"ESG reporting is not a compliance project"

With only a year left before companies need to start reporting on their ESG efforts using a structured framework, the question emerges: How can organizations strategically benefit from this change? To provide insights, Mario Matthys and Maarten Lauwaert from TriFinance share their perspectives. "Sustainability reporting is becoming more complex than implementing accounting standards like IFRS," Mario points out.

In his role as Expert Practice Leader Corporate Reporting, Mario Matthys assists companies in meeting their reporting requirements, encompassing both financial and non-financial aspects. He provides a concise overview of the timeline, distinguishing between large publicly listed companies and smaller unlisted ones.

Mario Matthys: "That first group was already subject to the NFRD, the EU's Non-Financial Reporting Directive. They got substantial criticism over the years. It often appeared to be more about greenwashing, with companies primarily highlighting their successes in glossy brochures, offering little real value.

"Under the new CSRD (Corporate Sustainability Reporting Directive) legislation, these companies are now mandated to collect data starting from 2024 and report from 2025. Ideally, this reporting will be integrated with their financial figures, resulting in an integrated report. The deadline is approaching rapidly."

"For smaller, unlisted companies, the CSRD applies if they meet at least two of the following three criteria," explains Mario. "These criteria include having a workforce of 250 full-time equivalents (FTE), a balance sheet total exceeding 20 million euros, and a turnover surpassing 40 million euros. Companies falling into this category will have an additional year; they are required to report on their 2025 figures starting in 2026. Adjusted rules for small and medium-sized entities are anticipated by 2028.

For context, within Europe, approximately 10,000 companies were already subject to the NFRD. With the introduction of these additional criteria, this number will increase to 50,000. Mario emphasizes that the rules are already in place for these companies.

"These regulations are still in the process of being incorporated into national legislation, with the possibility of minor adjustments, such as the reporting format. However, it's crucial not to delay action. Everyone is already aware of their current status and should proactively begin addressing these requirements now."

And that's where challenges arise. "There is a category of companies that view ESG reporting as part of their DNA," says Mario. "They have a dedicated sustainability team; they have set clear goals, and they demonstrate a genuine commitment. But that category represents a minority. Typically, these are large publicly listed corporations already familiar with NFRD, having gained prior experience. Nevertheless, they, too, face substantial work ahead, as CSRD is a lot more complex than NFRD.

"Then you have a category of companies that understand what needs to be done. In other words, awareness is already present. But they have yet to take action, and time is starting to run out.

"Lastly, there's a third category of companies that remain entirely unprepared. Boards and management may be disengaged or dismissive of ESG efforts. You would be shocked which big names are among them. Occasionally, I hear board members express doubts, saying: 'That's never going to come through!'. Guys...it ìs already there."

"Change management and raising awareness are significant challenges," Mario explains. "When I visit companies, I emphasize from the start that this isn't just about compliance. It's common to see surprise on people's faces, with questions like, 'Aren't we required to report according to certain standards and achieve objectives?' Yes, that's true, but the fundamental step is to genuinely believe that your company can contribute to a better environment, create a larger social impact, and initiate better governance. The reporting requirement is merely a consequence of this awareness. Once that awareness exists, you're already moving in the right direction."

Over time, this mindset will play a significant role in shaping your competitive position. “It's not an option, but a necessity,” Mario Matthys says. “Companies that do not engage in these efforts risk putting themselves out of business. Competitors will overtake them on all sides. We are already witnessing procurement departments inquiring about initiatives to mitigate CO2 emissions, waste management strategies, and a company’s energy mix. That’s not to mention bank loans. If you seek financing in years to come and fail to meet ESG standards, it may prove challenging, or you may face higher costs."

If your company finds itself in the second category, where you are aware of the need for ESG initiatives but haven't yet embarked on the journey, how do you get started?

Mario advises turning to experts who have a deep understanding of the landscape. "And begin with the basics," he suggests. "Seek assistance from those who are well-versed in the field. In my client interactions, I kickstart the process with a concise half-day awareness session. We explore what's currently happening, what's on the horizon, and the strategies to address these changes. The emphasis is on convincing stakeholders that these developments will reshape their business strategies. While it's possible that products may become pricier, consumers are increasingly willing to pay a premium for products that demonstrate greater sustainability compared to their alternatives."

Another pivotal concept that arises at this stage is the notion of double materiality. "Engage with all your stakeholders, including the board, management, staff, customers, and suppliers," Mario elaborates. Understand what they consider crucial for the company. This inquiry spans two dimensions: our impact on the planet, people, and governance, as well as the impact of ESG factors on us. These discussions will pinpoint the critical topics that will shape your reporting agenda. These topics can encompass areas such as energy consumption, CO2 emissions, employee well-being, and more. Each company will approach this in their own unique way."

The third step involves conducting a fit-gap analysis. Mario explains, "Assess your existing resources and practices to identify what you already have in place and where gaps exist. Many companies don't need to start entirely from scratch; they often have a foundation to build upon. However, it's crucial to acknowledge that this foundation is often incomplete and requires enhancement."

Once you take those first three steps, you'll find yourself a few months further down the road, Mario says. But the real work starts after that. "You need a robust framework that can effectively guide your efforts. Let’s say you have solar panels on your roof: how are we going to measure exactly what impact they have? What does this mean for us? Who is responsible for this? In addition to establishing this framework, careful consideration must be given to data collection and management for reporting purposes. That's where Maarten Lauwaert comes in.

In his role as Expert Practice Leader Data & Analytics, Maarten highlights a common issue with data: its scattered all over the company. "Data resides in various corners, from Legal and Procurement to HR and Finance, etc" he explains, "often in diverse forms and formats, ranging from Excel sheets to state-of-the-art software solutions. The challenge is not only collecting this data but also consistently consolidating it and presenting it in a unified format for reporting. Furthermore, the establishment of Key Performance Indicators (KPIs) is essential, along with their measurement and ongoing tracking."

When collecting data, it’s a good idea to work with central data platform, such as a data warehouse or data lake, to aggregate data from different departments. "We consider ESG data as just a new category alongside financial, operational, and sales reporting," he notes. "Ideally, you use the existing data environment and team to collect and manage this new data. This approach is more efficient than setting up yet another new environment or application for ESG data. For companies without an existing data environment or team, ESG reporting can serve as a catalyst to evaluate their entire data strategy, determining the most suitable data architecture and organization to facilitate timely and high-quality reporting."

Reusing the existing architecture also has the advantage of being future proof. "While CSRD is a current priority," Mario adds, "other regulatory developments like the EU Taxonomy and due diligence directives are on the horizon. You may also encounter supplier questionnaires that demand data provision. Therefore, effective data management remains a critical ongoing endeavor, as new requirements continue to emerge."

A significant number of companies entrust the responsibility for ESG reporting to their Finance department, and this isn't a coincidence, according to Mario. "Financial consolidation is often the only global process that involves data consolidation. Departments like Procurement, Legal, HR, or Operations typically lack such deadline-driven processes, or they have less of them anyway. As a result, Finance often has to light the path. While they may not possess the content expertise initially, they are often familiar with the reporting process."

"In many cases, companies encounter data that hasn't previously found its way into the data lake or data warehouse,” Maarten adds, “either because it was never there or because adding it would be too costly. Furthermore, some of the required metrics are qualitative and textual, not numerical. Chances are, different departments have to provide that data manually. This often necessitates manual data collection from various departments. So you will have to question those manually supplied KPIs in various organizational divisions. This, in turn, requires meticulous follow-ups, capturing data quality through workflow processes."

To facilitate this process, specialized solutions are available in the market. Several Corporate Performance Management (CPM) tools now include ESG modules tailored for this purpose. An additional benefit is that numerous companies already utilize a CPM tool for their financial reporting. By extending an existing CPM solution with an ESG module, it becomes possible to seamlessly create an integrated report containing both financial and ESG information, all within the same CPM application.

All those efforts eventually culminate in an integrated report. Or, as Mario calls it, the ultimate reporting deliverable. "Such an integrated report does have to contain specific elements: You have to describe your entire value chain, your risk assessment, your targets, and your actions, and of course you have to make the link with the financial figures. If you can do that in one application, it becomes significantly more straightforward."

For those already utilizing an EPM or CPM software, the incorporation of ESG data can be highly advantageous, streamlining management within a single environment.. "That way you can support the entire process, both in terms of procedure and data," Maarten says. "Starting from the double materiality analysis, moving on to determining the KPIs, data capture, and ultimately, the construction of the integrated report."

Existing ERP solutions can also assist in data capture. Mario gives an example. "If a company books an expense in its ERP, let’s say a trip to New York, data needs to be captured, including additional details like the miles flown, aircraft used, and any stopovers. The system then automatically calculates the associated CO2 emissions. The effectiveness of such tools can vary depending on your approach to ESG reporting. Some niche players may find specialized ESG tools more fitting for their specific needs."

Above all, you need to have a plan about where you are going," Maarten concludes. "This applies to both your KPIs and your technology. Even on a limited budget, you can strategically implement changes over time, step by step. The key is to initiate the process, create a plan, and most importantly, do not postpone it."