Analyst Perspectives

ISG Software Research is expanding our ISG Buyers Guide™ coverage to include the topic of sustainability. Our buyers guide will focus on sustainability exclusively rather than the full spectrum of environmental, social and governance topics. One reason is that gathering, managing, analyzing and reporting environmental data under the various frameworks and statutes presents enterprises with considerably greater challenges than the other two. For most, it is likely the least well defined and the hardest for acquiring and managing environmental-related data. ISG Research asserts that through 2027, one-half of enterprises will have insufficient data and software to adequately measure their environmental, social and governance metrics to inform their governance strategy, risk management and targets.

A second reason is that careful measurement and monitoring of carbon emissions, water consumption and waste management can provide an alternative view that exposes opportunities to optimize processes, reduce costs and improve financial returns. Economy and ecology are words with the same root and provide the intersection between conservation and sustainable business practices. Profit-making establishments will always seek to find ways to conserve inputs in a quest to achieve optimal profitability.

A third reason is that social and governance topics are far more fragmented, both in terms of social norms and specific regulations in countries and regions. Moreover, many enterprises already have software that gathers and reports on these topics.

Sustainability reporting has been the response to an increasing concern over the environment. With this has come a demand that enterprises measure and disclose data that informs on their impact on the environment. That demand caused some enterprises to self-report with varying degrees of rigor and reliability and with non-standard measurement methods. In turn, this led to some companies being charged with “greenwashing,” the practice of conveying a false impression or providing misleading information about how a company’s products, services, or operations are environmentally sound. In response, governments have imposed regulations on such disclosures, putting into place reporting standards developed by independent groups including the Global Reporting Initiative (GRI), Task Force on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB).

It's also worth noting that there is a demographic component to the demand for sustainability solutions. For the past decade or more, interest in environmental sustainability has been greater in Europe than in North America. And it's also the case that younger people have a greater interest in sustainability and environmental impacts than older demographics. This in turn affects how providers of products and services view the need to be able to respond to demand for sustainability data. Moreover, this affects the supply chains that funnel into final demand and the consumers of those products and services. So, for example, consumer products that are purchased by more environmentally sensitive buyers will have more of a business case to make for investing in sustainability then those not exposed to that market demand.

At this point, the European Union’s Corporate Sustainability Reporting Directive (CSRD) is the most consequential regulatory requirement, but the U.K., Canada, Australia, New Zealand, Singapore, Hong Kong and Mexico also require measurement and disclosures. A proposed reporting requirement by the U.S. Securities and Exchange Commission has been scrapped, but California has one going into effect. One challenge that enterprises face with compliance is the growing complexity due to diverging measurement and reporting standards across the globe. This fragmentation is a challenge for those operating in multiple jurisdictions who must harmonize reporting practices while achieving compliant with local laws in order to minimize the cost of compliance.

With regulation, enterprises have been investing in software that enables them to achieve compliance while reducing related costs and minimizing risk of compliance failure. Sustainability software helps enterprises meet evolving regulations by automating data collection and reporting, enabling real-time performance monitoring and facilitating the production of audit-ready disclosures. They support carbon management across Scopes 1, 2 and 3, to achieve regulatory alignment, as well as assess supply chain sustainability risks. Advanced features include AI-driven goal setting, benchmarking and predictive analytics. In evaluating software providers’ offerings, buyers also need to assess how the application facilitates integration enterprise systems for measurement and its adaptability to different regulatory environments, especially as these change over time.

One ongoing issue around the topic of sustainability is the degree of precision required in reporting on environmental impacts and therefore audit standards. In many enterprises, sustainability efforts, including strategic planning, statutory compliance and incentive management, are handled at the operations level while the task of analysis and reporting and on sustainability specifically, is in the hands of the finance and accounting department. Unlike a system rooted in the rigor of double entry bookkeeping, measures of sustainability do not foot, tick and tie the way that accounting data does. Reporting systems not rooted in the idea of materiality generate costs and weaken performance without providing compensating business benefits. Achieving desired outcomes in the reduction of carbon output, sustainable water usage, and other benefits without jeopardizing strategic business objectives and achieving financial objectives requires significant management effort.

To meet the growing demands of sustainability reporting regulations, I strongly recommend that enterprises use software to address their needs, especially large enterprises, publicly listed companies and multinational organizations operating in jurisdictions with mandatory disclosure requirements. Unfortunately, many will find their systems inadequate to the task. ISG Research asserts that through 2027, two-thirds of enterprises will lack the ability to optimize sustainability as well as strategic and financial objectives because of inadequate systems data governance and processes. These applications should streamline data collection, automate reporting across multiple frameworks (e.g., ESRS, ISSB, GRI), and ensure audit readiness through real-time tracking and digital assurance features. Buyers need to scrutinize how well and how easily the software integrates with existing enterprise applications that are the systems of record for sustainability data, support for Scopes 1–3 emissions tracking, alignment with global standards and adaptability to changing requirements. Additionally, the specific reporting facilities such as those for double materiality assessments and generating machine-readable reports, especially inline extensible business reporting language (iXBRL). Investing in software should be aimed at reducing compliance costs and risks while facilitating strategic decision-making and long-term financial and sustainability performance.

Regards,

Robert Kugel