CSRD: you must transform to report

Tomasz Baranczyk, partner of PwC Poland, CEE clients & market and ESG tax & legal leader, talks to the BPCC’s Michael Dembinski about the costs and benefits of implementing the Corporate Sustainability Reporting Directive, and whether it will harm or help Europe’s competitiveness.

Climate change is a challenge humanity must tackle – but is the EU’s Green Deal the right answer? Is it not harmful to the future competitiveness of the EU? And how do the costs of complying with CSRD balance with any environmental benefits resulting from the directive?
Mario Draghi’s report prepared for new European Commission offers interesting insights for us in terms of what could happen to sustainability going forward. Starting from the macro view, it’s a challenging opportunity. On the one hand we know that it requires lots of efforts and money. Mr Draghi indicates that for this opportunity to be really effectively at the EU level, we need to be prepared to spend €800 billion annually – roughly 5% of the EU’s total GDP – on additional investment to be spent on innovative technologies. The report shows a huge gap to the US in terms of competitiveness, but there’s hope for the EU given that there are parts of business in which we still seem to be pretty competitive – wind turbines, for example. The EU is still a source of really good technologies on the global scale. So there’s hope, but there needs to be some reflection on whether the requirements coming from the EU, such as CSRD and Taxonomy, are maybe not too much. The newly formed European Commission has confirmed that it will not resign from the European Green Deal, but perhaps this reflection will eventually lead to some loosening of regulatory burdens.

This is the bigger picture; it focuses on turning sustainability into a competitive advantage for the EU. To this end, it’s aimed at enabling the EU to reach its desired goal of being the first continent to be climate neutral by 2050; nothing changes from that respect. But looking at the micro-economic view, or the value-creation aspect from the company standpoint – and here I’m talking about this on the basis of the studies that we conduct at PwC – then there’s an expectation that the sustainability agenda is closely linked here with this technology revolution.

CSRD imposes significant new compliance issues for Europe’s large and medium-sized businesses – can technology step in to lighten the load?
Using AI can help to save much time spent on data collection and analysis. This is being seen as a game-changing factor which can significantly reduce businesses’ internal efforts. These savings will be achieved through automation; 59% of companies that we interviewed said that gathering and processing data in the context of sustainability reporting is the biggest barrier in transforming their businesses. Companies know exactly what data they need to collect for their financial reporting, but in terms of data needed to assess their impact on environment and society, they must first understand the scope of what needs to be collected – data that sits in many different places across the firm and its supply chain. Companies usually tell us that they’re aware of what’s expected based on ESRS [European sustainability reporting standards] either in the climate or social or governance part with regards to their own data, but they’re lost in terms of being able to get quality data from their value chain suppliers. For these SMEs, concepts such as ‘carbon footprint’ can be pretty alien; they don’t know how to calculate it or present it to their clients. Looking at Poland today, based on our studies, 45% of companies declared that for data gathering purposes they use Excel. Less than 3% of companies use or contemplate using advanced IT solutions for gathering and processing data for sustainability reporting purposes. So there’s a problem – they don’t know how, and they don’t know what to use, in order to collect the data.

Mario Draghi’s report provides numbers for sustainability compliance. In the case of non-listed companies the number is €150,000 whilst for listed companies it’s above €1 million. These are probably underestimated numbers if you look at total cost and effort needed here. At least thanks to technology there’s still the possibility to enhance this reporting – practically all the big tech vendors have ESG tools to support companies’ reporting – but we’re not yet at the stage where these tools are in widespread use. We’re much behind in terms of being prepared for data being gathered properly, with most companies still using spreadsheets. That’s the point I’m making from the value-creation perspective. Our studies show 28% of companies expect that sustainability regulations could lead to benefits by way of creating new sources of revenue.

Why this is the case? What will drive business to invest in this, other than fear of sanctions?
The logic of these regulations – including CSRD – is that to report you need to transform. Pursuing your sustainability agenda, your net zero, you need a plan to transform your business. While preparing yourself to report to boards and wider groups of people across companies, you must first reflect on what changes are needed in terms of improved energy use, in terms of your value chain, in terms of your supplies, and in terms of your product mix in order for you to be more effective. This can lead to improvements through the introduction of novel concepts. So this can hugely support innovation – much needed in our part of the EU.

The studies PwC conducts annually show a growing number of investors who say that sustainability management has become a crucial factor. Our most recent study shows 75% of investors confirming that companies’ sustainability management policies are taken into account when investment decisions are taken. However, there’s this growing uncertainty around the quality of data presented by companies.  I’m talking about the greenwashing. The last PwC global investor survey shows that 94% of investors believe that corporate sustainability reports contain unsupported claims! This percentage has substantially grown since last year, when around 80% of investors claimed that there’s some level of greenwashing in the sustainability data. So CSRD – based on a standardised approach towards data gathering and data presentation, and audited by external auditors – should become another game-changer. If this data can be trusted by investors, it can lead to increased level of sustainability-oriented investment in the EU. This can lead to more business. This is important; from this value-creation perspective this needs to be based on trusted data – that’s the crucial point.

To comply with CSRD, firms merely have to show that they are collecting and reporting the data. The numbers don’t have to show improvement; they just have to be reported. So at the end of the day it boils down to the investor to take a view. Banks and financial institutions here are going to have an enormous effect on the ESG strategy going forward because they’re already saying, “we don’t like your numbers; you’re polluting more, so your cost of operating capital or your investment loans are going to be more expensive”.
That’s the logic behind the system. Regulations were first imposed on financial institutions, on banks, so they’re already looking to green their portfolios. If they’re to work effectively with their clients, they’ll be pushing them towards financing green investments and offering more sustainability-linked loans and related instruments. Business should feel that if you invest in those sustainability-related areas, the cost of capital, the cost of borrowing will be lower. This is where we are heading.

ESG mislabelling was possible because of a lack of standardisation and the lack of external data verification. CSRD should result in more trust, more stability, more consistency, as well as more quality information in the system. But there are sanctions for presenting false data that can be imposed on board members. And external auditors can also be sanctioned if they confirm the validity of information that’s false or falsely collected.

Our survey shows that 61% of investors consider faster AI adoption as extremely important in terms of where they look for value creation; this AI is also there to support the process of gathering data and preparing data for sustainability reporting purposes. So this time- and cost-saving element, as well as this new value stream of revenue creation aspects is all very much related to machine learning. These two topics go in parallel: technology and sustainability.

Our various studies show that if there’s a standardised trust-based approach to sustainability data gathering and reporting, the expectation is on the side of companies as well as on the side of investors that this should lead to increased stakeholders engagement.

Companies have to presumably report how prepared they are for dealing with the effects of climate risk.
This is part of again this double-materiality exercise that companies reporting for CSRD will have to conduct. Companies will have to reflect on the scope of risks and opportunities stemming from these climate and social impacts, and will have to put together plans for how to address these. Looking at our PwC investor studies, there’s an expectation from investors that they should be presented with the monetary value of that environmental impact. Investors will need more precise information on how companies assess the impact of climate risk in monetary terms. How much money companies will need to spend to prepare themselves to sustainably conduct their business operations going forward; how to stay resilient and competitive. We have to find ways to do so; sustainability can be the area where the EU can be the standard setter, leading the world by more actively pursuing innovation in green business which eventually will gives European businesses a competitive advantage compared to the rest of the globe.

If we look at GDPR as an example – it’s the highest standard in the world when it comes to personal data protection. If any company from Asia or the US wants to do business in Europe or with Europe, it has to be GDRP compliant. So here we’re talking about a form of non-tariff barrier where that if you want to export your goods into the EU you’ve got to go through the sustainability compliance
You’re absolutely right – these regulations are EU regulations but in terms of companies headquartered outside the EU, companies from wherever from the globe with significant operations in the EU, with operations above €150 million, they will also have to report. GDPR is a good example globally; of course may be some kind of tension, but whatever the regulations, there has to be some approach to climate change because this is absolutely something that has to be addressed.  Businesses must be able to respond to the costs and opportunities stemming from that, so there has to be a way to react, and the EU is well advanced in terms of reacting by having proper rules. Yes, there are questions as to how they will be executed, and how they will eventually support innovation, but I’m hoping that again with some corrections stemming from the Draghi report, there is going to be significant progress in that field.

In late October, 230 lives were brought to a sudden end in Valencia in Spain because of a climate change-powered meteorological catastrophe. Yet people are not linking these extreme weather events to their day-to-day behaviour. They’ll still get into their big SUVs to drive five kilometres to their office car-park rather than taking public transport or cycling, and their shopping habits, their consumption, are still not predicated by the reality of climate change.

Yes and no. If you look at studies indicating what Generation Z is saying, there’s clearly hope here. The newest generation entering the workforce and the younger generations coming after them are looking at this differently.  For them sustainability is pretty natural. Their daily habits and patterns of consumption are different. So if I were looking for sources of hope, this generational change could be hugely influential in bringing about change. In one of the studies relating to consumer markets, more than 70% of surveyed younger consumers said that they take sustainability into account when purchasing goods. So for them, it’s quite natural to treat ESG or sustainability very seriously. This is not maybe that much visible in terms of older people. And  if we would look at where we were three years, five years ago or ten years ago, we can clearly see that there is progress, there are more people acknowledging that climate change is obviously happening, and that there have to be ways to address it. We are gradually moving in that direction. If that’s supported by the implementation of these regulations which will support the building of good habits, then that’s for the good. And if the community acknowledges that this can really help create for them new revenue streams, new business patterns, new innovations.  If this is all properly supported by AI and technology, we can be positive that this will help our economy and our businesses be more resilient, more innovative and maybe competitive – hopefully also on a global scale.