ESG: Why is it difficult to manage and report data?*
ESG (Environmental, Social, and Governance) reporting has become a crucial pillar for organizations seeking to comply with legal and regulatory requirements and demonstrate their commitment to climate impact and more responsible practices.
However, despite the topic’s growing importance, organizations face many challenges throughout the process – especially from a technological standpoint regarding data collection, monitoring, and analysis. Let’s take a look:
- Data Complexity: The breadth of ESG data, ranging from water usage, carbon emissions, and waste management to labor policies, gender equality, and corporate governance practices, underscores the need for advanced tools and processes. Automation during the collection, validation, reporting, and analysis stages is crucial. Many organizations lack suitable tools and processes that ensure efficient and accurate information management and integration, comprehensively and rigorously meeting regulatory obligations and stakeholders’ expectations.
- Lack of Uniform Standards: Despite efforts by entities such as the Sustainability Accounting Standards Board (SASB), the International Integrated Reporting Council (IIRC), and the Global Reporting Initiative (GRI), the amplitude and constant evolution of reporting frameworks lead to inconsistencies in how ESG data is presented, compared, and interpreted. This situation results in difficulties for stakeholders (including investors, regulators, and customers/consumers) who seek to evaluate an organization’s sustainable performance in a standardized and objective manner. Without a common language or a coherent set of criteria for measuring and communicating sustainability initiatives, organizations risk having their efforts misinterpreted or undervalued, also increasing the risk of greenwashing incidents.
- Limited Resources: The scarcity of resources – financial, human, and technological—is a hurdle when implementing companies’ sustainability strategies and underscores the need for efficient and innovative approaches to implementing ESG management and reporting systems. Automating software solution development, aided by new functionalities enabled by advances in Generative Artificial Intelligence, is a path that substantially reduces the costs associated with preparing and analyzing these reports and minimizes reliance on large teams of developers/IT.
- Regulatory Changes: Since 2023, the European Union has been taking a proactive approach to standardizing and increasing transparency in ESG reporting through three key regulations: the Corporate Sustainability Reporting Directive (CSRD), the Taxonomy Regulation, and the Sustainable Finance Disclosure Regulation (SFDR). These regulations not only broaden the spectrum of companies required to disclose their ESG practices but also promote more sustainable investment practices and guide organizations in transitioning to a ‘low-carbon economy’, requiring detailed and comparable information to be accessible throughout the European territory. However, the regulatory landscape is also evolving globally, increasing the complexity of reporting processes and forcing organizations to adopt information management solutions with agile adaptability.
- Communication and Interoperability Challenges: The lack of integration between management systems and ESG strategy, as well as with external entity data (suppliers, regulators, etc.), presents substantial technical challenges. Without effective interoperability, it becomes difficult, or even impossible, to combine operational data on resource usage with financial indicators, assess economic efficiency and optimized resource management, or even align HR management policies with ESG objectives to promote diversity and inclusion in the workplace.
Applying the concept of double materiality1 and ESG reporting is not just a regulatory compliance exercise. It represents a commitment to social impact and the climate agenda, promoting greater transparency that reinforces business strategy, stakeholder trust, proactive real-time risk management – including suggesting corrective actions before they become necessary – and retaining new generations of talent aligned with sustainability values.
Organizations of different sizes and levels of socio-environmental impact that recognize and capitalize on these indicators not only strengthen their competitiveness in the market and gain access to more favorable financing and investments but also actively contribute to building a fairer, more ethical future with a reduced climate impact. Ultimately, ESG reporting is not just about situating an organization on the sustainability map but about comprehending the direction the organization and the planet are moving towards.
1The concept of double materiality refers to the need for organizations to assess and report both the impacts of their activities on the environment and society (external materiality) and the environmental, social, and governance risks and opportunities that can affect their own viability and financial success (financial materiality). This concept helps ensure that reports are comprehensive and encompass organizational operations’ external and internal implications.
*this article was initially published on Greensavers.