Why Master Data Management should become the foundation for ESG reporting

September 18, 2023
4 mins.
Martin Kjeldsen

Why Master Data Management should become the foundation for ESG reporting

Master Data Management (MDM) will play a pivotal role in helping larger organisations compile and collate the necessary data that is required to fulfil the new European Union’s ESG (Environmental, Social, and Governance) impact reporting directive, slated to take effect for the 2024 financial year.

The change in having to publish findings on a company’s impact across the ESG elements will affect 50,000+ organisations who will be required to detail how their business strategy will mitigate the risks associated with the ESG issues and figures that they disclose in their reporting. 

What are the ESG elements that companies will have to report on? 

In regards to ESG, each element in the required reporting would need to be addressed and data provided on the following:

Environment: This focuses on a company’s adherence to environmental regulations and the impact they have on the natural environment; from factors such as carbon emissions, to energy consumption, pollution prevention, water and marine resources, biodiversity, resource conservation, waste management, renewable energy and efforts towards mitigating climate change.

Social: This encompasses a company's impact on society at large and its stakeholders (employees, customers, communities, suppliers, and other parties), evaluating how a company manages its relationships with those affected by its operations. Social factors include employee welfare, labour standards, diversity and inclusion, human rights, community engagement, product safety, customer satisfaction, privacy protection, and social contributions.

Governance: The internal systems and structure of corporate decision-making, oversight, and accountability will be reported on. Focusing on a company's internal controls, transparency, business ethics, and effectiveness of the board. Key governance factors include board composition, executive compensation, shareholder rights, risk management, anti-corruption measures, disclosure practices, and adherence to legal and regulatory requirements.

New CSRD regulations means ESG reporting for many more companies in Europe

In early 2023, the Corporate Sustainability Reporting Directive (CSRD) entered into force. This was a new piece of European Union legislation, a directive created to modernise and strengthen the current rules concerning the social and environmental information that companies have to report. 

The CSRD directive will directly impact large companies, as well as listed SMEs (Small and Medium sized Enterprises), who will now be required to report on sustainability. The directive however does exclude “micro” companies, those with less than 10 employees or below EUR 20 million in turnover.

Updating existing reporting directives in the EU

The CSRD aims to strengthen and extend the scope of the existing EU reporting requirements from its predecessor, the Non-Financial Reporting Directive (NFRD) that had impacted 11,700 companies, based on a much larger business size criteria for inclusion.

Companies subject to the CSRD will have to report according to European Sustainability Reporting Standards (ESRS). The CSRD also makes it mandatory for companies to have third-party assurance and external auditing of the sustainability information that they report.

In 2022, the European Financial Reporting Advisory Group (EFRAG) released its first draft of the ESRS reporting standards, which will fall under the CSRD.

Within the reporting standards the CSRD values sustainability metrics alongside environmental performance, with a special focus on how organisations monitor their social impact, such as employee health, human rights, bribery, anti-corruption and diversity. And there are several data-intensive disclosures within the ESRS covering greenhouse gas emissions, energy, waste, water, recycling and social metrics.

Why focus on reporting ESG?

The new EU directives will ensure that investors and other stakeholders have access to the information they need to assess investment risks arising from climate change and other sustainability issues. They will also create a culture of transparency about the impact of companies on people and the environment. 

The first companies who will have to apply the new reporting rules  will do so on their 2024 financial year data, for reports published in 2025.

Existing legislation such as the EU's Non-Financial Reporting Directive (NFRD) had already set out rules for the disclosure of non-financial information by certain large and listed companies. Companies that are already subject to the NFRD will need to report on their 2024 data.

As ESG considerations gain prominence globally, organisations impacted by the EU’s CSRD announcement need to start building their data foundations in anticipation of upcoming reporting and disclosure requirements. 

Longer term, the intended outcomes of CSRD will contribute to Europe’s 2050 climate-neutrality target, and European Green Deal objectives.

What is the connection between the DPP and ESG reporting?

The EU's Digital Product Passport (DPP) and ESG reporting are interconnected as they both contribute to sustainable practices and transparency within organisations.

The DPP is a digital framework that requires a manufacturer or reseller to gather detailed information on their product's environmental impact, its lifespan, and repairability. The DPP initiative aims to enhance sustainability by promoting resource efficiency, circular economy principles, and the reduction of waste. 

Companies will need to source data for the DPP on a product's material composition, energy consumption, carbon footprint, and other relevant information.

When it comes to the ESG elements, the DPP feeds into the reporting its environmental data around a products’ sustainability attributes and progress towards sustainability goals.

By linking the DPP with ESG reporting it can help stakeholders evaluate a company's environmental performance and make informed decisions based on the disclosed information.

So, how can having an MDM system help?

As ESG reporting requires accurate and comprehensive data across multiple dimensions, MDM provides the necessary framework to ensure data integrity and consistency.

By implementing MDM, organisations can centralise and govern their ESG data, creating a single source of truth. MDM facilitates data collection, cleansing, and standardisation, ensuring that information from various sources aligns with reporting requirements.

Having an MDM structure enables organisations to establish data quality rules, validate data against predefined criteria, and resolve any inconsistencies.

MDM also helps in linking and harmonising data from diverse systems, enabling a holistic view of ESG metrics. It ensures that the reported data is reliable, trustworthy, and meets regulatory compliance.

In summary, MDM acts as the foundation for compiling ESG reporting by ensuring data accuracy, integrity, and consistency across the organisation, enabling organisations to meet the growing demands of ESG reporting in an efficient and effective manner.

If you want to learn more about how to get started, book a free consultation and let’s explore how we can help you get the most from your MDM investments when compiling your ESG reporting.

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