Isobel Wild [00:00:07]:
Hello everyone. Welcome to status sustainability. Today we're going to talk about CSRD and how to prepare for it. Saif. Hey, how are you doing?
Saif Hameed [00:00:15]:
Hey Izzy. I'm good, thanks. How are you?
Isobel Wild [00:00:18]:
I'm very well. I get a bit overwhelmed by the idea of CSRD and I'm not even having to actually process or manage it. So I hope by the end of this podcast we could be a bit more level headed and not as intimidated by it. I don't know what your feelings are on CSRD before we start.
Saif Hameed [00:00:35]:
Yeah, I totally agree. I mean, the nice thing, I guess, is we've had a few years to process CSRD. Like the actual text has been out for a while. I would be surprised if most people practicing it have fully read it, but that's the case with most legislation. But it has been well socialized I would say, so far.
Isobel Wild [00:00:55]:
Well, for context for those who haven't read it, the corporate sustainability reporting directive, aka CSRD, is the EU's landmark law for making ESG reporting more consistent. So it requires about 50,000 companies of a certain size. So this is over 250 employees with over €40 million in revenue to make annual sustainability reports in line with the European Sustainability reporting standards. So just note this confused me too. CSRD is the law who states that you have to report it, whereas ESRs are the standards that tell companies how and what to report. So the ESRS basically requires companies to disclose how they measure and manage their sustainability impacts, risks and opportunities across twelve standards. And these are actually quite far reaching. So it's not just carbon, but it's also biodiversity, circular economy.
Isobel Wild [00:01:58]:
And I think the main thing I want to highlight here is the subject of double materiality. And this requires companies to look at both impact as well as financial materiality and means companies have to report on both of those risks and opportunities, which may be financially immaterial. So what does this all mean? It basically means that everything's just got a little bit harder. So there are more issues to report due to double materiality. There's broader themes for disclosure with the twelve ESRS standards, and there are a wider set of stakeholders to engage, including investors, customers, employees, suppliers, etc, etc, etcetera. Saif, I would love to just get your understanding on how different companies are approaching CSRD and if there are any like ambitious archetypes that you see emerging.
Saif Hameed [00:02:50]:
Yeah, I think that's a big meaty topic to dig into, Izzy. So thanks for the softball there. I'm seeing two archetypes, maybe three archetypes. Actually, there's always three Izzy and I were joking about this. There's always three on this show, three archetypes. One is where finance owns the topic. And so the finance team says, this looks a lot like the financial audit requirements that we've already tackled for years. Let us own this, because there's a serious liability for the business, its directors, whether it's fines or actual jail time expected.
Saif Hameed [00:03:27]:
In many jurisdictions, the sort of punitive or the penalties are devolved to the countries to come up with their own versions of that. France has some pretty stringent ones that have been released, but, yeah, so basically finance owns it and says, let us drive this. That's one archetype. A second archetype is where it's owned by an ESG team, and the ESG team owns the whole thing, which is all the data gathering, all the collation, the submission, etcetera. And there's a third archetype, which is where finance may own the submission and the collation at the end of the day, but their component parts devolved to different teams. And so there might be, for example, a sustainability team that owns carbon accounting as a subtopic, and there might be other teams that own different supply chain, might own some of the supply chain risk elements, and those are then aggregated together. And maybe that aggregation is done by finance. So I sort of see these three.
Saif Hameed [00:04:22]:
The first two are centralized in finance or ESG, and the third is distributed or devolved across the organization with some aggregation on top.
Isobel Wild [00:04:30]:
And do you have a sense of which one is the best archetype to go for?
Saif Hameed [00:04:34]:
No, I think that it depends on the company. And so the third one, I find, is often a larger company that I see doing this, where they have enough capacity to actually have some work streams owned by different teams and absorbed within the workflow cadence. I think, to be honest, that between the finance team owning submission and the ESG team owning submission, the risk averse will probably go for the finance option because it's a more tried and tested pattern of these sorts of high risk requirements being met. But I don't think there's one choice. I think actually every company, kind of based on its organizational structure and scale and size, might go in a slightly different direction.
Isobel Wild [00:05:15]:
And in terms of resource managing for CSRD, I know this will probably vary in terms of company size, but what kind of investment can you expect that you need to make to ensure that you can? Maybe we go down the like. You can actually just comply to CSRD and then perhaps I can ask for another second case study on how you can then integrate policies to make sure it's not just csrd you're complying to, but having full impact as well. So with those two points, what kind of investment are we looking at?
Saif Hameed [00:05:49]:
Yeah, so you mean like, what is the investment just to comply with regulation and the letter of the law versus actually, if you want to go full throttle towards change and impact? I forget the exact number, to be honest. But the EU CSRD had, as part of its buildup, an assessment done by third party consultants. I believe that they engage to see what the economic impact would be to companies that were captured by regulation. And I think it was in excess of a million dollars or so was the expectation of what it would cost the companies that were involved to put together all of the reporting requirements, manage the accounting, not just the emissions accounting, but also all the other aspects of this. And I think that out of that, from personal observations and anecdotal evidence, if I look at the 50,000 companies or 48,000 companies or so that are in scope, I find that many of them are probably spending a lot less than that amount today. And one could argue they're underspending and the spending is going to ramp up. But I think that many of those companies are spending a fraction of that number, and I think there's a small slice of those companies that are spending a multiple of that number. And I think that there's probably going to be some settling around this.
Saif Hameed [00:07:08]:
So the companies that are spending the higher amounts probably have some efficiencies. As they get more used to the cadence of this, maybe they go more towards automation and tooling. And the other companies, I think, start to ramp up what they're doing. And so maybe that number ends up being about right. But right now, I think it's kind of sort of a significant skew in different directions. And then. Sorry, Azee, for the second part. Ooh.
Saif Hameed [00:07:29]:
There is no cap on the amount you could spend to improve the impact of your business and your value chain. I mean, there is a cap, but it's like a hard cap to compute. But I think that, like, if you look at environmental impact reduction budgets in large companies, we're seeing this be anywhere from. If I think about, again, large companies within that group of 50,000 or so, I would say it's probably anywhere from a million dollars to 100, 200, $300 million a year is kind of anecdotally what I'm seeing in the market. I guess you take, for example, the Nestle budget of €1.3 billion to be spent on region AG, I think it was over three to five years or so. You can do the math on that sort of thing and already come to a number that is in the hundreds of millions. And I see multiple companies going in that direction. Those are obviously the behemoths, but even smaller customers of ours.
Saif Hameed [00:08:28]:
We have some customers that are fractions of that size, a few hundred million in total revenue, and they might well be spending close to a million dollars on their environmental impact programs.
Isobel Wild [00:08:40]:
Okay, so big money is on the table. But on this point of compliance versus impact, do you have any advice on how you can move beyond compliance and actually make useful impact of CSRD and of these policies that you're setting? So it's not just a tick boxing exercise?
Saif Hameed [00:08:59]:
Yes, I think that how you set up your program for delivery will drive that. And so let's take one example, right? If you're purely trying to meet reporting requirements, there are quick and easy ways, relatively speaking, for you to put together your environmental data. And this might mean that you use spend based scope, three emissions calculations, for example, decreasingly possible in the food and apparel and personal care space given flag. But let's say that's the direction you go in. You might use spreadsheets, you might aggregate stuff in a sort of quick and dirty way, less orient towards repeatability, but also less orient towards using this data for day to day decision making. You'll treat it as like a once a year exercise and kind of revisit that process every year. And it'll be a bit heavy lifting when you do it. But it's probably cheaper than setting up systems that you can use for ongoing analytics and ongoing decision making.
Saif Hameed [00:09:59]:
I think in the other direction, you'll start saying, well, actually we're going to need to move the numbers down, and I'm thinking very much about environmental impact here. And therefore we need to make sure we get weights, activities, more enriched data or purchases data, for example, with more metadata associated with it, and start building that and preparing it for analytics. Actually, that may mean you need to clean up a lot of the data because it's very messy, or you need to get data that isn't there at all in your ERP systems or otherwise. And that then starts taking you into this deeper and deeper kind of this sort of dragon's layer of stuff that you need to fix. And that makes sense if you want to drive environmental impact change. I think just bringing it back to the double materiality problem. There's also, if you look at those two categories of double materiality, one is what is the impact that my business is having on the world? And the other is what is the impact that the world is having on my business. Basically, you could get better data and enrich data for decision making in both directions and in the first one, which is the impact that my business is having on the world.
Saif Hameed [00:11:11]:
One could argue that there's an altruism or a brand perception management or something slightly fuzzy in spending additional dollars to make impact happen in that direction. But if you look at the other camp on the materiality spectrum, which is what impact does the world have on my business? That's purely prudent, pragmatic investment to minimize the impact that climate risk will have on your supply chain. That's going to pay back because you're just increasing resilience and minimizing disruption potential if you start acting on the basis of, of data. So I think there's also slightly different ways to view this, even within the double materiality zone and maybe just a.
Isobel Wild [00:11:49]:
Touch on the double materiality. Again, most companies doing the first draft of CSRD should mostly be done with their double materiality assessment. From any conversations you've had or any experience, what would you say is the best way of getting it right?
Saif Hameed [00:12:06]:
I think that my answer may seem a little boring because this is how I would approach any analytical exercise, which is I would first try and identify what does right look like. What are we shooting for? Why are we shooting for that? So if I take aside the two caps, I would say, okay, great. The impact that our business has on the world is important because it's going to boost the power of our brand. It's going to increase the strength of the relationship we have with our customers. Yes, it may help us figure out how to optimize carbon taxes and stuff like that in the future. But there's a whole bundle of value that we get from doing this well, and that's important for a narrative that you're going to build to get your business excited. On the other front, you'll say, well, the impact that the world has on our business, what happens if we do this well and what does well look like? And that's going to be, for instance, look at Covid, look at the impact that had on our business from a disruption perspective. Let's look at flooding, let's look at heat waves, let's look at what impact that would have and why this is important.
Saif Hameed [00:13:09]:
You start with the kind of the why. You then say, okay, great, what does it look like to get there and what do we need to do to get there? We need to get better data. Sure, but what are we going to do with the better data? Who are the teams that are going to do that? Let's get them involved now. Then you say, okay, fine. So those teams that are going to use the better data, where does that data come from? Okay, great, let's get that data on board. What is the set of analysis that we need to run on this data? Kind of run a trial around that and maybe it's a heavy lift to run that trial. And then you say, okay, great, I've run this trial, now let me set up for scale. How do I do this repeatably and basically kind of take the analytics project that I've run and make it an institution wide infrastructure project.
Saif Hameed [00:13:56]:
And that's sort of how I would approach not just solving for double materiality, but frankly any analytics use cases that are valuable for the business. If I was working for a telecom business trying to minimize churn, customer churn, I would also approach it the same way because I think that from my perspective, this is a data problem and a data analytics problem to solve for, and you're going to make actions on the basis of that short, but I'm looking at it from the data analytics lens, which is very similar in other use cases.
Isobel Wild [00:14:26]:
So it sounds like you're going to be collecting a whole lot of data which perhaps you might not be ready for. Do you have any insight or tips or tricks or tools that actually can help you prepare for this?
Saif Hameed [00:14:39]:
Yeah, and so I think that one of the best, you sort of need to start thinking about what's the tech stack that you're going to be putting together? And there's a couple of options here. You can either say, well, let us build this ourselves, because we have great institutional capabilities to build for analytics use cases. And then there's a second approach, which is, let's get something off the shelf. Increasingly. I used to be, this is going to sound very self serving, but I used to be a little more nuanced. But I'm increasingly finding that the off the shelf approach is just likely to serve companies better. This is whether they use altruistic or they use someone else, for that matter. But what we think about is you're basically creating a system of intelligence for sustainability.
Saif Hameed [00:15:23]:
And to create a system of intelligence in the data analytics space means that you're taking some element of business data that the business has and maintains in its ERP systems and probably knows reasonably well. But you're also combining this with data that sits outside the business that the business doesn't historically possess. And this is, let's say, the environmental coefficients, whether you look at this as emissions factors or water factors or some element of climate risk data, it's the kind of the environmental coefficients that don't sit outside the business. And you need to bring those in and combine those with business data that the business owns and knows very well. If I go back to, let's say, the churn example that I said, where you're trying to prevent churn in a telecom business, I've done those sorts of use cases before as well, in my consulting life, and that's typically all data that the business does own, actually. Like, there's very little, there's not really a lot of external data in the business needs to bring in. The business needs to figure out how to build a formula and an algorithm on top of the data that it has, and it can do that very well, and it should have the institutional capability to do those sorts of things. But where you're actually now combining that business data with external data and figuring out matching, if you're trying to create that stack yourself, then you are locking yourself in any way into buying external data.
Saif Hameed [00:16:44]:
So you already have an external spend component, and you're locking yourself into a big subject matter intensive problem, which is how do I combine the external data with the business data? In an environment where standards are constantly evolving, so you have an ongoing heavy duty maintenance problem to keep adjusting the formulas, let's say, to simplify things, and an ongoing external spend commitment to acquire the environmental coefficients. So there's actually very minimal saving to be had long term from building this internally versus buying something off the shelf where this problem is outsourced. I hope that makes sense. Izzy. Yeah, and doesn't sound too self serving.
Isobel Wild [00:17:28]:
Not at all. And I think the gauge that I get from CSRD is that actually the scrutiny is not just on the data, but also on the data collection piece. So if you can actually have those steps that you've done to collect the data and like have that third party verified, that's all. Also a key part of the puzzle.
Saif Hameed [00:17:46]:
If you kind of think about the use cases that companies historically solve for internally, in most cases, those are not use cases that they are expecting to have audited with increasing amounts of scrutiny externally. And I say this having again, my previous life supported many large companies on building their internal advanced analytics environment to generate outputs. And the quality of those outputs is often highly variable. There's a lot of tweaking that's involved. There's a high error rate. And that's because the business is sort of learning on the fly for this specific use case. But because of the high level of audit scrutiny that is coming on top of environmental data, you might not have that risk appetite, actually, where you can say, okay, look, two, three years, we're going to get this horribly wrong because we're figuring out what the formulas need to be. We're scrutinizing those environmental coefficients.
Saif Hameed [00:18:43]:
The business should really debate whether it wants that headache, given the risk.
Isobel Wild [00:18:47]:
Totally. And the last thing I just want to touch on is policies. So a lot of the reporting in CSRD is around policies, and you have to disclose each area within that policy. Do you have any advice on how to actually set the right policies and actions when perhaps actually you don't have those there already?
Saif Hameed [00:19:08]:
I think maybe just to clarify the question a little Izzy for our audience. When we're thinking about policies, we're thinking about practices that the business is going to put into play internally in the corporate environment. And I think that most companies have a good pattern for doing this reasonably. Most smoothly run companies have a good pattern for doing this reasonably in other contexts. If you think about Deni, for instance, most companies have had to evolve good internal policy frameworks for how they approach this set of challenges. And those frameworks are resilient to external scrutiny because they are tested on an ongoing basis. Like, you are always exposed to the potential that some member leaving your organization might take legal action because they feel that they've been unfairly treated. And so your policies in that sphere have to withstand that risk and exposure.
Saif Hameed [00:20:01]:
And I would suggest that this problem be tackled very similarly, which is companies have historically deployed a combination of two things. They try and acquire expertise. So they say, let me go and find someone who has solved this problem before in other organizations and let me bring them in. And there was a massive de and I wave happening in the 2016 2017 sort of era, and you start to see a chief diversity officer role be created in many organizations. And that was organizations acquiring this expertise. They were either trying to build it internally and saying, this is the person who owns this topic, let's beef up this sort of person's team and responsibility and invest in building capabilities, and we're going to build that capability internally, or let's bring someone in from outside who solved for this set of challenges before, and that's us acquiring expertise. And you can also do this by saying, let's combine our existing HR team, for instance, with external consultants that are specialized and that's kind of how this sort of challenge has been solved for in an analogous space. And I would suggest that organizations approach it the same way, which is look for expertise, whether you're bringing it in house or finding it externally, and then build an internal playbook that you can deploy and you can log and record and enforce reliably, and you've done this before and approach it with the same logic.
Isobel Wild [00:21:23]:
I think that's some great logic to end on. Saif, any final thoughts on the great CSRD?
Saif Hameed [00:21:29]:
I think that CSRD is in some ways already a bit of a legacy of a bygone era, which is odd because it's yet to fully come into force. And so the reason I say that is because CSRD was conceived in kind of boom times before COVID actually as well, and it was deferred during COVID and it's finally now on the cards. But it is something that the policymakers really of six, seven years ago have bequeathed to us. And I think that CSRD would probably have a harder time getting defined and passed if it was fresh today. And so as an environmentalist, I'm quite happy that we have CSRD. We had this debate, a little easy around the SEC stuff, but I think that CSRD is probably a high watermark for current times. And so I think it is, as an environmentalist, I think it's ambitious enough, which is good. I think it's going to probably take five or six years to really see companies starting to grow into it.
Saif Hameed [00:22:33]:
So we're probably going to see a lot of clarification around the edges. There's a lot of gaps like CSRD. The whole accompanying documentation doesn't define every edge case and doesn't define every aspect of how you're going to meet these requirements. I think that's going to be fleshed out. I think we're going to start to see more examples of best practice emerging, and I think we're also going to start to see more instances of bad practice emerging and fines and penalties. And I think that'll start driving a lot of momentum towards compliance. But this is all what we have in store over the next five years. So it's going to be interesting to.
Isobel Wild [00:23:08]:
Watch, for sure, many podcast episodes ahead. I look forward to it. Saif, thank you so much. And thank you, everybody, for listening. Goodbye.
Saif Hameed [00:23:16]:
Thanks, Izzy.