Captain Planet Greenlights Blockchain for CSRD

In an eco-friendly plot twist that would make Captain Planet proud, the EU has rolled out the Corporate Sustainability Reporting Directive (CSRD) - a blueprint that’s got big companies talking about more than just profits. Imagine a world where every major company’s reports don’t just boast about their latest earnings, but also how they’re helping (or hurting) our planet.

Gone are the days when environmental impact was the oft-neglected elephant in the (board) room. With the CSRD, the EU is handing out magnifying glasses to investors, regulators, and anyone curious enough to take a peek—enabling them to scrutinise how companies are dealing with climate change, social issues, and our beloved environment. It’s a bit like social media for corporations, but instead of trust-inducing selfies, it’s all about their green credentials (or lack thereof).

So, as the CSRD kicks off a new era of corporate accountability, let’s explore the EU’s corporate sustainability reporting vision and you guessed it—dive into blockchain’s role in bringing trust and transparency to the world of corporate sustainability reporting.

Unpacking The Corporate Sustainability Reporting Directive (CSRD)

Under the European Green Deal and considered an extension of (or replacement for) the EU’s 2018 Non-Financial Reporting Directive (NFRD), the CSDR is the cornerstone of the EU’s vision for a sustainable economy, environment, and society.

Since January 5, 2023, the EU has been like a strict school teacher dishing out homework for companies, requiring them to disclose information on what they see as the risks (and opportunities) arising from social and environmental issues and the impact of their activities on people and the environment.

NFRD CSRD Brings Over 50,000 Businesses Into The Green Fold

The original NFRD required organisations to share information about five core aspects in their annual reports including respect for human rights, environmental protection, anti-corruption and bribery, gender, education, profession and age diversity, social responsibility, and the treatment of employees.

Moving beyond the Non-Financial Reporting Directive, CSRD extends the scope of the requirements to all listed companies and large companies. Approximately 50,000 companies in the European Union will be obligated to complete the extra-curricular work and non-EU companies generating sweet euro revenues of €150 million+ will also be brought into the green fold, required to comply with CSDR.

The CSRD requires that companies report information on financial risks, such as those risks to the business created by climate-related events (e.g., flooding, droughts, hurricanes, etc.) and information on the impacts of corporate activity on people and the environment, such as carbon emissions, pollution, deforestation and human right violations, among others.

Unlike the NFRD, the CSRD has introduced a new requirement of external auditing of sustainability reports and the digital tagging of the information to be fed into a central system. Thanks to the EU, the sustainability rules of the business game have been set, and come 2025, we’ll see the first batch of these tell-all reports.

Every Great Reporting Initiative Requires Great Reporting Standards (ESRS)

The EU has kicked off the European Sustainability Reporting Party, and because every great party needs a great playlist, the EU has introduced the European Sustainability Reporting Standards (ESRS) to ensure everyone’s dancing to the same tune.

CSDR and ESRS aren’t just about making companies sweat; they’re about reducing the guesswork for investors, empowering consumers, and trying to make the reporting process as smooth as the melting ice caps or ethically sourced organic coconut butter.

It’s vital that reporting is standardised and efficient, as according to KMPG, "The ESRS will significantly affect the scope, volume and granularity of sustainability-related informationthat companies need to collect and disclose”.

Companies will need to include comprehensive sustainability statements in their management reports. These statements should cover:

• General Disclosures: Focusing on both 'impact materiality' (how the company's activities affect the environment and society) and 'financial materiality' (information influencing investor decisions). This dual approach, known as double materiality, requires extending reporting to the entire value chain, including all business relationships.
  
  
• Industry-specific Disclosures: Tailored standards requiring additional disclosures for companies in certain sectors.
  
  
• Custom Disclosures: Companies must also report specific impacts, risks, and opportunities unique to their operations, adding depth to the standard ESRS requirements.

Captain Planet will be happy knowing that he’ll soon be equipped with the data to verify that his favourite chocolate bar has been ethically sourced and sustainably produced. Investors will sleep well knowing that they are making informed (and hopefully profitable) investment choices. But for those sitting behind the steering wheel of major corporations? They’re faced with quite the reporting challenge.

CSRD Challenge Becomes Blockchain Opportunity

The scope and detail of the reporting standards mean businesses face a very real challenge of collecting, processing and reporting data. This challenge creates an opportunity for businesses and technologies looking to make it easier to comply with the CSRD mandate and ESRS standards.

This reporting challenge is amplified massively for companies with extensive value chains, as eloquently described in this Corporate Sustainability Reporting and Blockchain study;

Imagine you’re a multi-national like Nestle and you need to report on the impacts, risks and opportunities connected with producing Captain Planet’s favorite KitKat bar. Now imagine doing the reporting for 2,000 other products and now consider that Nestle’s value chain includes over 5 million farmers in rural areas who all need to be engaged in the process.

And because businesses are more than just production, you also need to report on your employment practices, internal health and safety processes, and all other facets of operations that may have an impact on people and the environment. Now that the scope of the CSRD challenge is starting to enter focus, let’s bring blockchain to the discussion.

A Quick Blockchain Explainer

Beyond crypto, NFTs and DeFi—blockchain brings a lot of potential to the sustainability reporting party. As the guest DJ, blockchain cranks up the trust and transparency for data reporting and welcomes an era of corporate accountability. But first, what exactly is blockchain...

"Blockchain, also referred to as distributed ledger technology, refers to a database, which is shared across a network, thereby allowing users who do not necessarily trust each other to share the responsibility of database management without recourse to a central validation authority.” (Source: Duke University FinReg blog)

This database is a powerful innovation that enables individual parties to contribute to a shared file system—adhering to CSDR’s requirement of the digital tagging of information to be fed into a ‘central system’—that can then be accessed by verified third parties. Let’s break it down and see what it means for CSRD.

How Blockchain Can Help With CSRD

1. Immutable Audit Trails

Blockchain is the opposite of a murky cloud or centrally controlled private database hidden in the basement. Once sustainability information, like emissions data or energy usage, is logged on a blockchain, it's there for good—no edits, no deletes.

Entering data into the blockchain ledger requires an account that can sign ‘transactions’, effectively entering data in the blockchain ledger (kind of like signing at the library to borrow a book). This immutable transaction history means every piece of data has a verifiable history of who said what and when which dramatically reduces the chances for mischief and makes the data trustworthy.

Blockchain start-up Monadi is aiming to be one of the first out of the CSRD solutions gate, announcing the 2024 launch of their CSRD tool using the Partisia blockchain which seeks to enable data transparency, credibility, and encryption for sustainability reporting.

2. Decentralised Verification

Instead of one big boss verifying data or controlling the database, blockchain uses a decentralised network—think of it as a roundtable where multiple parties (regulators, auditors, even competitors) verify new data entries in the shared blockchain database.

This decentralisation is a major design feature of many blockchains and is an inherent part of their ability to process transactions (data entries) from otherwise unknown parties and reach a consensus (resulting in an updated database).

This could be especially powerful with a Proof of Stake (PoS) consensus model, where network validators, selected based on their stake in the network, ensure data integrity. It's democracy in action but for data!

3. Smart Contracts for Auto-Pilot Compliance

Smart contracts on the blockchain could automate much of the sustainability reporting process. These digital contracts execute actions automatically when certain conditions are met—like releasing quarterly sustainability data to the public or alerting companies if their emissions exceed legal limits. It's like having a hyper-efficient robot secretary that makes sure everyone plays by the rules.

With the CSRD’s requirement for third-party auditing of sustainability reports, blockchain and smart contracts can massively streamline and automate this process too. The EU-approved auditor would be granted access to the blockchain-stored reporting data, and smart contracts could release a specific entity's sustainability report with a simple request or even automatically when pre-defined conditions are met.

The audit history would then be registered on-chain, any certification for compliance would also be registered on-chain, and the entire history and certification could be verified by the EU or any other third party.

4. Traceability Across the Value Chain

With CSRD requiring detailed reports on entire value chains, blockchain provides unmatched traceability through each step. From the moment raw material is extracted to the end-of-life of a product, blockchain can track it all.

This isn’t fantasy either. The World Wildlife Fund (WWF) and BCG Digital Ventures have launched a digital platform that uses blockchain to track food and products. The OpenSC platform helps people and businesses avoid illegal, environmentally damaging, or unethical goods by enabling anyone to scan a product QR code to reveal where the product came from, how it was produced, and how it journeyed along the supply chain.

Marco Lambertini, WWF International Director General, commented;

"Unsustainable production of food and goods is a major driver of environmental damage and some of the worst supply chains remain rife with human rights issues. For the first time ever, OpenSC gives consumers the power to track their purchases from source to store, enabling them to buy and importantly, demand sustainable and ethical, fair products from companies. OpenSC is a game-changer, massively increasing transparency and accountability.”

There are ample other blockchain value chain tracking projects showing promise too. Examples include tuna supply tracking,Starbucks' tracking of coffee beans, and cocoa bean tracking for chocolate bars. This transparent tracking of ingredients through the value chain helps companies prove their green credentials every step of the way.

5. Standardized Data Frameworks: Speaking the Same Language

Blockchain can help standardise data across borders and industries, simplifying the complex web of international sustainability reporting. As CSRD mandates machine-readable documents, blockchain’s data integrity and standardisation can facilitate the seamless and secure sharing and retrieval of information.

Just like the internet and computers use data standards, frameworks and protocols to function effectively, blockchain and CSRD/ESRS can leverage data standards to ensure we’re all speaking the same language.

And when we’re all speaking the same language, it ensures we can all seamlessly contribute to a centralised system and it simplifies things like industry benchmarks that all businesses can aspire to.

6. Real-Time Data with IoT Integration: The Pulse of Sustainability

Integrating blockchain with Internet of Things (IoT) devices can transform data collection. IoT sensors could monitor everything in real time, from water usage to greenhouse emissions, and record this directly on the blockchain.

Imagine your sustainability reporting data is updated continually and automatically using sensors, and this real-time data is connected to batches of products with scannable barcodes. This provides a constant stream of data, giving stakeholders an up-to-the-minute snapshot of a company's environmental impact and also allows for more granular tracking through the entire value chain.

Blockchain Fosters A Genuine Culture of Sustainability

As we conclude our exploration of how blockchain and the Corporate Sustainability Reporting Directive (CSRD), it’s evident that we are on the cusp of a transformative era in corporate accountability.

When the lights turn on and the music stops, blockchain will be there as a cornerstone technology for ensuring that sustainability reports are transparent, secure, and indisputably accurate.

By integrating blockchain into the CSRD and ESRS frameworks, sustainability reporting is transformed from a once-a-year chore to a real-time, unalterable ledger of environmental impacts and social governance, bringing a level of clarity that was previously unattainable.

As blockchain continues to unfold its potential, the narrative of corporate sustainability reporting is being written. Perhaps blockchain may find its place by enabling trust and fostering a genuine culture of sustainability.