By Nadja Picard, Global Reporting Leader, PwC Germany and
Prof. Dr. Ruediger Loitz, Capital Markets and Accounting Advisory Services Leader, PwC Germany
As many as 50,000 companies situated in the European Union will need to consider transforming their reporting mechanisms to conform with the new Corporate Sustainability Reporting Directive (CSRD) requirements which were approved in principle in June, 2022.
The new reporting requirements will present real challenges to companies when organising, collating, accessing, exploring, evaluating and acting on relevant data. Reporting transformation and digital enablement should be foundational to overcoming those challenges. It won't be easy but will present immense opportunities for companies who get it right.
With CSRD, data on sustainability information, such as information and origins of CO2 emissions, intra- and inter-departmental water consumption, or humanitarian factors in supply chains, to name just a few, must be disclosed in the management report.
Transformation on this scale is unprecedented. Preparers will need to draw on data from many disparate sources, different systems and in different formats - so-called unstructured data; and in some cases, sustainability reporting systems which don’t currently even exist. However, once the digitalisation is completed, it will provide a representative overview, and represent an important step towards fulfilling future regulatory reporting criteria, offering comparability of company actions for stakeholders. Digitalisation can create at least three major opportunities for businesses:
Standardisation and automation can improve the quality of sustainability reporting, and relieve the burden on company resources.
Digitalisation can optimise existing company processes, which can further unlock untapped benefits for the corporation's strategy and operations.
Sustainability reporting further provides stakeholders an ‘open book’ on corporate action, and inaction, when it comes to pressing social or climate related matters.
Technology won’t make all data easily available; data sources must be carefully analysed, and their collection standardised. A cross-functional team of specialists like environmental technology, data engineers, and social experts, will be required to identify suitable data sources. On top of all this, management will need to support the production of this data with the right systems and controls infrastructure to ensure that the data is of the required quality, and ultimately, assurable.
The digital transformation of the reporting ecosystem will require collecting and analysing mass amounts of data - comparable to financial reporting - with the special feature that arises in a framework of technical characteristics that has never existed before. This is no doubt one reason why standard setters are finding it difficult to specify precise regulations at this time. The requirements for technical solutions are complicated by the fact that, in addition to quantitative data, regulators require a considerable number of qualitative explanations, which are more difficult to interpret from a technical standpoint.
Under the CSRD and the EU-Taxonomy, companies need quantified data on the value chain, e.g. carbon footprint of the products purchased, life cycle analysis from cradle to grave, recycling quota at the end for the value chain, human rights issues, etc. Artificial intelligence (AI) should be a technology to provide digital insights into these challenges.
And there is a silver lining: mass data is much more amenable to sophisticated and extensive analysis by data-analytic tools than it was just a few years ago as technology has made massive progress during the last years. However, the requirements to report are increasing in equal measure. New technologies such as AI that read and interpret texts "intelligently" must be considered. While the mere extraction of unstructured data was an AI application during the last years, the analysis, evaluation and the intelligent search for inconsistencies in texts will be another one. Neural networks will be tailored to business areas to be able to make (at least semi-) automatic preparations for decisions on their basis. Systems will be connected in order to collect qualitative and quantitative information to integrated databases. The interface management between systems and the transfer of data is more in demand than before.
The list below can be a starting point for a company considering a sustainability reporting digitalisation strategy:
Simply put, a digitalisation of sustainability reporting offers the most efficient and cost effective way forward to building trust through transparent high-quality information on corporate actions.
CSRD applies essentially to companies listed on an EU-regulated market and to companies and groups that meet two of three criteria:
More than 250 employees
A balance sheet total of more than 20 million euros
Net turnover of more than 40 million euros.
The provisions apply from the 2024 reporting period for companies that are already obliged to report non-financial information according to the current regulations of the Non-Financial Reporting Directive (NFRD). Companies not previously subject to the NFRD will not be subject to the new provisions until 2025. Small and medium-sized listed companies have a grace period of one year. In addition, from 2028 onwards, non-EU companies with a net turnover of more than 150 million euros in the EU and at least one large subsidiary or branch in the EU will be affected.