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Turning to AI for help with Materiality Assessments

One of the biggest issues facing businesses today is sustainability reporting and data collecting, more especially, the capacity to disclose sustainability data legally and accurately.

Sustainability practitioners are faced with the difficult challenge of gathering pertinent data from dozens, if not hundreds, of stakeholders and interpreting it all into a single output. This effort is driven by the growing requirement for transparency from corporations and the need to comply with regulations. As a result, there is further pressure on procurement and investments as professionals look for ever-more advanced and comprehensive solutions to suit their demands.

Reuters Events has released new, proprietary research that reveals how sustainability practitioners are addressing this challenge. It displays new trends in technology acquisition, first-hand accounts of utilizing particular technologies, and the obstacles still standing in the way of such investment.

The following chart shows that the top investments made over the previous 12 months were supplier surveys and audits, emissions-accounting solutions, and internal data analysis solutions, according to the report.

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Source: Reuters Events’ Sustainability Reporting and Data Management 2024 survey

This could be taken to mean that sustainability professionals have dedicated a significant portion of the past year to establishing the fundamental framework needed for accurate and compliant reporting. This includes obtaining the necessary data into the company, examining it internally, and using it, specifically, to identify emissions. This is suitable for firms who are currently expanding their reporting capabilities due to the introduction of new rules and reporting requirements.

When we evaluate the investment sentiment for technological investments that are scheduled over the next three years, however, we see a clear shift. According to survey respondents, investments in ESG data-management platforms, artificial intelligence (AI) for materiality evaluations, and sustainability risk management solutions are becoming increasingly commonplace.

This is in line with a general shift in opinion toward more complex and sophisticated reporting technologies, such as blockchain and predictive analytics for sourcing and logistics.

Among the technologies we studied, AI for use in materiality evaluations saw a particularly strong increase in investment sentiment, going from the 15th (or second-last) most attractive sector for investment to the second most popular for future investments. Although interest in artificial intelligence (AI) in general and generative AI in particular has skyrocketed recently, the use of AI in materiality assessments is probably more common now that more organizations are adhering to the International Financial Reporting Standards (IFRS) and Taskforce on Nature-related Financial Disclosure (TNFD) reporting standards, which both demand materiality and double materiality assessments.

The results, taken as a whole, indicate that the set of sustainability reporting tools and capabilities available today is inadequate for the reporting environment of the future. It will be necessary to collect and analyze data in a more sophisticated way, and to automate as many operations as feasible.

Crucially, though the survey participants indicate that some of the tools that are most essential to facilitating accurate and compliant sustainability reporting perform the worst in terms of usability and efficacy.

The average ratings (out of 10) that respondents gave the suite of sustainability tools are displayed in the figure below, which accounts for both implementation ease and efficacy. Identifying which technologies score higher or lower than average in both criteria by looking at the figure that also displays the median score lines for both.

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Source: Reuters Events’ Sustainability Reporting and Data Management 2024 survey

Predictive analytics and sustainability risk-management systems are among the top five technologies for future planned investments; they are located in the bottom-left hand quadrant, or technologies that score lower than average for both. Furthermore, out of all the technologies surveyed, supplier audits and surveys had the lowest scores. These processes are essential for gathering pertinent supply chain data for Scope 3 emissions reporting.

The findings were further corroborated by verbatim responses to the survey. Practitioners lamented that they were expensive, hard to audit, and that businesses had no control over the structure or veracity of the data they returned. While describing the usage of supplier surveys as a work in progress, one responder made the observation that “[it’s] hard to verify data suppliers.” More knowledge training and capacity building are required for [them] to be able to offer precise and reliable data.

According to the research, cost is another major concern for sustainability practitioners when it comes to procurement. This concern extends to how much solutions cost in comparison to their own budgets as well as how they justify the return on investment to the board or senior leadership of their business. The following figure illustrates the investment obstacles that respondents to the study indicated, indicating the predominance of internal considerations over external factors.

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Source: Reuters Events’ Sustainability Reporting and Data Management 2024 survey

Although external and technological obstacles continue to exist, most survey participants (56%) identified internal factors as deterrents to investment, with budgetary restrictions and a lack of support from upper management receiving special attention from 16% and 9% of respondents, respectively.

After asking for qualitative input, with a prevalent concern being the difficulty in determining or justifying the precise return on investment for investments in sustainability reporting systems. One respondent stated, “Demonstrating a clear ROI on sustainability investments can be challenging, especially in the short term.” Others specifically mentioned the necessity of gaining support from the chief financial officer or other person in charge of the organization’s budget, particularly if the investments are significant and/or need to be justified to shareholders.

However, expenditures are being made; according to 37% of respondents, their company spends at least $100,000 annually on its sustainability reporting function. The survey participants also identified a variety of vendors. Survey participants listed over 300 distinct companies when asked which ones they already deal with or would like to collaborate with in the future. This shows how large and dispersed the sustainability reporting ecosystem is today.

After evaluating the most often cited vendors and found several suppliers; the suppliers for each particular combination of technologies are shown in the table below. Vendors cited by a significant number of respondents are indicated by those highlighted in green, and vendors frequently mentioned for several technologies are indicated by those highlighted in yellow. Although the survey’s verbatim data indicates that sustainability practitioners do not think there is currently a single, all-encompassing solution available for sustainability reporting, the trend of vendors providing a variety of, frequently related services—such as data collection, management, and analysis—seems certain to continue.

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Source: Reuters Events’ Sustainability Reporting and Data Management 2024 survey

More information on the aforementioned conclusions may be found in the Reuters Events Sustainability Reporting and Data Management Report 2024, which is available here.

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