The EU’s Corporate Sustainability Reporting Directive (CSRD) will require many companies in and outside the EU to report on environmental, social, and governance (ESG) topics, with staggered effective dates starting in 2024. Large U.S. multinationals will be among the first groups to comply with this precursor to the Securities and Exchange Commission’s climate disclosure rule.
Preparations that companies have to make are extensive. They have to build cross-functional teams, educate participants, set timelines, figure out data sources and flows, and discuss materiality and scoping issues.
Accounting and controllership executives have key roles. Three executives talked about their early progress and approaches to CSRD compliance at the Corporate Financial Reporting Insights conference last month.
For the most part, sustainability reporting is about drawing together employees from multiple departments, not hiring a dedicated team. Elizabeth Saxon, senior director of global policy, technical accounting, and ESG controllership at Dell, said preparing to comply with CSRD is “by far the most cross-functional work that I have ever done. There were organizations within the company I never knew existed.”
“We're not building an army of full-time ESG people; we have to leverage people where they are today and kind of incorporate this into their daily work."
Director of ESG regulatory affairs and compliance, Cummins
Although the project requires a lot of time and resources, many people in the company “all of a sudden have a new side-hustle of ESG on top of an already very full workload,” said Jermaine Badie, vice president of accounting and external reporting in global finance at food and beverage company Mondelēz.
Said Josh Inman, director of ESG regulatory affairs and compliance at engine manufacturer Cummins: “We're not building an army of full-time ESG people; we have to leverage people where they are today and kind of incorporate this into their daily work.” However, Inman said, many employees want to be a part of the cross-functional group and bring energy and enthusiasm to the project.
One of Dell’s starting points is looking at existing data and assessing if it’s within the scope of the sustainability reporting requirements. The computer maker has a three-pronged approach: contracting a third party to conduct a readiness assessment, building an internal readiness assessment guide, and leveraging internal audit.
Much of Cummins’ investment and time has been in developing an ESG data lake behind its firewall that connects to “about 20 different internal systems,” said Inman, that collect data ion the employee base, for example, or energy use in manufacturing plants.
“Our intent is getting everything in one spot,” said Inman. The next step is, “Can we map the data out to where it might go?” said Inman. When it’s all done, the hope is the type of reporting obligation won’t matter. “We can go to our supermarket of data, take what we need off the shelf, and create a report,” he said.
The CSRD framework requires accounting executives to see the world through a different lens of materiality because it introduces the principle of “double materiality” for assessing ESG impacts. Companies have to report not only how climate change financially impacts their business but also how their businesses impact people and the environment.
Figuring out what’s material for a company can get complex. Dell quickly realized it needed professional help with the materiality question to set up a good process and build the framework, said Saxon. “It’s critically important to have the right people in the room,” she said.
Five years ago Cummins contracted a third party to help with a materiality assessment for its own purposes, said Inman. “There was no CSRD, no knife at our backs” at that time, said Inman.
Fast-forward to CSRD and the ESG disclosure requirements coming out of California. The Cummins team hoped to leverage the existing materiality assessment but couldn’t find it. “We couldn’t find anything,” said Inman. “Someone did it five years ago; it was on a hard drive, and maybe they moved on,” Inman speculated, “Which, of course, auditors hate.”
For the materiality assessment this time, Cummins has learned from its mistake, recognizing the evaluation has to be audited. The company concludes its double materiality exercise this month, which Inmnan called “incredibly well documented” — one of the benefits of using a third party.
Which entities will fall within the scope of the disclosure requirements? The granularity of sustainability reporting across a large organization is another large part of preparation for CSRD compliance. According to PwC, the management of non-EU-headquartered companies must decide whether “individual subsidiary or global group reporting (or something in between) best balance the company’s sustainability communication strategy with effective and efficient compliance with the reporting requirements.”
PwC says the answer “will depend on a company’s facts and circumstances and may have a dramatic impact on the nature and extent of resources needed to prepare for reporting.”
“Undoubtedly there will be additional country slices that we’ll have to do even if we go the enterprise route.”
Senior director of global policy, technical accounting, and ESG controllership, Dell
Early on at Mondelēz, Badie’s group looked at all the company’s different legal entities and came up with more than 60 entities that would technically require reporting if the company went the “standalone” route. “I liked the global consolidated view” on which Mondelēz already reports because “we already have some processes,” Badie said, and “controlling the messaging is a little easier.”
Cummins, said Inman, has a complex legal structure optimized for things like tax and acquisitions and other reasons, but “it’s not so good for CSRD reporting.” The focus right now is getting the building blocks in place so Cummins can report at any level, said Inman. “Honestly, from a scoping perspective, we’re keeping our powder dry,” he said.
“We're going to report big numbers at the company level, but then we may also have to report different numbers at individual legal entity levels,” Inman said.
Saxon said Dell is “not fully settled” on whether to take an enterprise approach. There are nuances in the standards, and “looking at things like disaggregation and when will it be okay to provide entity-wide information versus disaggregation is new for all of us,” she said. “Even if you go the enterprise route there may be disaggregated metrics you need” to publish, Saxon said. “Undoubtedly there will be additional country slices that we’ll have to do even if we go the enterprise route.”
When asked about the surprises in the compliance journey, Saxon, who started leading the function about a year ago, said it’s the slow pace of progress: “It takes a long time to get alignment, education, and understanding.”