Sustainability in Tech: From CSRD Obligation to Opportunity

Last Thursday, Beetroot hosted an insightful panel discussion that explored the role of tech in sustainability, the intricate landscape of ESG and CSR compliance in the EU and the United States, and the regulatory challenges and benefits that businesses face. We invited experts and fellow business leaders to discuss how companies can transform CSRD (Corporate Sustainability Reporting Directive) from a compliance hurdle into a strategic asset that drives competitive advantage and future-proof initiatives. They were: 

• Rana Ersgård, co-CEO of Beetroot. Rana is also a board member of a non-profit and has over 20 years in HealthTech and IT.
• Klaudia Shevelyuk, Strategic Sustainability Senior Consultant at Ramboll Management Consulting. Klaudia brings 20 years of managing major international climate resilience projects to the table, including collaborations with the UNDP and embassies. 
• Pete Jefferson, Senior Vice President at BranchPattern. Pete is an expert with 20+ years of experience in sustainable building science and consulting on high-performance, environmentally friendly building projects.
• Johan Löfquist, the Head of Sustainability Data at Worldfavor. He has over seven years of experience in ESG reporting and digital transformation within the EU regulatory framework and is leading a team of sustainability specialists.

What is CSRD in the context of reporting sustainability?

We asked Mr. Löfquist to share his opinion of CSRD and how it differs from the older ways of reporting sustainability in the European Union.

“CSRD is replacing an existing EU legislation called Non-Financial Reporting Directive (NFRD). It’s quite similar to DRI and is quite an uplift from the current directive. That’s one way to summarize it. It includes requirements on double materiality, which wasn’t the case previously, and that really sets the bar for regulation.”

What is double materiality?

Companies need to conduct a double materiality assessment to identify their material impact, ESG risks, and opportunities throughout the whole value chain, which is an innovation. CSRD establishes double materiality as a new standard of reporting. As Klaudia Shevelyuk explained further, “In contrast to materiality assessment that was previously in the NFRD, it should look like integrated reporting because, for the first time, the double materiality assesses both non-financial and financial impacts. Another new requirement for sustainability reporting is that it should be machine-readable (digital).”

“Both from the inside-out and outside-in perspective, CSRD lifts some accent aspects that had been neglected, especially with the NFRD, that companies tended to perhaps prioritize and focus on the things they have a positive impact on and neglecting things that they might have a negative impact on, especially further down in their supply chain,” continued Johan Löfquist. “So it’s trying to capture those parts as well.”

US vs. EU: Specifics of sustainability reporting

US-based businesses and companies have different experiences with sustainability regulations. We asked Pete Jefferson from BranchPattern to share his perspective on how the matter is reported and followed up in the US compared to the EU’s CSRD. He noted that even though the situation in the States is more complex than in Europe, there are reasons to be optimistic:

“While the US made international news by pulling out of the Paris agreement, the private sector did step forward and fill that gap. Furthermore, almost every public-traded company (over 90%) is doing some form of ESG reporting. The problem lies in the multitude of ESG frameworks, but the EU’s CSRD is providing some structure that could positively influence what’s happening in the United States.”

The US political system complicates sustainability reporting due to long-standing debates over federal versus state authority, adding a layer of complexity depending on the state in question. Primarily guided by the Securities and Exchange Commission (SEC), regulations focus on publicly traded companies and emphasize single materiality—matters most pertinent to investors. While this approach marks a start toward changes, it lacks the breadth and aggressive stance seen in the EU regulations.

A common trajectory towards greater transparency and accountability

Even though it is too early to speak of the effectiveness of Europe’s CSRD in driving genuine sustainability efforts, the standardization of reporting promises increased transparency and comparability. This visibility could foster peer pressure and catalyze substantive environmental actions among companies.

Rana Ersgård emphasized that standardized reporting is also a tool to achieve something else.

“I think that eventually, it will become harder and harder to separate the ESG efforts geographically. Because the companies are multinational and supply chains spread across the world, there will be a trickle-down effect as well. We will see how it goes once people start reporting things in the same way, which is one of the points of the regulation.”

An important goal of the CSRD is to eliminate greenwashing by establishing standards that enhance corporate transparency and comprehensibility for stakeholders. Pete Jefferson highlighted that although North America may currently trail in adopting CSRD reporting, European practices are likely to influence American methods. In the real estate sector, where Jefferson’s company is active, there is a focus on decarbonizing the built environment, which is responsible for over 40% of global greenhouse gas emissions. He notes that large organizations operating in both North America and the EU aim to avoid discrepancies between their “green” European and “brown” North American portfolios.

The pitfalls of effective reporting: Checking the boxes or genuine sustainability action? 

Johan Löfquist expressed a less optimistic view about the effectiveness of sustainability reporting standards, as there are concerns that companies might treat them as a mere compliance checklist. The introduction of European Sustainability Reporting Standards (ESRS) might not fully mitigate this risk. With double materiality being central to audits, firms could manipulate their reporting obligations to minimize disclosure. The final legislation’s removal of mandatory reporting on climate and workforce issues might enable companies to exclude critical data by deeming it non-material, which could lead to poor double-materiality analysis and subject them to criticism. 

Many companies mistakenly believe that the hardest aspect of sustainability is the reporting itself. In reality, more challenges lie in integrating sustainability into business strategies, understanding their role in sustainability and the value chain, and managing the corresponding internal changes. Effective sustainability reporting, which includes determining relevant KPIs, actually becomes straightforward when a company has substantive actions and policies to report. Without significant internal action, reports tend to lack depth and insight.

Reflecting on sustainability initiatives revealed that significant financial incentives in the US are motivating deeper engagement with sustainability beyond mere compliance. Specific regulations, e.g., New York’s Local Law 97, which financially penalizes buildings that exceed energy consumption limits, are driving asset managers and developers to consider the implications of climate-related risks on their properties proactively; this marks a shift towards actively addressing sustainability challenges.

Although complex, the guidelines can prove to be helpful pathways for sustainability. Larger organizations, particularly those operating both in the US and the EU, are beginning to standardize their sustainability reporting. With the CSRD setting a precedent in Europe, these companies are likely to align their US operations similarly, seeking to harmonize their efforts across different regulatory environments to improve efficiency and set ambitious sustainability benchmarks. This strategic approach reflects a shift from passive compliance to active participation in setting the sustainability agenda.

Starting sustainability reporting: Initial steps and potential challenges for companies

Figure out the “why”

For companies beginning sustainability reporting, it’s crucial to first understand the “why” behind the effort. It involves identifying the driving forces—whether they be investor demands, customer expectations, or regulatory requirements like CSRD. Knowing the purpose of reporting shapes the approach to the process and determines what information is relevant and necessary to disclose. Starting with a clear understanding of the motives helps prevent the risks of reporting irrelevant or misleading information and ensures the reporting aligns with stakeholder interests.

Have a structured approach

Klaudia Shevelyuk from Ramboll recommends a four-step approach to sustainability reporting:

• Scoping: Begin by clearly defining the scope of your sustainability efforts. Determine what areas will be covered and the extent of the reporting.
• Double materiality gap assessment on ESRS: Conduct a thorough evaluation to identify gaps between your current practices and the expectations outlined in the European Sustainability Reporting Standards (ESRS), focusing on both financial and non-financial impacts.
• Roadmapping action plan: Based on the gap assessment, develop a detailed action plan that outlines the specific steps needed to address identified gaps and meet reporting requirements.
• Implementation and reporting: Execute the action plan and monitor its effectiveness. Finally, report and disclose the outcomes and improvements made in your sustainability practices.

These steps are designed not just as compliance measures but as opportunities to transform and integrate sustainability deeply into your business strategy.

Decide on what to measure

When companies start sustainability reporting and consider the targets to measure, it’s important to be aware of the potential pitfalls of linking these targets to executive incentives. A UK study has revealed that such a practice can lead to setting less ambitious goals. This, in turn, can undermine the effectiveness of sustainability initiatives. As targets become a fundamental part of sustainability disclosures under frameworks like the ESRS and previously under DRI, companies must strive to establish meaningful and challenging targets that truly contribute to sustainability rather than settling for easily achievable goals that merely aim to ‘save the world.’

Start reporting before it becomes legally binding

For small and medium-sized enterprises (SMEs) looking to start sustainability reporting, even if not legally required, prioritizing and managing the workload is essential. Here are the key steps:

1. Conduct a governance assessment: Begin by evaluating your governance structure. Ensure you have all necessary policies and processes in place and that you understand your value chain and the impact of your business operations.
2. Identify material topics: Determine which sustainability issues are most relevant to your business and stakeholders. Depending on your industry and supply chain, these could include human rights, environmental impact (like CO2 emissions), or labor rights.
3. Use structured reporting standards: Consider reporting frameworks that offer structured but manageable approaches, such as the UN Global Compact’s communication on progress, which provides a lighter version of reporting suitable for SMEs.
4. Conduct double materiality analysis: Tech companies or those dealing with significant data should prioritize issues like data privacy and security, which are critical to customers and other stakeholders.
5. Innovate based on insights: Engaging in sustainability reporting can be a catalyst for discovering new business opportunities and innovations that align with sustainability goals.
6. Consult with experts. When the process of sustainability reporting seems overwhelming, remember that seeking expert advice can provide the necessary clarity and direction, offering support and guidance.

Starting early, even before it becomes a regulatory obligation, can help SMEs adapt smoothly and leverage sustainability reporting as a tool for business development and stakeholder engagement.

The role of technology in sustainability

Technology plays a critical and expanding role in sustainability across various sectors, from healthcare and construction to supply chain management and urban development. It not only facilitates the implementation of smart solutions, such as energy-efficient buildings and smart cities but also enhances sustainability reporting and data analysis. 

Particularly, from the real estate perspective, technology is crucial for reducing greenhouse gas emissions by improving the management of operational carbon and addressing the embodied carbon in building materials. There is a significant need for further technological advancements to better understand and optimize the full lifecycle impacts of building materials.

In terms of regulatory compliance, such as the CSRD, technology ensures that sustainability reports are digital and machine-readable, streamlining data handling and improving accessibility. Tools like the CSRD navigator assist companies in conducting gap assessments and managing their sustainability data more effectively.

Rana Ersgård is positive there are many untapped potential areas where technologies will play an even bigger role.

“An example from Sweden, where there have been a lot of interesting news stories lately, is about an entrepreneur who made a database out of all available public information around invoices and the public sector and applied an AI algorithm to it to find anomalies. They revealed fraudulent activities in some municipalities, such as unauthorized payments, highlighting issues of equality, corruption, and transparency. So, there’s definitely a lot of space here where technology will play a role. We’re also seeing a growing emphasis on coding practices that reduce energy consumption, which affects the entire lifecycle of product development, including hardware and software.”

Overall, technology is a transformative force that not only supports current sustainability practices but also opens up new avenues for future advancements and more efficient data management and reporting.

The impact of AI on the future of CSRD reporting

AI has the potential to significantly enhance the future of CSRD reporting by leveraging the machine-readable data mandated by CSR. This shift towards digital data formats will facilitate comprehensive analytics, unlocking a vast array of opportunities for companies to analyze and utilize this information effectively. The European Single Access Point (ESAP), slated for launch around 2030, will further centralize CSRD data, enhancing accessibility and analytical potential.

AI’s role extends beyond data handling to improving the quality and enforcement of sustainability reporting. With AI, companies will be able to address the challenge of auditing and compliance more efficiently, alleviating concerns about the reliance on human expertise in a rapidly growing and evolving field like ESG.

Moreover, AI technologies will bolster critical tasks such as data collection for double materiality assessments, predictive analytics, and scenario analysis. These tools will not only streamline processes but also empower companies to prioritize their sustainability actions and strategies better, leading to more informed and effective decision-making.

What sectors will benefit from embracing CSRD reporting as a tool for growth?

Companies across various sectors, particularly those that are listed, stand to benefit from embracing CSRD reporting. Listed companies, especially in high-impact sectors such as real estate and retail, gain significantly as their CSRD reports attract attention from pension funds and large investors who factor these into their Environmental, Social, and Governance (ESG) ratings. This makes CSRD reporting particularly valuable for these sectors, providing them with opportunities to enhance their visibility and appeal to impact-oriented investors.

For industries like real estate and construction, which have traditionally lagged in sustainability practices, CSRD reporting offers a chance to transform from laggards into leaders. This sector stands to gain as it moves towards understanding and reducing the environmental impact of construction materials used in building projects, where there are still struggles with getting EPDs (environmental product declarations) and understanding the supply chains and embodied carbon. The process of collecting and analyzing data through CSRD reporting can drive more informed decision-making in real estate projects.

Additionally, the new CSRD regulations will extend their reach beyond EU-based companies to include non-EU players that have significant operations within the EU through branches or subsidiaries starting from 2028. This expansion means that even non-listed SMEs and non-EU parent companies will need to embrace CSRD reporting to operate and grow within the European market. This broad application underscores CSRD’s role as a transformative tool for industries aiming to align with global sustainability standards and attract international investment.

Summing up, new regulatory frameworks offer businesses the opportunity to restructure their operations towards more sustainable practices. By engaging in double materiality assessments and involving local stakeholders, companies can discover new sustainable pathways and targets, viewing these efforts not just as obligations but as chances for transformation. Get the full webinar recording to uncover more insights from this meaningful panel discussion.

As a tech ecosystem, Beetroot is committed to creating sustainable social, economic, and environmental impact at scale. Our approach to sustainability is linked closely with the UN’s Sustainable Development Goals. It translates into our daily work, strategic choices, and building relationships with partners, customers, colleagues, and the environment, establishing Beetroot as a trusted supplier of tech solutions for impact-oriented companies. Download our Sustainability Report to learn more about our tangible efforts, and feel free to reach out to join forces in making a meaningful difference through technology.