and have a proven record of ESG compliance.
Verifying and assessing ESG data
Like in the realm of financial reporting, companies’ ESG performance can be measured based on a wide array of KPIs. Among other benefits, the disclosure of such indicators is to help ensure the transparency and comparability that stakeholders increasingly require. To ensure the quality and reliability of ESG data, the Corporate Sustainability Reporting Directive (CSRD) now requires affected companies across the EU to review the data their sustainability reports contain. The need to implement corresponding processes is posing serious challenges to many of these companies at the moment; after all, ESG information (as in the case of financial data) must fulfill certain basic requirements in order to pass an audit.
What is ESG data?
ESG data plays a central role in companies’ efforts to operate sustainably. It serves as a basis for sustainability strategies, the creation of ESG reports, and the evaluation of companies by rating agencies. ESG data includes any and all KPIs that offer insights into a company's sustainability performance or that of a particular asset. It can also comprise current or historical information or projections for the future.
Materiality assessment: Starting point for systematic data collection
Considering how wide-ranging and complex ESG topics can be, you might first be wondering what type of ESG data needs to be gathered. According to the European Sustainability Reporting Standards (ESRS, the EU's new framework for sustainability reporting), companies should concentrate on KPIs that can be classified as important in connection with specific sustainability-related effects, risks, and opportunities. To identify such effects, risks, and opportunities in a systematic way, the ESRS mandate their analysis based on the principle of double materiality (meaning in terms of how they impact both the respective company's finances and the world at large). It's a good idea to pay particular attention to this materiality assessment right from the start of your reporting process; your company's efforts in preparing for, carrying out, and evaluating its analysis will be part of the related auditing, so the underlying processes and decisions involved need to be documented in as robust and transparent a manner as possible.
Note: For everything you need to know about compiling a materiality assessment, check out the blog article Four Steps to Developing an ESG Strategy Based on a Materiality Assessment
Challenges related to the quality and availability of ESG data
Once the different types of data that need to be collected have been defined, ensuring the quality and availability of this information is the biggest challenge many companies must overcome. Those with numerous branch locations and largely decentralized structures can't currently assume that the information they require will all be provided at the necessary level of quality. Furthermore, ESG data typically has to be gathered from a variety of sources and departments due to the wide range of topics involved. It differs in this regard from financial data, which controlling departments are usually responsible for collecting. Other data points – Scope 3 emissions, for instance – are so complex that they are sometimes calculated based on estimates; here, the underlying assumptions and parameters also need to be defined and validated first. All the aspects that further complicate the data collection process naturally led to an increased likelihood of error and make it more difficult to verify reported information.
System-supported collection makes data more verifiable
Driven by the far-reaching developments that have taken place in corporate sustainability reporting in recent years (think of the CSRD, the EU Taxonomy Regulation, or Germany's Supply Chain Act), more and more solutions that support data collection are attempting to gain a foothold in the market. Implementing appropriate software for collecting, calculating, and consolidating ESG data as early in the reporting process as possible offers a number of advantages. For example, an organization-wide software rollout (ideally with corresponding support) will ensure that the processes underlying your data are robust and all the relevant information is gathered in a central location. At this point, it's also possible to implement interfaces to IT systems that are used for other purposes, which will allow you to rest easy knowing that certain data points will be collected automatically. The process of producing comparisons against previous years – which will be mandatory for all quantitative parameters and financial sums once the ESRS goes into effect – will also be much simpler and more reliable. The same applies to data verification, plausibility checking, and consolidation. Using software to collect ESG data can thus be a big help in making sure your information is correct and complete, which is why doing so is considered a worthwhile measure by most auditors, as well.
Other ways to improve the verifiability of ESG data
Particularly for data that can’t be collected automatically (or only with significant difficulty), measures beyond the implementation of ESG software should be taken to increase data quality and verifiability. After all, even the best solution won’t be of much use if your data isn’t collected properly and eventually leads to flawed, unreliable results. This is why we recommend tasking central figures with monitoring and coordinating the data collection process right from the start and serving as points of contact for others involved in the process. In doing so, it’s especially important that everyone involved knows why the information is being gathered, what the goal is, and what the benefits are. To facilitate related communications and lend technical support to the data collection process, a recurring meeting format can be established, or a separate channel set up that can also be used to ensure quality and track how the process is progressing. In addition, regular systematic checks should be implemented, and any necessary adjustments made in the data collection process to identify and address problems at an early stage.
