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Can financial reporting solutions effectively support ESG reporting requirements?

ESG reporting is becoming more important for businesses. Some are thinking about using their financial reporting tools for this. But with ESG covering so many areas, can these tools really do the job? Let's look into the challenges of this approach.

The Significance of ESG Reporting in the Corporate Reporting Landscape

Environmental, social, and governance (ESG) reporting has become an important part of corporate reporting. ESG metrics help investors and stakeholders to evaluate the overall risk and sustainability of the company’s performance. As a result, companies are under increasing pressure to report on their ESG performance, but they face several challenges while doing so. One of the primary challenges is choosing the right software solution to collect and report ESG metrics. Some companies consider using financial reporting solutions for ESG reporting. But will these solutions offer a fitting solution for the challenges ESG reporting will pose? In this blog post, we will discuss the limitations of using financial reporting solutions for ESG reporting.

A single-function solution for a cross-functional challenge?

ESG is by definition a cross-functional topic. Typically, human resources will play an import role in social topics, procurement, and operations will play major roles in environment topics and governance touches management all over the board. Almost every function within a company needs to contribute. So a solution for ESG reporting needs to bring insights from all these functional area’s together. Financial reporting solutions were designed with the financial user group in mind. Typically, spreadsheet-like user interfaces and formal workflows are being used. These solutions might not be a good fit with the needs of other functions in your organization. This can undermine user adoption of this relative new process in your organization.

What is the appropriate investment for an ESG reporting solution?

Since ESG reporting is a topic that touches many functions in your organization, many people must be involved. In financial reporting, only professionals in the finance function are involved. A financial reporting solution typically carries a price tag that is based on that focused user base. In ESG reporting, things are different. Much more people are involved but often for just their part of the total ESG scope. When you multiply the number of people involved in the ESG reporting process with the average price tag of a financial reporting solution, you will soon conclude that the total cost for a financial reporting solution to support an ESG reporting process is very high. This is the reason why some organizations collect data from non-finance functions using data-interfaces and spreadsheets. This tactic has multiple drawbacks, one we will discuss in the next paragraph.

How can a financial reporting solution break the audit trail?

Assurance is one of the concerns you wouldn’t expect when you use a financial reporting solution for ESG reporting. Finance systems are built for compliance, and assurance is in the roots of these solutions. So why is this a concern for ESG reporting? The main cause for this is the use of spreadsheets to collect data from non-finance functions as a first step in the process. This solution is often implemented for the two reasons we mentioned in the preceding paragraphs (quality of the user interface and cost per user). By using spreadsheets, the audit trail is broken and assurance is extra complicated and costly. A good ESG reporting solution offers an unbroken audit trail, storing all data, comments and documents in one managed environment.

Is ESG reporting solely focused on numbers?

ESG reporting differs from financial reporting in another important way. ESG reporting is far more qualitative than the more quantitive financial reporting. So capturing the ESG data can be a challenge in a financial reporting solutions. For instance, items where you need to use a likert scale, can be a challenge. Of course, workarounds can be created to overcome these challenges but it is clear that these solutions were designed for a different audience and different challenge.

Going beyond the boundaries of your own organization?

ESG reporting is more and more driven by supply chain dynamics. There is much emphasis on scope 3 emissions in recent regulations. Topics like sustainable sourcing are driving the need to collect data far beyond the boundaries of your own organization. Simple usage data can be collected by using interfaces or files, but for more insight into your supply chain, you need more advanced ways to collaborate with your supply chain partners. This can be a challenge for financial reporting solutions. By design, they are focused on a user group within your own organization.

Conclusion: financial reporting solutions cannot do it alone

In conclusion, while financial reporting solutions have served corporations well in the field of financial data aggregation and reporting, they fall short when it comes to the multifaceted and comprehensive demands of ESG reporting. The cross-functional, qualitative, and extended supply chain nature of ESG data requirements necessitates a solution that is inherently more collaborative, flexible, and comprehensive. Leveraging purpose-built ESG reporting software that can cater to these unique needs is a critical step towards successful and effective ESG reporting. Therefore, while financial reporting solutions may form a component of your ESG reporting process, they cannot be the complete solution. Be sure to consider this when planning your ESG reporting strategy.

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