Most businesses are struggling to prepare their data to meet a new European regulation that is designed in part to deliver huge troves of corporate ESG information into financial institutions’ systems.
More than four-fifths of companies questioned in a study by data mastering company Semarchy said they lack confidence in their data management capabilities to meet compliance requirements under the European Union’s Corporate Sustainability Reporting Directive (CSRD).Further, a quarter of the 1,000 IT professionals and chief data and information officers surveyed said they doubted the accuracy of their data, and a third admitted they had adopted a cautious strategy towards compliance as deadlines approach in the next 12 months.
“With regulatory uncertainty and rising expectations around sustainability reporting, many organisations view compliance as a significant hurdle,” said Semarchy EMEA global sales and global manager Hervé Chapron. “The challenge isn’t always a lack of data — it’s often about ensuring its reliability and trustworthiness.”
Poor Quality
Any CSRD data log-jam would hinder financial institutions’ own ESG reporting obligations under the Sustainable Finance Disclosure Regulation (SFDR), whose requirements will also evolve in the coming year. Under the SFDR, institutions must declare the ESG performance of their investments. But without the data that the CSRD is expected to generate – covering about 50,000 listed and large private companies operating in Europe – their own disclosures will be of poorer quality and liable to hamper crucial investment and risk management decisions.
One of the key challenges to firms reporting their ESG data is their ability to create digitally tagged, machine-readable reports, the study said.
“The creation of these reports requires not only robust data integration, but also standardised data formats, automated tagging processes, and the ability to reconcile disparate data points into a cohesive and compliant structure,” the Semarchy CSRD Data Readiness Report stated. “Without setting the right unified data foundation, achieving the precision required by the CSRD is next to impossible.”
Added Burden
Large companies have been subject to parts of the CSRD’s requirements since January last year and further obligations were placed upon them this year. Small businesses will be in focus from January next year.
Amid a clamour of discontent over the expectations placed on businesses, the EU is about to suggest reforms to streamline its sustainability reporting procedures. The proposed Omnibus Simplification Package (OSP) is designed to reduce the reporting burden for businesses that are subject to an array of ESG regulations created under the bloc’s Green Deal. If adopted, it will reduce disclosure obligations by a quarter for all companies and lower them by 45 per cent for small and medium-sized enterprises.
Nevertheless, the OSP – which is expected to be outlined this month – has been criticised for diluting the EU’s sustainability drive and putting yet more regulatory loads on the shoulders of businesses.
Judy Kuszewski, chief executive of sustainability consultancy Sancroft International, said that the OSP will weaken the standards it sets out to streamline – the CSRD, the Corporate Sustainability Due Diligence Directive (CSDDD) and the EU Taxonomy, which provides the basic framework for the EU’s ESG regulations.
“Rather than helping, we believe this drive towards standards interoperability threatens the value of existing standards and will weaken protections for people and the planet,” Kuszewski wrote in a mailout. “It will also cause serious headaches for businesses that have already invested significantly in compliance with CSRD and CSDDD.”
Some Optimism
The Semarchy CSRD Data Readiness Report did have some bright spots. It found that two-thirds of respondents had appointed senior data professionals to oversee auditing of CSRD-related data and about the same proportion said they recognised sustainability reporting as having business value as well as being a regulatory burden.
“It is not merely a reporting obligation but fundamentally redefines the essence of how organisations drive their operational and commercial strategy,” Xavier Gardie?s, senior partner, head of consulting at French data consultancy firm Micropole wrote in the report. “It requires companies to undertake a business-wide project that engages the entire value chain.”
The report’s authors said that the shortcomings found among companies were not due to a lack of data. In fact, they said, nine-tenths had been gathering data for at least year. The problem was in data management and data auditing.
“Organisations must shift their perspective on compliance and reporting,” wrote Chapron. “Rather than viewing it as a complex burden, businesses can leverage the centralised data for better decision-making and create long-term value. Simplified data management turns audit-readiness into a strategic advantage.”
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