How sustainability reports are shaping the digital and technology sector

The Forvis Mazars digital and technology sector report provides a benchmark study and peer-learning lessons that highlight the importance of a common language for sustainability reporting. Key findings include a focus on social issues and a high level of engagement among the board and executive committee. Linking executive pay to environmental, social and governance (ESG) issues is showing signs of improvement. However, challenges persist in sourcing high-quality data, particularly on Scope 3 emissions in the value chain, and in navigating the complexity of transition plans amid the rising use of artificial intelligence (AI). 

The study was conducted to analyse a selection of large European digital and technology companies classified as Public Interest Entities (PIEs) with more than 500 employees. For companies in this category, 2024 marked the first reporting period requiring the publication of sustainability information in accordance with the European Sustainability Reporting Standards (ESRS), as part of the implementation of the Corporate Sustainability Reporting Directive (CSRD). Before this, companies communicated their sustainability activities and performance using their own reporting protocols.

Introducing a common language

As a reminder, the CSRD is an EU regulation designed to strengthen corporate transparency and accountability on sustainability matters. It requires in-scope companies to disclose detailed information on their material impacts, risks and opportunities related to ESG issues. By promoting greater transparency, the CSRD aims to accelerate the transition toward a more sustainable and responsible economy.

The ESRS, adopted by the European Commission, seek to harmonise sustainability disclosures and facilitate access to sustainable finance. These standards have been designed to be interoperable with international frameworks, reducing the burden of multiple reporting requirements.

The introduction of ESRS helps develop more comparable and transparent sustainability statements across companies by providing a common language. Following this first year of application, the study analyses reports to see how companies have reacted to the regulations. A peer comparison study also gives a sense of where companies are in their sustainability reporting journey and shares best practices. Importantly, it provides a valuable and comprehensive tool for benchmarking how the sector is implementing the new requirements, identifying specific challenges companies face and tracking emerging trends.

Standout key findings

One of the cornerstones of the sustainability statement is to conduct a double materiality analysis that links ESG issues to financial impacts. In terms of standout key findings from the reports analysed, it was no surprise that, as a sector reliant on intellectual assets, social topics related to the workforce were the most developed. Of further note was the input of high-level management involved in identifying the material issues and strategic impacts. This indicates that a company's ability to take a dual-lens approach to materiality lies firmly at the board and executive committee levels. 

Regarding climate change reduction targets, the study shows that only 30% of the companies analysed have published a transition plan for climate change mitigation that meets disclosure requirements. While this figure is gradually improving, it highlights a realisation that developing a transition plan is more challenging than previously expected. Conversely, 70% published a decarbonisation plan that does not address all these requirements and therefore cannot be considered compliant with ESRS.

Artificial intelligence plays a role

A further challenge is developing carbon footprint data for Scope 3 emissions across the value chain, including data centres and cloud services. On average, Scope 3 accounts for 89% of greenhouse gas (GHG) emissions reported in the carbon inventories of companies in the panel, with the lowest observed value being 61%. Allied to this, the study also observes that companies are currently facing the difficulty of monitoring and reporting on the fast-evolving and increasing use of artificial intelligence (AI). Developing a transition plan, particularly for Scope 3 emissions that involve AI, remain a challenge given the complexities involved and the global nature of the sector.

Governance engagement was a further notable highlight of the study, particularly the involvement of boards and executive committees in reporting and validation decisions, and in developing sustainability strategies. The study also observes that 45% of companies now link executive variable pay to ESG criteria, which not only encourages responsible behaviour but also emphasises that ESG is a performance issue.

Data remains an issue

In terms of data collection, company size was a factor with larger groups investing in data automation tools and reporting platforms to improve coverage and reliability of data gathered. However, most companies in the study struggled to collect specific data, particularly on value chain emissions. 

Despite ESRS providing a defined methodology, the study observes significant heterogeneity in key indicators, which still makes comparisons difficult. Interpreting expectations and ensuring the right quality and availability of data continue to be challenges. 

Improving confidence

The study notes that, in this first year, verification was not mandatory across all countries. As a result, some companies performed the exercise voluntarily. At this stage, we continue to see a balancing of market practices, but mandatory verification on a wider scale will help to improve comparisons and give stakeholders confidence in reporting. 

On the whole, the digital and technology sector's commitment to sustainability reporting was overwhelmingly evident throughout the study. Equally, the expected simplification of regulations will help to make reporting more understandable. However, while analysis highlights the current operational challenges of gathering and ensuring the data quality required for sustainability statements, it's also crucial that companies do not see reporting as an end game but as a starting point. 

Strong reporting underpins decision-making, providing a transparent view of where a company is moving from and where it is going. Therefore, it's essential to go beyond legal compliance requirements to impact strategy and stakeholder relationships, building a business model capable of managing the entire ecosystem with confidence.

Benchmarking and learning from peers are pivotal to such ambitions. Observing how companies are working towards standardised calculation methods, strengthening data systems, investing in data collection and internal controls to extract reliable data are key.

A reporting strategy that encourages comparability, transparency and accountability will help shape the future of the digital and technology sector in their ongoing efforts to develop robust sustainability statements and realistic transition plans for climate change.