Regulations take effect: ESG reporting software sales are expected to soar in 2024
Pushed by investors, regulators, and employees, many more companies will likely systematize their ESG tracking and reporting with standardized software tools.
Michael Steinhart
Gillian Crossan
Ariane Bucaille
Ankit Dhameja
Sales of software solutions that help companies track and report on environmental, social, and governance (ESG) metrics will likely surpass US$1 billion this year, as EU and US reporting regulations—along with reporting requirements in Asia, Australia, and the UK—take effect, and as more investments require ESG disclosures.1 Forecasts for ESG reporting software estimate a CAGR from 19% to 30% over the next five years,2 and Deloitte predicts the tipping point will be reached in 2024, with growth accelerating to more than 30% and revenue climbing from under an estimated US$800 million in 2023 to just more than US$1 billion in 2024 (figure 1).
Emerging challenges and regulations will likely drive greater ESG reporting adoption
ESG reporting isn’t new, per se. Many large, global companies release ESG or corporate sustainability reports voluntarily each year, highlighting their commitment to reducing carbon emissions and achieving sustainability goals.3 These reports are seen as important for investors and customers, plus potential employees who want to align with “virtuous” companies and support sustainable growth.4
In Deloitte’s 2023 Gen Z and Millennial survey, for instance, 50% of Gen Z respondents said they are pushing their employers to drive change on environmental issues, and 42% said they’d switch jobs due to climate concerns.5
A challenge with current ESG tracking and reporting approaches, however, is that they may not necessarily be consistent or accurate.6 Different ways of calculating emissions and accounting for carbon use may yield vastly different results, especially as companies are expected to move beyond “Scope 1 and Scope 2” (the emissions they generate and the emissions of the utilities they consume) and consider Scope 3 (the emissions generated by their upstream supply chains and downstream value chains) in evaluating their impact.
In more recent years, many companies have also been scrutinized for their adherence to social values such as diversity, equity, and inclusion (DEI), preservation of biodiversity, and ethical practices. Again, with dozens of voluntary frameworks to choose from, companies employ a wide range of inputs to arrive at statistics that often paint them in a positive light.7
In fact, the top-cited barrier to ESG adoption, according to a global survey of business leaders, is a lack of consistent and standardized data.8 Deloitte expects that new regulatory requirements, along with outputs designed to those specifications, will establish de facto standards and drive adoption. These regulations—primarily in the EU and United States, and in the United Kingdom, Hong Kong, New Zealand, and other countries—take effect in the 2024–2025 timeframe.9
The EU’s Corporate Sustainability Reporting Directive (CSRD) is an update to the 2014 Non-Financial Reporting Directive (NFRD), and it expands the number of companies required to provide sustainability disclosures from around 12,000 to more than 50,000.10 It also imposes requirements around “double materiality,” which means companies must report the impacts that ESG efforts have on their own businesses and the impacts they’ll have on the environment, human rights, social standards, and sustainability-related risk.11 CSRD applies to multinational companies whose EU activities generated more than 150 million euros in annual turnover over the last two years. These European branches may have to provide consolidated reporting on their parent company’s activities to the EU, as well.
In the United States, proposed rules from the Federal Acquisition Regulatory Council require certain federal contractors to disclose their greenhouse gas (GHG) emissions and climate-related financial risk, and to set science-based targets to reduce their emissions.12 California’s recently enacted Climate Accountability Package imposes Scope 3 reporting requirements on any company with revenues above US$1 billion that does business in California.13
The SEC is working on ESG reporting requirements for many registered funds and investment advisers. Its proposed rules, “Enhanced Disclosures by Certain Investment Advisers and Investment Companies About Environmental, Social, and Governance Investment Practices,” are designed to promote consistent, comparable, and reliable information for investors who want to review a fund’s or adviser’s incorporation of ESG factors.14
As enacted, companies that are subject to the EU CSRD rules must file reports in 2025, reflecting data for FY24. The rules expand reporting requirements to mid-size and smaller companies by 2026, as well, as increasing the total addressable market and revenue opportunities.15
Finally, CSRD and proposed SEC compliance will also require third-party assurance of ESG reports. Auditors will likely have a larger role in guiding companies around ESG frameworks, standards, disclosures, and other opportunities. Taken together, these regulatory activities suggest that the time to implement a robust and comprehensive ESG tracking and reporting software solution is now.
Setting targets beyond Scope 3
In a 2021 Open Compliance and Ethics Group survey, only 9% of companies said they use ESG tracking software, which further underscores the potential for rapid uptake.16 These software solutions take a variety of approaches to calculating Scope 3 and other social impact metrics. How much carbon footprint each of a company’s suppliers and distributors adds, for instance, depends on where these entities are located, the time of year, and the efficiency of their own energy solutions.17
ESG tracking software takes company data as an input, along with vast data libraries, indexes, estimate tables, and sometimes AI to calculate carbon usage, ethics and corruption levels, and other social and environmental impacts. The size and accuracy of these libraries are one area where solutions attempt to differentiate from one another. Some incorporate HR data, as well, to report progress on DEI and economic parity goals.
The solution-provider market is crowded, comprising pure-play ESG analytics players, ERP companies that have acquired and bolted-on ESG functionality, professional services companies, and tech giants. Pricing varies widely with different structures based on the types of emissions reporting required. With close to 50,000 companies now under CSRD compliance mandates, the potential for US$100 million+ in 2024 sales seems likely.18 A flurry of M&A activity in the space also indicates that the market is anticipating a wave of adoption in the near term.19
The bottom line
ESG tracking and reporting doesn’t have to be about ticking a regulatory box; it may help reduce tangible risks and create opportunities for companies. As accurate and actionable ESG insights flow into the operation, new business models may emerge, which can lead to new revenue streams. Deloitte’s sustainability action report found that 62% of executives surveyed are prepared or currently undertaking extensive preparations for the expected increase in reporting requirements.20
The solution that companies choose should provide hooks into back-end systems and automatic data collection, plus robust analytics for multiple data sources. Its report functionality should conform to CSRD, SEC, and other regulatory and voluntary frameworks—in addition to providing customizable reports that may be integrated to reflect business goals and processes. These solutions should also be configurable based on the size and industry of the company and its global presence, tailoring materiality guidance and ESG reports to the various regulatory requirements.
It’s important to strike a balance between ESG goals and competitive innovation, and the two aren’t mutually exclusive. A clear strategy and action plan that does not compromise stakeholder returns and puts long-term ESG goals in perspective is possible. With stakeholder engagement and a comprehensive view of operational and reputational risks, ESG tracking can create a competitive advantage. Government incentives and credits represent another critical path for mitigating short-term ESG expenses.21
Also, keep in mind that ESG tracking and reporting can help to attract investments and fuel growth. Nearly 80% of respondents to a Deutsche Bank survey said they want investments to be associated with companies that are positively impacting the world,22 and Deloitte estimates that by 2024, half of all professionally managed global investment assets—representing trillions of dollars—will have ESG metrics reported.23 Investors seem to recognize the long-term value creation that ESG-focused companies bring in terms of risk mitigation, decarbonization, enhanced reputation, and stronger growth potential.