Sustainability regulation presents an opportunity for companies to protect themselves from greenwashing and should be regarded as a chance to showcase progress “rather than a box-ticking exercise”.
That’s the view of Deloitte’s ESG reporting and assurance lead, Hollie Keating, who believes that prioritising action in this area is essential to avoid the risk of damaging your brand and eroding stakeholder trust.
“Stakeholder and societal expectations have evolved to the point where ESG and reputation management are interconnected. It’s great to see the growing commitment to transparent reporting, but too many businesses view ESG as a compliance and regulatory issue rather than an opportunity to achieve competitive advantage. It’s a real missed opportunity.”
Sustainability is an increasing area of focus for Deloitte, with a global €900 million investment announced last year, including the establishment of the Deloitte Centre for Sustainable Progress. The Irish firm has also committed €500,000 as founding partner to the DCU Centre for Climate and Society, which held its annual conference last week.
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Deloitte Ireland’s sustainability practice is focused on supporting clients across the full breadth of their sustainability journey – with expert teams led by Keating, Orla Dunbar, ESG data and technology; Aoife Connaughton, strategy and decarbonisation; and Marc Aboud, risk and regulation.
One of the most significant developments for Irish firms is the forthcoming introduction of the Corporate Sustainability Reporting Directive (CSRD) in January, which will affect over 50,000 large and listed companies across Europe.
Keating says that that the legislation will have “major implications” on ESG disclosures and is more wide-ranging than many companies have realised.
Deloitte’s ESG data and technology lead, Orla Dunbar, agrees, highlighting that regulators are going to hold sustainability data to the same standards as traditional financial information and data collection processes will need to become significantly more robust in order to respond.
“The integration of ESG into financial disclosures will require changes in strategy, process and technology — and organisations need to start preparing now. It’s very easy to get lost and many of our clients are overwhelmed, struggling to understand where to begin. The good news is that much of the data required for sustainability disclosures already exists within a business, but the correct approach is needed to bring this together.”
Furthermore, there are financial consequences to consider. Organisations seeking financing are now finding that banks, private equity firms, and other potential investors are asking questions regarding sustainability performance and social impact.
“Going forward, the assurance of ESG and sustainability disclosures by independent parties will be integral to enhancing the confidence of stakeholders utilising this information for decision-making purposes,” Keating adds.
Deloitte’s six practical steps to prepare for upcoming regulation:
1. Prepare to report under multiple frameworks and prioritise the must-haves
Due to the lack of a universal sustainability reporting standard, organisations will need to comply with various mandatory disclosure frameworks in the short and medium term. Start by understanding and complying with mandatory reporting – both as it currently exists and as it evolves.
Prioritise investments in data and technology to automate the continuous collection and prepare the “must-have” metrics. Once you have gotten to grips with current and emerging mandatory reporting, find the right voluntary standard(s) to adopt.
“Given the significance of ESG disclosures for determining access to resources such as capital and talent, the strategy of going above and beyond compliance is recommended once you have the data and reporting infrastructure in place to support it,” says Keating.
2. Focus on transparency, reliability and comparability
Integrity and transparency are key in sustainability reporting to avoid greenwashing and reputational risk. Improving the quality and consistency of ESG disclosures enhances transparency, but that transparency needs to focus on what investors and other stakeholders need to know to assess a company’s performance in a number of aspects including economic, environmental and social.
“Organisations are expected to share details in relation to their ESG strategy, and progress against commitments, along with information around their transition plans. It is not enough to only disclose what your ambitions are, you need to demonstrate progress against key performance indicators,” explains Keating.
“Move away from broad statements and provide evidence to substantiate the claims being made to avoid any potential risks of greenwashing. Consistency across disclosures is critical and a big area of focus in our reviews, and in the eyes of stakeholders and regulators.”
3. Develop a single source of truth for ESG data
The most significant barrier to improving the quality of ESG data is the fact that the data is widely dispersed and difficult to aggregate. Under the CSRD, independent assurance of sustainability will become obligatory. Organisations will quickly need to focus on delivering investor-grade data that is accurate, auditable and timely to facilitate the audit and assurance process.
Dunbar recommends taking a holistic approach to ESG data, ensuring that there is a “single source of truth” as many companies can tend to work in silos.
“Begin by developing an ESG data and technology roadmap that balances tactical, short-term solutions with a strategic, long-term vision. In many cases, companies already have a lot of the required data for sustainability reporting, however it is stored across functional silos. Focus on integrating your data into a centralised data platform, leveraging existing data sources and applications, before building a common data model to facilitate a shared language for ESG reporting across the business.”
4. Embrace technology to deliver accurate and auditable reporting
Business leaders need to rapidly assess whether their current ESG reporting processes and technologies will support the investor-grade data and reporting required for the audit and assurance process, as well as the flexibility to support rapidly evolving reporting needs for years to come.
Investment in integrated digital solutions, capabilities and architectures to monitor and optimise sustainability performance is essential for long-term resilience.
“Clients tell us time and again that they are relying on manually maintained spreadsheets for all aspects of sustainability reporting, from data collection to transformation and final presentation,” explains Dunbar.
“Organisations need to invest in automated data collection and architecture that supports a shift away from annual reporting towards continuous performance management. When it comes to front-end reporting solutions, focus on tools with the capabilities to facilitate disclosures in line with a wide variety of frameworks.”
5. Put finance in the driving seat
While there isn’t a consistent approach in determining who is responsible for overseeing ESG within an organisation, recent financial reporting standards have directed attention towards finance.
“Finance can use its existing skills and systems in areas such as internal and external reporting, cross-functional collaboration, financial management, governance and risk management, and investor relations, to spearhead the organisation’s ESG endeavors,” says Dunbar.
6. Embrace the opportunity
Acknowledging that companies are facing “genuine challenges” when it comes to meeting the new reporting obligations, Keating believes that those who invest and make a strategic commitment in this area will gain a competitive edge.
“Sustainability data is increasingly being used by investors, businesses, governments, market regulators, employees, and consumers to inform crucial decisions. It is vital that the data used in these decisions is of high quality, accuracy, and reliability. Inaccurate ESG data can erode trust in markets, lead to poor decision-making, and derail efforts towards genuine sustainability.
“To overcome these challenges, business leaders must prioritise investments in reporting transformation and digital enablement. It won’t be easy but will present immense opportunities for companies who get it right.”
Find out how Deloitte can support your company with ESG data and reporting at www.deloitte.ie/sustainability.
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