The Corporate Sustainability Reporting Directive (CSRD) brought sustainability to business headlines when it was ratified by the European Union in November 2022 and gradually adopted by member countries in 2023. Another wave of headlines followed as Chief Sustainability Officers (CSOs) called out the major reporting strain that it represents.
By setting the bar very high and deadlines very short, the CSRD highlights that existing reporting capabilities are inadequate to meet regulators’ expectations. The purpose of this article is to provide a non-exhaustive introduction to the CSRD, explore the net gains it tries to introduce amidst the data-intensive reporting complexity, and how Dataiku could help CSOs and CDOs achieve these.
CSRD’s Macro-Level Objectives and Impacts
The CSRD is an expansion on the Non-Financial Reporting Directive (NFRD), in an endeavor to monitor and incentivize cross-sectoral extra-financial performance. Learning from NFRD criticism, the CSRD intentionally harmonizes and aligns expected data disclosures with widely adopted sustainability standards (GRI, ISO, CDP), regulations (SFDR, IFRS’ ISSB, and so on), and the EU Taxonomy.
A key ambition of the CSRD is to help investors more effectively integrate sustainability information in their decision-making which requires them to access comparable, standardized data about their investees’ socio-environmental performance. This means the CSRD tries to advance the conditionality of access to capital on investees’ socio-environmental contribution, thus laying the ground for a positive upward spiral.
Any article introducing the CSRD will tell you about the three tiers of companies in scope and reporting timeframes. In a nutshell, the CSRD will concern 49,000 organizations in the EU (namely, 75% of businesses operating in the European Economic Area, EEA), up from the NFRD’s 11,700 (or about 16% of businesses in the EEA) and is expected to impact 10,000 businesses operating in the U.S. Moreso, a recent study revealed that in the U.S. and the U.K. “8 in 10 of organizations not in the CSRD’s scope still intend to comply.” This speaks to the CSRD’s influence on business opportunities and access to capital.
For all this ambition, many are left to ask whether the CSRD is capable of producing novel insights truly useful for the advancement of a meaningful sustainability transformation? Is it possible to achieve these benefits by streamlining the reporting burden? Assessing the likelihood that the EU’s ambition can advance the economy’s sustainability requires leaning into its content’s details. To kick this off, we look at the double materiality, transition plan and verified assurance and, in doing so, open up considerations as to whether the case could be made that the net gains extend beyond compliance.
Micro Level Impact 1: The Double Materiality Assessment (DMA)
The DMA is concerned with materiality or the attribute of anything that can significantly impact a company’s economic conjecture. Impact drivers analyzed for materiality are typically outside-in vectors as traditionally understood in financial risk (i.e., macroeconomic metrics like unemployment, inflation, etc). Double materiality deliberately extends the analysis’ framing to inside-out impact drivers: how an organization’s direct operations plus up and downstream value chain impact to society and the environment. This could have deep economic consequences by introducing an obligation to disclose on notoriously unpriced externalities.
Practically, the DMA is a multi stakeholder exercise meant to identify, evaluate, and analyze the material impacts’ different possible evolutions given official global warming scenarios. The DMA’s purpose is to identify which topical requirements undertakings must report on (E1-4, S1-4, G1, etc.) meant to sieve what conditional data points must then be reported on.
Unfortunately, the DMA’s laudable ambition is impeded by the absence of guidance on materiality thresholds. This means what counts as material or not is subjective to the undertaking, so long as an organization provides an explanation. Therefore, organizations in similar subsectors and regions could set different thresholds and thus thwart comparability.
Micro Level Impact 2: The Transition Plan
Each topical disclosure poses questions of:
- How these impacts are projected to evolve in the short, medium and long term based on scientifically recognized climate models;
- How this would potentially and actually impact the undertaking’s financial viability on aforementioned time horizons;
- How they plan to — and are progressing on — tackling these negative impacts;
- How the undertaking is mobilizing Capital Expenditure and Operational Expenditure to achieve this.
Roughly, all these topical analyses are to be consolidated in a transition plan. This requires businesses to collate proof of adequate decarbonization and adaptation targets, corresponding levers, and adequate financial planning to achieve this. The document is meant to serve leadership, investors, and regulators to ascertain that the undertaking is seriously working towards a transition to mitigate and adapt to the systemic financial risk of the climate and social crisis.
Evidently, the CRSD introduces huge amounts of mostly new data points (~ 1,144). Problematically, undertakings have little to no experience collecting or building these, and even less best practices to compare their process. The risk of “garbage in, garbage out” is thus in order.
Micro Level Impact 3: Reasonable Assurance
Building on the above, another notable CSRD innovation is compliance’s conditionality on an independent auditor’s provision of limited assurance. This implies the need for a traceable, transparent data trail. In this way, the CSRD is not only trying to get companies to ask themselves new questions and holding them accountable for previously overlooked impacts, it also requires that companies provide granular evidence to back their analyses.
This introduces another pitfall: Deadlines are approaching and organizations lack a clear roadmap on how to meet them in terms of evidence. Given the circumstances, it seems the best an undertaking can do for now is to ensure that the data preparation, consolidation and data quality verification processes are optimally transparent, traceable and autonomously accessible to anticipate the first assurance exercise.
Can Data Strategy Unlock a Way Forward?
Given the scale and scope of the CSRD, there are both practical and strategic opportunities presented. While this blog hasn’t focused on how to be compliant, it has explored where markets are today in relation to the requirements laid out by the CSRD and raised questions about the strategic benefits related to net gains of compliance. We discussed ‘the case for novel insights’ surfaced by CSRD compliance. Specifically, the greater granularity with which it requires businesses to analyze their whole value chains’ socio-environmental impacts and the need for a robust, integrated, traceable reporting process to achieve reasonable assurance.
Next, we presented how CSRD’s shift of focus — from what has been to what needs changing — is a major innovation with ramifications for the working definition of a viable business. Increasingly, decision-making on investments, business partnerships, and insurance may be informed by new information and priorities surfaced by the CSRD. In this way, sustainability reporting is being seated alongside financial reporting as a crucial marker of businesses’ longevity and health.
At Dataiku, we observe how this state of affairs is putting the onus on our clients’ CDO and IT teams. If the CSRD exercise mandates elevating sustainability data and data strategy from a marginal, box-ticking exercise to one on par with integrated, corporate financial data and reporting — then where should one start to update one’s data model?
Check back in early October for the second part of this blog series where we will share a way Dataiku could help you streamline the technical underbelly of your CSRD reporting.
Glossary:
CSRD: Corporate Sustainability Reporting Directive
ESRS: European Sustainability Reporting Standards
NFRD: Non-Financial Reporting Directive
ISSB: International Sustainability Standards’ Board
IFRS: International Financial Reporting Standards
GRI: Global Reporting Initiative
SFDR: Sustainability-linked Financial Disclosure Reporting
ISO: International Organisation for Standardisation
CDP: Carbon Disclosure Project
DMA: Double Materiality Analysis
BP: Basis for Preparation
SBM: Strategy, Business Model
GOV: Governance
IRO: Impact, Risk, Opportunity
MDR: Minimum Disclosure Requirement
See ESRS data points
CDO: Chief Data Officer
CSO: Chief Sustainability Officers