Environmental, Social, and Governance (ESG) data collection has become a critical task for companies as they strive to meet the new disclosure requirements under IFRS S1 and S2 introduced by the International Sustainability Standards Board (ISSB). These standards aim to provide investors and stakeholders with consistent, transparent, and comparable sustainability-related information.
- IFRS S1 focuses on the disclosure of sustainability-related financial information, requiring companies to provide a holistic view of their sustainability risks and opportunities.
- IFRS S2 is specifically aligned with the Task Force on Climate-related Financial Disclosures (TCFD), and mandates detailed climate-related disclosures, including greenhouse gas emissions and climate-related risk management.
However, for many companies, especially in the UK, complying with IFRS S1 and S2 in UK presents significant challenges in collecting, processing, and reporting ESG data. This blog explores the biggest hurdles in ESG data collection and how dedicated ESG software can streamline compliance efforts.
Biggest Hurdles in ESG Data Collection for IFRS S1 and S2 Compliance
1. Fragmented and Siloed Data Sources
One of the biggest challenges in ESG data collection is the fragmentation of data across different departments, systems, and regions. ESG data is often spread across multiple sources, including:
- Operational data from manufacturing plants
- Supplier information from procurement teams
- HR data for diversity and inclusion metrics
- Energy consumption and emissions data from environmental systems
Siloed data systems make it difficult to aggregate, standardise, and report ESG metrics accurately. Companies must integrate this information to create a unified and consistent dataset, which can be a time-consuming and complex task.
2. Lack of Standardization and Consistency
Even within the same organisation, ESG data is often recorded using inconsistent metrics and reporting formats. Different business units may use varying methodologies to measure the same data points, such as carbon emissions or resource consumption.
- Inconsistent Definitions: Metrics such as “carbon footprint” or “water usage” may be defined differently across business units, leading to inconsistencies.
- Data Quality Issues: Without standardised processes for data collection, companies risk inaccuracies and inconsistencies in the reported information.
Given that IFRS S1 and S2 UK require consistency and comparability in ESG disclosures, ensuring data standardisation becomes a major hurdle.
3. Difficulty in Measuring Scope 3 Emissions
Scope 3 emissions — indirect emissions that occur in the value chain, including suppliers and customers — are particularly challenging to measure and report. Scope 3 emissions often account for the largest portion of a company’s carbon footprint, yet they are the most difficult to quantify due to:
- Lack of Supplier Data: Suppliers may not provide the necessary emissions data, or their reporting practices may not align with the company’s standards.
- Complex Supply Chains: Companies with complex, global supply chains face difficulties in tracing and aggregating emissions data across multiple tiers.
Since IFRS S2 mandates disclosures related to climate-related risks and emissions across the entire value chain, measuring Scope 3 emissions is essential but remains a significant challenge.
4. Ensuring Data Accuracy and Auditability
ESG disclosures under IFRS S1 and S2 UK require accurate, verifiable data to ensure stakeholder trust and regulatory compliance. However:
- Human Error and Manual Processes: Manual data entry and reliance on spreadsheets increase the risk of errors and inconsistencies.
- Audit Challenges: Ensuring audit-ready data for ESG reporting is complex, as it involves cross-checking multiple data points from various sources.
Without robust processes to validate and audit ESG data, companies risk submitting inaccurate or incomplete disclosures, leading to reputational and regulatory consequences.
How a Dedicated ESG Software Helps Overcome These Hurdles
To address these challenges and facilitate compliance with IFRS S1 and S2 UK, companies are increasingly turning to dedicated ESG software. These platforms automate, streamline, and enhance the entire ESG data collection and reporting process, offering several key benefits.
1. Centralized Data Collection and Integration
A dedicated ESG software integrates data from multiple sources into a centralised platform, ensuring that all relevant information is captured and consolidated.
- Seamless Integration: ESG software connects with existing enterprise systems, such as ERP, HR, and procurement platforms, to pull data in real time.
- Automated Data Aggregation: The software aggregates data from various sources, eliminating manual errors and improving data accuracy.
2. Standardization and Consistency
ESG software ensures consistency in data collection and reporting by applying standardised methodologies and frameworks.
- Predefined Templates and Frameworks: Many ESG platforms come pre-loaded with templates aligned with IFRS S1 and S2 and other global reporting standards.
- Automated Validation Checks: Built-in validation mechanisms identify inconsistencies and errors, ensuring high-quality data.
- Enhanced Measurement and Reporting of Scope 3 Emissions
Dedicated ESG platforms simplify the measurement and reporting of Scope 3 emissions by providing:
- Supply Chain Mapping Tools: These tools enable companies to trace emissions across their value chain.
- Data Collection Portals for Suppliers: Some ESG platforms provide portals for suppliers to report their emissions data, ensuring alignment with corporate reporting standards.
4. Improved Accuracy and Auditability
ESG software enhances data accuracy and auditability by providing a structured, traceable system for capturing, verifying, and storing ESG data.
- Audit-Ready Data Trails: The platform maintains a comprehensive audit trail, making it easier to verify data and comply with regulatory requirements.
- Real-Time Monitoring and Alerts: ESG software provides real-time monitoring and alerts for potential inconsistencies, ensuring that errors are detected and corrected promptly.
Conclusion
As companies navigate the complexities of ESG data collection and reporting under IFRS S1 and S2 in the UK, dedicated ESG software emerges as an essential tool for overcoming the biggest hurdles. By centralising data collection, ensuring consistency, improving accuracy, and facilitating audit-ready disclosures, ESG platforms empower organisations to meet regulatory requirements while enhancing transparency and accountability. As the regulatory landscape continues to evolve, investing in robust ESG software will be key to maintaining compliance and building long-term stakeholder trust.
