As the world of mandatory sustainable reporting continues to evolve, will businesses need to scrabble around desperately to keep up? According to German startup Briink, AI may hold the answer.
In June, the European Council – the body which defines the overall political direction of the European Union – reached agreement on the corporate sustainability reporting directive (CSRD), alongside the European Parliament.
The legislation, first mooted in April 2021, is a key step beyond the current NFRD (non-financial reporting directive) towards mandatory sustainability reporting, more detailed requirements, and accessibility, ensuring reported information is comparable, reliable, and easy to find. Formal adoption is expected towards the end of this year; November or December, depending on who you read. This is, however, not to mention the separate Sustainable Finance Disclosure Regulation (SFDR), which applied from March 2021 and imposes mandatory ESG disclosure obligations for asset managers and other financial markets participants.
By January 1 2024, 2025 or 2026, the CSRD regulation will apply – depending on whether your company is already subject to NFRD for the former, and large and small companies respectively for the latter two. French finance minister Bruno le Maire described it at the time as ‘more transparency for citizens, consumers and investors.’
Confused? It’s not surprising. Look around and the majority of online outlets currently assessing CSRD are law firms and legal blogs, attempting to untangle the complexity in their traditionally dry style. Taking ESG metrics as the baseline – although not everyone may agree – CSRD will require a greater understanding from organisations of their ‘E’, ‘S’ and ‘G’, as well as their data more widely.
Much like GDPR, executives reading this may think there is plenty of time to get their houses in order, before scrabbling around desperately for a solution. Ultimately, it’s about getting your house in order – but the good news is technologies such as artificial intelligence (AI) and big data can help.
Tomas van der Heijden is co-founder and CEO of Briink, a German startup which uses AI to help private equity firms and wider companies automate and scale their EU taxonomy and SFDR assessments. The company offers scanning, assessing and reporting with data security, with a fully compliant, machine-readable EU taxonomy report at the end of it.
Being a finance lawyer by training and having helped build a legal tech company in the US with a friend, van der Heijden’s return to Europe saw him realise the need for a company such as Briink, taking the plunge with experienced natural language processing (NLP) data scientist Samuel King.
“When I moved back to Europe from North America, I saw there was a huge wave of really aggressive, and also really forward-thinking new sustainable finance regulations emerging, to really mobilise capital into sustainable companies, increase transparency when it comes to ESG, and also combat greenwashing,” van der Heijden tells Sustainable Future News. “But there were not a lot of good solutions out there, especially for the large swath of companies that will fall under the expanded scope of NFRD, or the soon-to-be-rebranded CSRD.”
Part of the problem is that van der Heijden describes sustainability data as ‘basically a large mess of unstructured documents’. Websites, documents, PDFs; it’s there, but a lack of uniformity is a struggle. Enter Briink.
“When it comes to sustainability, [information] can often be found within some sort of database – but it’s not really been collected, organised, or structured – and also, importantly, tied back directly to the regulations,” explains van der Heijden. “Because these regulations are new; for a lot of what these regulations are asking companies to do, they haven’t really organised it before as sustainability data.
“So a big part of what needs to be done at the moment is basically going in and trying to find all of the relevant, or potentially relevant pieces of information in large sets of unstructured data. That’s what we’ve been building with our NLP models.”
Understanding both the greater potential and requirements of data collection and reporting, both from an organisational and investment perspective, is Patrick Slavenburg, a Netherlands-based entrepreneur and AI analyst. One of his upcoming projects is Smartified, providing data and AI services for ESG, climate change and energy transition.
Slavenburg is an advocate of ‘augmented intelligence’, which is defined as creating a system for a ‘human-centred partnership model of people and AI’. A good example of this can be seen in wider applications of AI for climate, such as machine learning – which Slavenburg says is ‘basically finding patterns in data’ – predicting weather patterns. The consensus right now, as reported by The Conversation, is that AI is improving weather predictions, but human expertise is still necessary.
Slavenburg spoke at the recent Big Data Expo event in Utrecht around big data and AI in the era of ESG metrics with CSRD on the horizon, and his talk noted the sheer complexity of ESG to start with. From dozens of metrics, the most frequently used are quantitative – carbon footprint, energy and water on the ‘E’ side – to qualitative, encompassing diversity, data privacy and health on the ‘S’ and ‘G’ side.
“ESG metrics weren’t meant to describe originally how good the company does, but how much risk it runs,” Slavenburg tells Sustainable Future News. “If you’re ever planning solar panels, but it’s in a hurricane, you still have a low rating for that, for the climate metric, even though you’re building the most amazing solar panels, super ethical, and everybody gets paid a nice salary and so on – because the risk is in the extreme weather events, not in how well you did.
“The new laws from Europe are doubling materiality; so not just the fiduciary duty to shareholders, but also what effect you have on society around you.”
Slavenburg notes his session was ‘packed’ and gave an example attendees raised of a potentially difficult area. “There was concern in how we collect all the data,” he notes. “For example, HR is a good one, because HR data is super-sensitive and siloed as hell. Even a regular software engineer or data engineer is not somehow getting access to this data. So [attendees] were kind of worried about ‘how do we report on these?’ ‘How do we aggregate this but, then at the same time, who has access?’
“So that was one way they were struggling,” adds Slavenburg. “How to get all their data through all these different laws and regulations combined, for something that then could create a paper trail in a way for an accountant to verify like ‘yeah, you’re not lying, you really are paying men and women the same.’”
As an example of a verifiable paper trail, Briink offers templates which can be generated for article 8 or article 9 fund reporting as part of SFDR. The former is for funds which promote environmental or social characteristics, while the latter is for funds that have sustainable investment as their objective.
This ties in with the company’s targeting of both private equity and wider business. For van der Heijden, it makes perfect sense.
“Our initial focus was really on the corporate side of things,” he explains. “You look at the timelines, you’ve got the CSRD coming out, it’s going to cover 55,000 or so companies with mandatory reporting requirements. And we looked at it and said all these companies, a lot of whom are going to be private companies, are going to need to report on sustainability for the first time.
“What we found though was, contrary to what I think the regulators might hope, a lot of these companies that are not yet being very proactive when it comes to implementation,” van der Heijden adds. “So they look at the reporting timeframe and they go ‘well, we’ll do it when we have to’, right?
“What ends up happening is that you have a bit of regulatory limbo going on, where investors – particularly private equity investors that have a lot of private companies in their portfolios – want to report on the sustainability metrics of these portfolio companies, but these companies are not yet having to report,” says van der Heijden.
“Our interest as a company is not just to help companies comply. Our mission as a company is to help a lot of companies move faster towards a low carbon economy – and I think the real beauty of working with private equity funds is they have a certain level of control over their portfolio companies, so they can push stuff that those companies might not do for any other reason.
“They’re not really motivated by the sort of mandatory disclosure requirements from the European Union – at least not yet.”
As for the future of ESG and what organisations should do to prepare for CSRD, Slavenburg is ‘absolutely convinced’ that not all metrics will be the same – but it will remain the benchmark as it evolves. “I think in Europe, it’s a done deal,” he adds. Slavenburg recommends organisations be transparent about how they obtained their ‘E’ data, and how many steps were taken. “The more sophisticated the tools and the less steps, the higher the credibility of the metric,” he says, adding that using external data to validate self-reporting and claims from internal data will add further credibility.
van der Heijden notes that Briink is more about the environmental transition than the social, which aligns with the regulations as they stand – but things will fall into place.
“I think by no means [ESG} regulations are perfect – many times, because they require political consensus,” says van der Heijden. “There are also really controversial elements to them, areas where they for example overly rely on allowing for transitional energy sources like nuclear and gas, which leads to accusations of greenwashing and just sort of watering down these environmental regulations.
“For us as a company, what we want to do is really transition the economy from brown to green. But the regulations as currently drafted are not the perfect mechanism for that,” he adds. “I think the regulators, to a certain extent, also understand that. These are brand new regulations; they haven’t really been tested out in the market before. So there’s analysis going on right now as to what is effective and what isn’t – because ultimately, they’re science-based frameworks.
“So I think we need to see how the actual application of them is playing out, before we can pass judgement as to how effective they are.”
You can read more about the following topics from official European Union sources:
EU Corporate Sustainability Reporting Directive – initial proposal April 2021
Directive of the European Parliament and the Council as regards CSRD (pdf) – June 2022
Sustainability-related disclosure in the financial services sector (SFDR) – April 2022
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