ESG accounting: a balanced consideration between finance and sustainability

Thursday 4 April 2024

With the introduction of the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS), sustainability is no longer an option but a requirement which poses challenging goals for companies in sustainability reporting. In this article we will look at how technology and tooling can help drive sustainability and compliance in the business world by talking to Kees Kerstens, co-founder of Salacia Solutions – a Rotterdam-based company that is at the forefront of providing ESG (Environmental, Social, and Governance) software as a service (SaaS).  

The evolving field of ESG accounting

The complexity of the CSRD and ESRS means that there is a growing demand for robust tooling to ensure compliance. Kees often compares the future development of ESG accounting to financial accounting. Seeing how financial reporting has evolved into a structured system over the years, he expects ESG data to likely follow suit. This is necessary; just as financial data is no longer collected and managed in Excel, companies will eventually need to use 'ESG accounting tools’ for their sustainability data. Salacia anticipates that using these specialized 'ESG accounting tools’ will be more efficient than building in-house solutions, especially for the second wave of companies obligated under the CSRD that will need to comply by 2025. This type of system also makes it easier for accountants to perform audits.

However, as Kees notes, the landscape of ESG data platform providers is still fragmented, with a range of solutions focused on specific themes such as climate impact and personnel policies. According to Kees there is currently no one provider that offers the complete picture. The CSRD calls for a double materiality analysis, policies, action plans, goals, and measures. ESG accounting comes into play to translate business data into CSRD data, and then to generate input for the annual report. Here again, the analogy with financial accounting is striking. The financial annual report also often consists of different components, of which financial accounting is a part. It also depends on the company's own wishes; how much do they want to do themselves, and where can tooling be deployed?

Perfection is the enemy of progress

Kees further asserts that, although the ESG field is relatively young, companies must start to report based on the data they already have, such as procurement and energy consumption data. At the same time, 'data gaps' for the coming years can be identified. The CSRD is new and data collection won't be perfect from the first year. As the CSRD deadline approaches, it is more important and efficient to start working with what you have rather than to wait and make various improvements in your systems first. You can always make a plan for how to improve the key data sources over time. One thing to keep in mind though is that transparency is key in CSRD and that you have to state if you do not have certain data, policies, action plans, etc. yet.  

How do you choose a suitable tool?

When choosing a suitable ESG tool or platform, Kees advises to look  for tools that have an accountant's approval certificate, which simplifies the reporting process. The platform should also be flexible in importing company data and offer multiple options for extracting data from client sources. Finally, Kees advises choosing a tool that covers a wide range of ESG topics to avoid having to pull input for the annual report from several different tools.

About Salacia Solutions, their challenges, and success stories

Salacia Solutions focuses on the quantitative aspect of the CSRD; the so-called numerical data points. Their platform covers all ESRS standards, such as climate, water, own employees, and governance, and has an accountant's certification. Their platform turns operational data into graphs and tables that are suitable for the annual report.

The biggest challenge Salacia and their clients face is the availability of data. As previously mentioned, this should not prevent them from getting started. The responsibility to improve the availability of data of course lies with the client, but Salacia also offers support. During the onboarding process, Salacia goes through the reporting requirements for each material topic with the client. Together they will then investigate which data is needed, where it can be found (e.g., in which systems is the data currently being collected), whether all entities are included, and how easy it is to link to the Salacia platform. The closer to the client's primary data systems, the better. This allows you to eliminate all manual intermediate steps, such as calculations in Excel, which also pleases the accountant.

Another essential aspect of Salacia's service is ensuring the process is auditable and traceable. They never perform an aggregation until it is necessary for the annual report, allowing every data point to be traced back to its origin. In other words, it is possible to go all the way back to the individual data point and show what has been done with it, what calculations have been performed, etc. Initially, it is more work to not aggregate data points, but in the long term, you are less flexible if you do since then you will have to explain to the accountant why you added everything up and what (manual) calculations you performed to apply aggregation.

Finally, Kees shares a success story of a client who, by automating their ESG reporting process with Salacia's platform, saved weeks of work. Where it used to take weeks to collect data, perform calculations, and create a report, everything is now much faster and easier. Data only needs to be requested from all project teams; the rest happens automatically.

One of the most important developments that Salacia is seeing is that more and more clients are using ESG data in strategic decision-making. This is precisely where Salacia wants to go and where Kees also sees the future of ESG reporting and compliance heading: a balanced consideration between finance and sustainability, with data of comparable levels on both sides.