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Sustainability Reporting

The 5 Biggest Challenges of ESRS Reporting

February 1, 2024

At Daato, we love a good challenge. Reporting challenges are a sign that the practice is progressing and legislation is doing its job to combat greenwashing and to raise the quality of sustainability disclosures. Of course, this means a steeper learning curve for reporting organisations – that’s why we exist! Here are the top five biggest challenges of reporting in compliance with the European Sustainability Reporting Standards (ESRS), with links to helpful tips and guidance.

Double materiality assessment

One of the most talked about requirements of the ESRS is a double materiality assessment. Where it was acceptable before for companies to report topics that are material to the business, now companies must ensure that they report impacts by the business on external stakeholders including the environment. This widens the field of coverage considerably and adds layers of complexity to the materiality assessment process. The challenge lies in determining potential positive and negative impacts all along the value chain, thus involving supply chain risk assessment and stakeholder engagement, both extensive processes in their own right.

Getting and collecting the right data

Data management looks different for each industry, and it’s a misconception that companies with a small supply chain have it easier. Financial institutions, for example, do not have a supply chain, but their portfolios extend to the far reaches of the economy. Therefore, it’s useful to think of value chains in addition to supply chains for data collection.

Where the company operates in environmentally-sensitive areas such as in a carbon-intensive industry or near local communities, this would involve accounting for scale, scope, and severity to assess the impacts – three determinants of materiality according to the ESRS, as well as data on targets and metrics. In the first example (carbon-intensive sector), you would have to conduct carbon footprinting using the GHG Protocol. In the latter example, e.g. the construction of hydroelectric projects may displace large indigenous populations and infringe on land rights, qualitative and quantitative data have to be collected by engaging with community stakeholders to determine potential and real impacts. The nature of data collection in each case is different but both are a challenge without the right expertise.

Having all necessary policies/actions/targets in place

The ESRS requires four areas of coverage for each material topic: governance, strategy, impacts, risks and opportunities, and metrics and targets. Some companies may already take action to mitigate certain risks or impacts, but may not have an articulated governance procedure or coherent strategy at the policy level. You must show planning and oversight of Impacts, Risks and Opportunities (IROs). Sometimes, this may look like setting up a grievance channel to function as a governance mechanism and a whistleblowing policy.

Target-setting is also a huge challenge for many organisations that do not have a strategy in place for material impacts. Depending on the topic, targets can be a scientific or technical process, such as target-setting to achieve net zero which involves not only looking at internal organisational capabilities but also coordinating with national and international ambitions and timelines. For a company to commit to a target, governance and strategy must necessarily be in place to commit, execute, and monitor progress. As you can imagine, this requires massive effort planning across departments.

Reporting in xBRL format

The EFRAG recently approved the draft ESRS xBRL Taxonomy for sustainability reporting. The draft will be published soon for public consultation, after which companies can know exactly what to expect in terms of the presentation of data. This is important because the ESRS requires disclosures to be submitted in xBRL, an electronic reporting format used for financial reporting which involves tagging data according to the taxonomy to make the report easily readable. Companies that are not used to this format will find it a challenge to adhere to this requirement for the first time, especially digitally challenged organisations lacking the capability or expert input.

Auditing

The ESRS requires that reports obtain limited assurance. While assurance is performed by an independent contractor, the challenge for companies is to present verifiable data, a requirement of the ESRS. According to the ESRS definition, verifiability means that data must be able to be independently corroborated by different parties. A simple example is if you reported a certain number of employees in the financial year, and the auditor finds two different numbers, which can happen if you do not define full-time employees and contractors, then the data is unverifiable. This goes back to the issue of traceability, a notoriously difficult achievement in data management.

There are other challenges to ESRS reporting, but with help, you’ll be able to address the biggest ones above.

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