Article 1 in Series: Early Lessons from the Trenches of CSRD Implementation by Noam Gressel
TLDR: CSRD is far beyond “business as usual” ESG reporting. To survive the heat and live to report another year, we must embrace innovative tech solutions that address the most challenging stumbling blocks.
Can you imagine attempting to escape our climatic crisis using wings made of metal feathers on a leather frame held to your body by beeswax? This age-old mythology and its inevitable tragic outcome (Icarus falling from the sky once his wax-coated wings melted) are often interpreted as a warning against hubris. But should we be treating entrepreneurship and ambition so harshly, especially when the motivation is merely an attempt to escape captivity and fly freely despite the scorching sun?
Working my whole career at the intersection between new technologies and the fight for environmental betterment, I believe a more sympathetic and constructive moral to this ancient Greek story might be in place:
Radical change requires the use of adequate technologies.
This is also my message to all those currently scratching their heads, wondering how to tackle the challenges of the European legislation known as CSRD (Corporate Sustainability Reporting Directive). It indeed is an extensive exercise, requiring companies to think through and report their performance, environmental and societal impacts and risks across multiple realms of the environment, society and corporate governance. In short, it is a self-generated, 3rd-party audited, statutorily-required report card consisting of over 1,000 questions that will impact your relations with a multitude of your business’s "grownups”: strategic clients, bankers and investors, policy makers, civil society and the public at large. Not quite the report card you would have hoped to bring home as a teenager…
So what are the adequate technologies for CSRD that will prevent your company from melting under the sun, as in the Greek tragedy? First, it’s important to recognize that such extensive legislation would not have reached political fruition 20 or even 10 years ago, even in the European Union, a leader on these matters.
In legislating CSRD, there is an embedded assumption that adequate technologies exist to meet the challenge.
This assumption applies both to the regulators who will need to review and enforce the law and to the complying organizations, which are burdened with lengthy regulatory requirements, standards, an insurmountable number of guideline documents, supporting materials, and internal reference documents.
A good example of legislators assuming the existence of adequate technologies is the requirement to report using the XBRL format (in compliance with the European Single Electronic Format (ESEF) Regulation. This format has been utilized for financial reporting for some time now, allowing regulators to use digital analytical tools for the oversight process. It also enables other stakeholders, such as investors, to review and prioritize investment decisions using scripts and algorithms that capture the most minute details of interest to them. Ultimately, these tools unlock analysis, alerts and actionable insights that meet their specific investment criteria.
Now that I’ve spent some time in the trenches with clients of ECO-OS, an ESG accounting and intelligence software company I co-founded some years ago, I am able to share what works well, what is absolutely necessary and what is likely to fail. To kick off this series of lessons learned, I’ll begin by exploring the most critical components for the early implementation stages of preparation, setup and launch, including both technologies and best practices.
The following list of CSRD Must-Haves includes both technologies and best practices and was collected through our extensive experience with various companies.
These experiences have taught us the hard way that a thoughtful, technology-driven approach is essential for successfully meeting CSRD requirements.
This guide provides a clear outline of the foundational steps necessary to build a robust and compliant reporting framework, ensuring your company is ready to meet the challenges head-on.
CSRD Must-Have # 1: A single, cloud-based data management system for all quantitative ESG metrics
You do not want to burden your people with the transfer of data from one system to another especially when data was already captured for other operational purposes, for local regulatory needs or for other internal management requirements. If your GHG emissions are already calculated, make sure that CSRD is using the same calculation engine, consistent GHG Protocol-aligned methodologies and emission factors that are also synced with your internal KPIs and targets.
A one-stop-shop will prevent human error, procrastination, save everyone’s time and enforce consistency up, down and across your organization.
However, it should be recognized that smart integration does not occur overnight. In fact, it shouldn’t. First, spend time discovering where the best available data resides, who and how it’s maintained and if it is extensive enough to require machine-to-machine integration. Some smaller datasets should be integrated gradually, either by adding them to systems that are already integrated with your ESG data solution, or via automated or semi-automated forms of file transfer and upload. We view integration as an evolutionary process rather than as a one-off costly, upfront assault on your IT.
CSRD Must-Have # 2: An AI-supported starter kit for qualitative ESG questions
75% of CSRD is a range of textual and multi-selection questions (e.g. yes/no, check the box lists, etc.). There are 3 options to deal with the hundreds of qualitative questions requiring your thoughtful consideration and personally-liable signoff:
(a) lose your sanity while simply thinking about CSRD;
(b) hire consultants to take on the task (in which case you’ll lose your sanity once you recognize they will still need an overwhelming portion of your attention on each and every one of those hundreds of questions to assist them with locating critical information and adequately interpret it); or
(c) save your psychiatric bill for a future time by using a large language model.
Pick one that is designed specifically to read the documents throughout your organization and diligently respond to each and every one of those questions with clear representation of where and what answers you may find within the documents, flagging any inconsistencies between the documents and where your organization may be lacking a clear adequate response.
Our ECO-OS CSRD Starter Kit does exactly this, leveraging advanced AI technology to streamline the process, ensuring accurate, comprehensive, and efficient handling of all your CSRD-related qualitative questions.
It should be noted that this last psyche-saving option does not negate the role of consultants or the role of executives who need to fulfil any missing requirements and ultimately reviewing and signing off on the disclosure before it leaves the organization. It simply shifts consultants’ focus from spending much of their time on data collection and adaptation to where human intelligence has a key role: setting priorities through the double materiality analysis required by CSRD and testing and adjusting the AI-supported responses, while also providing the analysis for some of the details requiring highly specific expertise (such as matters relating to risk analysis, spattered across the ESRS standards underlying the CSRD).
CSRD Must-Have # 3: A year-early gap analysis disguised as an internal shadow report (or vise versa).
Using technology alone is obviously inadequate. The culmination of the interconnected quantitative data assembly and our AI-supported ECO-OS CSRD Starter Kit is a compilation we call the ECO-OS CSRD Navigator: an internal report that can be generated, updated and regenerated at any given time to provide your organization with an up-to-date picture of what progress has been made.
This powerful snapshot includes an outline of the inconsistencies between policies and procedures that still require resolutions, which metrics have yet to be compiled and what policy gaps must still be filled. Juxtaposed against the materiality analysis (usually being conducted by consultants in parallel to our data driven effort) the company gets a clear picture as to the completeness of their shadow submission well in advance of the actual submission. (Note: most organizations that will be liable under CSRD are required to begin reporting in the next 1-4 years, depending on certain organizational criteria).
CSRD Must-Have # 4: A mindset shift: treat ESG accounting as you would treat financial accounting
Most reasonably large organizations have by now recognized that financial performance must be managed using standardized accounting practices implemented with adequate internal controls that ensure data quality, completeness and traceability. Those that haven’t are likely in trouble. That is the radical mindset shift that must now be applied to ESG accounting, which for a few decades now was treated more like marketing material (at worst) or using a plethora of loose local customs, assumptions and approximations that allowed for meaningless bean counting at the corporate level (a slightly lesser worst). These days are over, certainly for those active in the European arena.
And while technology can assist with a range of automated controls assisting with everything from alerts, document management, traceability and big-picture management, most of the shift will need to occur first and foremost in people’s minds.
It is people that will need to green-light preparation well ahead of schedule, it is people that will need to allow the machines to do their job. At least for now. The upside to this rather challenging shift is that once completed, companies can create value through ESG accounting; sustainability-linked finance now offers better interest rates, climate and social risks can be managed up and down the value chain and research and development can better align their efforts offering new products through data-driven innovation processes.
In summary, CSRD is one piece of legislation that cannot be addressed with the “same old, same old” tools and approaches used successfully for its predecessors. The ECO-OS CSRD Starter Kit is a good example of technology we couldn’t imagine developing in the past, let alone using it for regulatory purposes. Scalable, cloud-based computing has been around for a couple of decades, but its rapid implementation for ESG purposes has only come to fruition these past few years with the new generation of tools exemplified by the ECO-OS CSRD Navigator. So what should be your next step? Have decision makers in your organization take the Icarus test: does your organization have the best heat-resistant wax technology to fly freely, despite the scorching sun?
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