In an era where corporate responsibility and environmental stewardship are paramount, sustainability reporting has become the cornerstone of transparency and accountability for organisations worldwide. Companies will be expected to provide more detailed and comprehensive information on their environmental impact, social initiatives, and corporate governance practices. Stakeholders are increasingly demanding transparency in these areas, and organizations that fail to meet these expectations may face reputational risks.
As addressed in our previous blog post, a range of different ESG frameworks exist for organisations to adopt. In fact, Ernest and Young estimate that there are over 600 ESG reporting standards globally, many of which differ in their interpretations of sustainability. The fragmentation of approaches to reporting has made it difficult to compare sustainability data between organisations within the same industry. For investors, this has meant that the impact of sustainability and climate-related risks and opportunities on a company’s financial performance has been difficult to ascertain. However, this is set to change as of 2024.
Earlier this year, the International Sustainability Standards Board (ISSB) released two different reporting standards for disclosure, currently in consideration but set to be applied in 2024. These standards are:
IFRS Standard 1 – General Requirements for Disclosure of Sustainability-related Financial Information
IFRS Standard 2 – Climate-related Financial Disclosures
The standards represent a global effort to standardise financial reporting practices and incorporate many of the larger existing frameworks that have been used to date, including the Taskforce on Climate-Related Financial Disclosures (TCFD), The Sustainability Accounting Standards Board (SASB), The Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF). A memorandum of understanding has been created between the Global Reporting Initiative (GRI), one of the most widely used ESG frameworks, and the IFRS foundation, with both organisations sharing a commitment to collaborate to ensure complementary and interoperable standards.
The goal of these Standards is to provide high-quality and globally comparable data, helping to make it harder for companies to ‘greenwash’, while enabling stakeholders to be more confident in a company’s claims made within their sustainability reports.
A breakdown of these Standards can be seen below:
When reporting against these standards, companies need to disclose information across 4 pillars (drawn from the TCFD):
Governance: The governance processes, controls and procedures the entity uses to monitor and manage sustainability-related and climate-related risks and opportunities.
Strategy: The approach for addressing sustainability-related and climate-related risks and opportunities that could affect the entity’s business model and strategy over the short, medium and long term.
Risk Management: The processes the entity uses to identify, assess and manage sustainability-related and climate-related risks.
Metrics and Targets: The information the entity uses to assess, manage and monitor its performance in relation to sustainability-related and climate-related risks and opportunities over time.
For Australian companies, reporting in accordance with these standards is not yet mandatory, however, they have been endorsed by ASIC and the Australian Accounting Standards Board (AASB). ASIC Chair Joe Longo made the following statement in his address at the State of the Nation Conference in June 2023:
“Firms should be well advanced in embedding robust corporate governance practices ahead of more rigorous reporting requirements that are imminent in the standards being released by the ISSB in two weeks. These ambitious standards will require companies to adopt a systematic approach to collecting and analysing data across the company itself, and its supply chains. Preparation for that should be starting now.”
ASIC has also recommended that Australian publicly listed companies adopt the TCFD Recommendations in preparation for the transition to the ISSB Standards for reporting.
What is the role of digital technology within sustainability and climate-related financial reporting?
As a leader in this space, our first question is always – how can we support organisations to leverage technologies to improve their performance and decision-making? What we have noticed is that as the pressure to report ESG performance has increased, so has the types and availability of digital technologies used for sustainability reporting purposes.
The capacity of various technologies to enhance the monitoring, measurement, assessment, mitigation, management, planning, and forecasting of diverse sustainability practices is widely acknowledged. Equally notable is their potential to enhance transparency and accountability among various stakeholders and initiatives.
Many organisations are turning to emerging technologies such as IoT to support their reporting capability against the different disclosure pillars identified above. From our review of the adoption of IoT technologies in this space, IoT is most used to help organisations report their risk management practices, and their sustainability and climate-related metrics and targets. Let's dig into this below.
IoT technologies can be used to assess and report on the physical risks that could affect a company’s prospects:
Hazard assessment: IoT sensors can be deployed in vulnerable areas such as coastlines, forests, or urban centres to continuously monitor environmental conditions. These sensors can measure temperature, humidity, air quality, sea level, and more. Long-term data sets help to identify variability and change, helping to better predict climate-related risks that could impact a company’s infrastructure, employees, and supply chain. For example, Indicium has been working with a well-known distillery in Southern Tasmania to better understand the impact of temperature on their product. Our solution collects and stores data so that historical analyses can be undertaken to determine how temperature variables may impact the end quality of the whisky. Measures can then be taken to mitigate any risk to product quality stemming from climate change.
Minimising exposure and vulnerability to extreme events: IoT can be used to develop risk management strategies to minimise the adverse impact of extreme climate events. Indicium’s Flash Flood Forecasting System is one example, where we developed an alert system that monitors water levels during periods of high rainfall and provides timely alerts to relevant stakeholders to help them prepare and evacuate safely in a flash flood event. We also have a number of projects underway that utilise Fire Detection camera technology to quickly identify fires within remote forested regions.
Collecting and reporting data relating to sustainability and climate-related activity is another area in which IoT shines. Commonly applied applications include:
Monitoring and recording energy usage: including total energy consumption (MWh), energy use intensity (kWh per metric ton of product, total purchased electricity (MWh), and total consumption of fuel (MWh). Indicium has worked with a number of clients to help them collect information about their energy use, including a global cosmetic client working towards B Corp recertification. Click here to read about how our solution provides them with real-time energy data.
Water usage: total water withdrawals (cubic meters), total water withdrawals at water-stressed manufacturing sites (cubic meters), Water use intensity (cubic meters per metric ton of product), water use intensity at water-stressed manufacturing sites (cubic meters per metric ton of product). Indicium's End User Control System solution developed for Parks Shire Council in NSW is one example of how IoT can be used to monitor and control the use of water in irrigation practices, creating efficiencies in the allocation of water across community spaces.
IoT can support organisations to capitalise on opportunities related to optimising water and energy use by tracking consumption against baselines. The cost savings achieved not only support the organisation's financial position but also provide additional financial resources to invest in other areas that create environmental impact.
What are the benefits of using IoT technologies for risk management, and measuring and reporting against climate-related metrics?
The use of IoT technologies for measurement and reporting against climate-related metrics has many benefits.
1. Digital technologies allow an organisation to collect new data previously unavailable, increasing the flow of information and allowing for more rapid decision-making (see Dr Carol Adams' research). A popular phrase 'you can't change what you don't measure' is applicable here.
2. Using digital technologies enhances the efficiency of sustainability reporting by allowing for the automatic collection of data, as well as the ability to store reported information and rapidly generate reports (see Dr Carol Adams' research).
3. The very nature of the data collected aligns with broader requirements for disclosure. For example, TFCD guidelines require that the information disclosed needs to be:
Clear and understandable
Reliable, verifiable and objective – free from bias and value judgment – providing an objective measurement of performance
Consistent over time – provide data that is current, can be viewed historically, and can predict performance over short, medium and long-term time horizons
In the recently published draft guidance for environmental and sustainability reporting, the ACCC highlighted a range of eight principles for trustworthy environmental and sustainability claims. Principle 2 requires organisations to provide evidence to support their sustainability claims. The ability of IoT technology to collect objective and concrete data which is captured in a regular and consistent manner, enables companies to compare their performance against verifiable historical data, helping them to make accurate and truthful claims.
How can organisations prepare for sustainability and climate-related reporting requirements?
There are a number of things organisations can do in preparation for changing standards of reporting.
Prepare for the Future: While reporting in accordance with these standards is not mandatory yet, it's essential to start preparing now. Now is the time to develop a strategy for data collection and analysis throughout your organisation and supply chain.
Explore Digital Technologies: As the demand for ESG reporting escalates, the adoption of digital technologies, such as IoT, becomes imperative. These technologies offer opportunities to enhance risk management, measure and report climate-related metrics, and optimise resource use. With over 20 years of experience in this space, we can work with you to understand your reporting needs and find a solution that is tailored to your organisation.
Leverage Objective Data: Utilising digital technologies for measurement and reporting can help you collect objective and verifiable data. This aligns with the principles of clear, reliable, and consistent reporting outlined by TFCD guidelines and other regulatory bodies. Transparent and trustworthy data is essential in the era of heightened ESG scrutiny.
Stay Informed: Keep a close eye on developments in sustainability reporting standards and regulations, as well as emerging digital solutions. Stay informed about best practices and opportunities to align your organisation with global ESG reporting standards.
At Indicium, we are committed to supporting organisations to improve their environmental impact and remain resilient in the face of climate uncertainty. Visit our website to learn more.