Large businesses residing in the EU are due to publish their first ESG/sustainability reporting under the new EU CSRD legislation in 2025 and non-compliance forms a major risk. IDC’s MarketScape helps organizations select the right technology partners for the CSRD reporting journey.
EU CSRD regulation is imminent, and the risks of not being prepared for this new EU directive are significant for any organization operating within EU markets. With a majority of affected companies not sufficiently prepared, more and more companies are seeking support from technology vendors.
We recently published a MarketScape that offers a holistic assessment of the technology vendors in this relatively new space. Services and technology providers have rapidly started to build capabilities to support customers with the data and technology challenges associated with CSRD reporting and wider corporate ESG/sustainability efforts. With tech vendors expecting these offerings to form a significant future growth opportunity, the race for market share has only just started. The 2024 IDC MarketScape European ESG Technology Services for CSRD Compliance is meant to guide organizations in the selection of technology service providers offering CSRD reporting services in order to identify the most suitable solutions for their organization for today as well as tomorrow’s requirements.
ESG Reporting Set On An Equal Footing with Financial Reporting
At a time where sustainability is no longer a choice but a necessity, corporate reporting on environmental, social, and governance (ESG) factors is taking a significant leap forward with the European Union (EU) Corporate Sustainability Reporting Directive (CSRD), which is placing sustainability reporting on par with financial reporting.
The CSRD, which came into force in January 2023, mandates a phased implementation. The first set of large, listed organizations will have to report according to the 12 European Sustainability Reporting Standards (ESRS) as early as 2025 for their financial year 2024. This new directive is a much stricter regulatory framework than the previous Non-financial Reporting Directive (NFRD), which was not strictly enforced and applied to a very limited number of companies.
The ESRS key performance indicators (KPIs) are now clearly defined and are much more comprehensive, amounting to over 1,000 data points for certain industries. They will be strictly enforced, as they now require external auditing (assurance). Moreover, the ESRS not only cover data points from within the organization but also include upstream and downstream metrics, such as Scope 3 emissions which are harder to obtain in a regular and reliable way as they lie outside the direct control of an organization.
Technology Partner Help To Achieve CSRD Compliance
This new directive sets high standards for data quality, the processes and workflows related to gathering data, as well as data governance. It requires an operating model with workflows, assigned responsibilities, and accountability. Through the harmonization of ESG reporting metrics under the CSRD, a much greater level of comparability and transparency will be achieved. This will have a major impact on companies’ risk profiles and thus gains significant attention at the board and C-levels.
The required ESG KPIs creates a data challenge for organizations, as typically ESG data is not readily available or held in formats that make it hard to collect and process on a regular basis. Organizations subject to CSRD regulations are seeking help from technology service providers to get ready for CSRD reporting and ensure compliance. Those providers, in turn, are positioning themselves to support customers with their CSRD reporting efforts and developing technology service offerings.
Navigating Partner Selection for CSRD Compliance
CSRD compliance is complex and difficult to handle by companies using exclusively their internal resources. Often there is a legacy ESG reporting practice in place due to voluntary initiatives such as reporting according GRI, TCFD, SASB and/or other frameworks. The majority of businesses, however, are not in the position to fully reuse the data, processes and workflows for CSRD compliance. Several important aspects should be considered when selecting a partner for CSRD compliance:
Consider a Full Spectrum of Services and Tech Partners
CSRD partner ecosystem differs in terms of focus areas and core capabilities for CSRD reporting services, namely:
- Advisory-led vendors, typically part of audit companies that have expanded into the IT domain, have comprehensive management consulting capabilities.
- Systems integration (SI)-led vendors have broad capabilities across technology consulting, SI, and outsourcing services with comprehensive expertise in data architectures and integration/modernization of new or legacy business systems.
- Software Specialists: Specialist tech vendors include players that have ESG services as their core business and, in the current case, offer specialist software solutions (ESG reporting software) enhanced with consulting services.
- Multi-disciplinary: These vendors have a broad set of capabilities across professional services, IT consulting, SI, technology assets, and ongoing IT and business process operations.
The IDC MarketScape ‘ESG Technology Services for CSRD Compliance‘ evaluates 11 technology service providers across these areas.
Make Project and Change Management Capabilities a High Priority
Forming a new discipline, CSRD reporting is relatively volatile from the process and content perspectives on both sides – vendors as well as their clients. It is a learning journey with stringent rules and extensive requirements regarding transparent communication between the provider and its customer. Apart from business advisory and technology implementation, services and technology vendors are dealing with shifting the mindset, supporting stakeholders to make the case for CSRD reporting, adding burden to existing tasks, reskilling and training own and customers’ employees. Many organizations embarked on the CSRD compliance journey relatively late, creating pressure on internal stakeholders and external partners. Project and change management capabilities will be of crucial importance in order to lead the CSRD project to success.
Aim for Process, Workflow, and Technology Repeatability and Scalability
CSRD reporting is currently mostly perceived as a business cost item that organizations need to invest time and resources into to achieve compliance. Focus should be on the fact that the organization is also collecting valuable ESG data and insights that can be leveraged for further business transformation: a sustainable digital transformation that is able to drive future business growth. To be able to gain actionable analytics and forecasting capabilities, ESG data processes and workflow need to be digitized for repeatability and scalability. Implementation of ESG data management platforms combined with robust ESG data governance and integration with existing systems will ensure that organizations will be able to capitalize on their investments by leveraging ESG business insights for, for example, generating efficiencies and cost savings across business and/or creating new business models based on sustainability value propositions