Part 4: Blog in Progress – future content will be published & linked here
This is the first part of a blog series that I´m going to publish about the SAP Sustainability Control Tower. The SAP Sustainability Control Tower was launched in December 2021 and therefore the solution is evolving constantly. On November 7h, 2022, the solution was re-launched as a standalone solution [version 2022.10]. As sustainability is a strategic priority at SAP, new releases and capabilities of the solution will follow.
In this blog post I will give an overview about what ESG Reporting is and why it is important as well as current challenges that come up followed by steps that can be taken for a holistic steering and reporting approach.
This blog series is continuously updated depending on new changes to the product.
What does ESG Reporting mean and why is it important?
ESG Reporting: Data Value Journey
ESG Reporting: How to get started with sustainability reporting
ESG Reporting: Challenges
ESG Reporting: Steps
What Does ESG Reporting Mean and Why Is It Important?
Whether you´re new to the topic or you´re already familiar with it, I quickly want to explain what ESG reporting means and why it´s important for companies of any size.
ESG is an abbreviation for Environmental, Social and Governance (German: Umwelt, Soziales und Unternehmensführung). Basically, it is describing the three sustainability-related areas of corporate responsibility within companies.
Companies must report their environmental impact annually to fulfill
Expectations of Share- and Stakeholders,
Regulations (e. g. national laws, EU-Taxonomy),
International Agreements (e. g. Sustainability Development Goals, OECD Guidelines),
Comply with Standard Provider Organizations (GRI, SBB, IFRS),
Business Initiatives (WEF, VBA) &
Sustainability Rating and Data providers (Sustainalytics, Vigeo)
What we see is that the world is changing from a classical Profit & Loss to an Environmental Profit & Loss Staement approach.
Source: SAP | The Evolution of Financial Reporting
A lot of our customers are doing sustainability reporting manually (yes, with Excels!) which is time-consuming, results in high error rates and little transparency. Especially, when a lot of suppliers and other parties are involved, it gets more and more unclear.
For further information about getting ESG Reporting and Performance Management under control, Gunter Rothermel is explaining the importance as well as how you can “get lost in the “fog” created by the “alphabet soup” of sustainability standards” in his blog post. He´s also giving some further and very important information on why this topic is important. This is why I´ll continue to give you some more insights about the data value journey, challenges and steps of ESG Reporting.
To sum it up, companies struggle with an increasing complexity of an end-to-end sustainability reporting which is auditable, up-to-date, timely and of course integrated along the entire value chain.
ESG Reporting: Data Value Journey
In the following image you see the data value journey regarding holistic steering and reporting.
Source: SAP | Data Value Journey
The least mature and least benefit generating stage is reporting sustainability metrics on an island. Most of our customers still use spreadsheets, which is a good starting point but not sufficient to be able to keep up to date with the constantly developed further sustainability frameworks.
For generating more value, data needs to be acquired, enriched and automated. Especially, data input plays a key role. As sustainability itself is complex, we do not only have one data source in order to report on a holistic level. So with any automation, we are able to eliminate errors and system breaks. A structured data acquisition is necessary to harmonize sustainability data as well as building up structures that can be used in the future.
The third stage focuses on the changing sustainability reporting requirements. It is important to have a single source of truth that can be used to report on parallel semantic frameworks. Moreover, it is necessary to validate the data and do risk identifications.
The final and most admired stage (also the most mature one) generates the greatest business value and is about managing the total ESG performance and impact. If for example non predictable circumstances happen such as the COVID pandemic, we need to know which impact such an event has on our sustainability performance.
ESG Reporting: How to Get Started with Sustainability Reporting
Sustainability reporting has taken on a very special significance in 2022. But how can holistic ESG reporting look like and what steps are necessary to achieve this?
Source: Adobe Stock | ESG Reporting Steps
Although sustainability per se has been an important and serious topic in the corporate context for many years, companies are under pressure to disclose their sustainability-related economic activities due to regulatory influences.
We already know what ESG Reporting is and why it is important. So what are the challenges and more importantly what steps need to be taken by companies?
ESG Reporting: CHALLENGES
Challenge No. 1 - Data Collection
The first challenge addresses data collection. As explained already, many companies still collect their data manually (result: needs a lot of time, errors, data quality issues, etc.).
What is really important, are Scope 1-3 emissions that play a crucial role. In contrast to Scope 1 and 2 emissions, which can be collected "relatively" easily, there are major hurdles to collect and report on Scope 3 emissions along the entire value chain. In addition, it is difficult to obtain concrete sustainability values, which is why a lot of companies rely on average values (from sustainability providers for example).
Challenge No. 2 - Reporting on Frameworks
Over 600 different regulatory frameworks and standards are continuously being developed further. The sustainability reporting landscape is extremely heterogeneous which is very challenging for companies. Questions that may arise are: What should I report on? Which frameworks should I follow or consider and how can I include my company- or industry-specific KPIs?
Challenge No. 3 - Linking and looping it back to business processes
The last challenge is the integration of sustainability reporting into current core business processes. What we see often is that the sustainability strategy is still disjoint from the corporate strategy and business model.
Sustainability must be addressed systematically. It needs to be integrated into current core processes to achieve sustainable success and adapt to changing consumer preferences, global resource shortages and new regulations.
All in all, this raises another question: what steps are necessary for a holistic and integrated ESG Reporting?
ESG Reporting: STEPS
The following steps could be a starting point and can be followed:
Step No. 1 - Identify ESG risks, metrics and subsequent data collection
The first step is to establish a foundation of sustainability metrics. In this step,it is important to involve company stakeholders such as finance or HR. Successful ESG reporting should never be done as a silo.
In addition, risks must be identified and potential impacts defined. Subsequently, data must be collected along the entire value chain. In a perfect world, this process should be automated as much as possible. Therefore, a single source of truth of sustainability data is key for successfull ESG Reporting. Having data in the right place at the right time - always!
Step No. 2 - ESG Reporting
As in any area related to analytics, data quality must be good and data must be available to derive the right business decisions. Companies should focus on an open and extensible solution that enables reporting on parallel semantic frameworks but also the creation of own industry- or company-specific KPIs.
In addition to the typical reporting functionalities (drill-downs, filtering, etc.), it is important that actual data is compared to targets and thresholds are determined. This results in variances, which can be used to identify deviations. Furthermore, trends in sustainability values should be taken into account (e.g. supported by forecasts). Following these steps, company own ambitions can be identified and evaluated. No need to mention this, but I do it anyways: Reporting should be supported by meaningful visualizations of course so that end users can draw conclusions easily.
Step No. 3 - Planning and integration into existing business processes
The final step is to ensure that the reporting process is audit-proof and embedded into existing business processes. It is important to evolve from an annual to a continuous reporting. Continiuous monitoring allows to achieve targets much quicker. In addition, company internal projects and initiatives should be created to influence (increase or decrease) certain KPIs.
In summary, it is indispensable for companies to deal with ESG reporting. Even companies that do not fall under the current necessity of reporting on ESG, are advised to start establishing sustainability reporting now (otherwise it could be "too" late to arrange the right steps and preparations).
Clearly, the benefits of holistic steering and reporting are undeniable. Companies that integrate sustainability into their core processes consistently outperform their competitors.
Lastly, a holistic and integrated reporting not only addresses stakeholder needs, but also provides opportunities to transform emerging social and environmental risks into business opportunities.
In conclusion, sustainability and ESG reporting should be seen as an opportunity rather than a challenge.