Setting up a sustainable ESG data collection system

In the sixth episode of At Centre Stage we will address a topic which is high on the agenda of many businesses around the globe – sustainable development. This is particularly true in Europe, where the Green Deal as well as a Corporate Sustainability Due Diligence Directive on their way, both of which will extend the existing reporting requirements for large companies on the social and environmental impacts of their activities. So, sustainable development is not just a buzzword, even if many companies are still not taking the subject seriously enough.

Our guests will be Sonja Radović and Saša Sodja. Sonja is an attorney-at-law with nearly ten years of working experience as well as founder of Codio Impact, a venture whose mission is to help companies set up an automated system for collecting and managing Environmental, Social, Governance (ESG) data as well as creating a reporting system which responds effortlessly to increasingly demanding requests from the market, the regulators, and other stakeholders. Saša, a partner at CMS Slovenia, is deeply involved in CMS Slovenia’s effort to become a sustainable law firm—not just relative to Slovenia, but the wider CEE region. Together they will dig up some hard nuggets of truth related to this topic—especially important, since it is so easy for a company to be accused of greenwashing if it is not careful. 

Below you can watch the video, listen to the podcast or read the transcript of the lively debate on the topics currently rousing the country’s business, legal and political community.

Sašo Papp: Hi we are back with another episode in our video podcast series At center stage in which we address the most pressing issues in the fast changing economy, especially in booming sectors and industries. We invite you to join us if you want to understand the behaviour of certain market players, gain insights into topics that will likely transform operations in certain industries or just want to get firsthand information on the legal developments in a particular sector. My name is Sašo Papp and I'm your host. I'm a longtime radio guy and lately also a podcaster with very diverse interests.
A topic high on the agenda of many businesses around the globe is sustainable development. This is particularly true in Europe with the Green Deal as well as a Corporate sustainability due diligence directive on its way that will extend the existing reporting requirements for large companies on the social and environmental impacts of their activities. So, sustainable development is not just a buzzword, even if many companies are still not taking the subject seriously enough. A situation actually that reminds me of the time before the GDPR entered into force across the EU. But I'm sure my guest today, Sonja Radovic and Saša Sodja will help me dig up some hard nuggets of truth related to this topic. Especially since it is so easy for a company to be accused of greenwashing if it is not careful. We will consider how and where to start with sustainable development and then how to continue once the baseline is established.
Both my guests are lawyers by profession and both share a passion for topics related to sustainable development. Sonja is attorney at law with nearly 10 years of working experience. She's also a founder of Codio Impact, a venture whose mission is to help companies set up an automated system for collecting and managing environmental, social, governance, ESG data as well as creating a reporting system which responds effortlessly to increasingly demanding requests from the market regulators and other stakeholders. We are also joined by Saša, a partner at CMS Slovenia. She is deeply involved in CMS Slovenia's effort to become a sustainable law firm, not just relative to Slovenia, but the wider CEE region. She also belongs to the corporate / M&A team and so has firsthand experience of how ESG topics are already affecting the transactional landscape. A warm welcome to both of you, Sonja and Saša, thanks for joining me. 

Sonja Radovic: Thank you very much for having me. 

Saša Sodja: Nice to see you again Sašo.

Sašo Papp: The commission's proposal for Corporate sustainability due diligence directive is still in the process of being adopted. How important is it that companies start planning and preparing for this legislation now rather than later, Saša?

Saša Sodja: Very important. That directive if implemented as currently planned will directly impact approximately 13,000 companies within EU and in addition to that around 4,000 companies outside the EU. So at least that is what the EU commission assessed. It may not seem much because mostly bigger sized companies become directly obligated to incorporate the sustainability due diligence within their businesses, but you know even if not obligated directly and legally, smaller sized companies, so also SMEs, as part of the supply chain of these obligated companies will become economically required to fulfill the same conditions. So to answer your question, it's very important. 2 to 3 years may not seem a long time, but you know, in addition to everything else the company is doing, you know, day to day business. These are processes that are not easily implemented, you know, to make it easy on themselves, it's better to start early and not just because of the potential penalties and regulations, you know, but also because this is the right thing to do for the company and the stakeholder because being sustainable also drives business value. 

Sašo Papp: Can we compare the implementation of this legislation with the GDPR? Will we see a similar pattern when it comes to company compliance? And how difficult will the process be for SMEs and micro companies? Sonja and Saša, both of you, your thoughts? 

Sonja Radovic: So there is a lot to unpack there. I think when it comes to the reach of regulation, what we've seen in the in the past with CSRD and the supply chain directive that is upcoming, which Saša just mentioned, what we see as a trend is that more and more companies are falling under the scope and the regulation is mandating auditable data and that's where we come into a huge problem because when you compare it to the GDPR, the GDPR imposed certain rules for companies to adjust and stop the misuse of personal data of its consumers. What ESG regulation requires is for companies to actually understand how they are impacting the world and how actually the world and the market is impacting themselves. So, first you need to establish how you're doing that and then you need to collect a significant amount of data throughout the company, which is where we come to the problem, and that takes time and resources. So, the GDPR in my opinion, and I may be crucified for saying this by any GDPR lawyer, is a bit smaller in scope in comparison to the ESG. For the ESG you really need time to prepare, you need to know where your data lies, you need to know what your data is, what is materially relevant data and then you need to collect it in a way that is auditable and ready for anyone to certify it later on. So, I would say the time is right now, not because it's a good and greatly interesting thing to do, but also because you will be too late if you start later. And when it comes to SMEs we face one additional problem. So, SMEs will in accordance with what the European Union has already said, they will not be subject to the same scope of standards to disclose. They will have some smaller standards that are still not issued. So, we really don't know what is happening and whether they will just be expected to report on the same standards but with a twist. So, they will have smaller standards, they have longer to adapt. So, the first year on which they will be reporting is 2025. However, SMEs tend to have less resources in house and externally. And that makes things significantly more complicated. In our research for the first sustainability report, companies of a size of let's say 252,000 people needed 6-18 months to actually collect the data. So, that immediately tells you how complex this procedure may be. 

Sašo Papp: Even though this legislation will likely require a significant amount of additional resources and labour to achieve compliance, how might companies best start preparing for this legislation now, so they don't get caught off guard, Sonja?

Sonja Radovic: I think the first step is actually determining... so there are really a lot of ESG parameters and metrics that you can measure. So, one of the most famous ones at this point is CO2 emissions. So, everyone knows about them. Many companies already started tracking or understanding what CO2 emissions are. However, ESG has over 500 metrics that you could measure. So, going from water and waste disposal to health and safety of employees, and injuries at work, diversity and so on, and ranging all the way to anti-corruption, anti-competitive behaviour, governance of the company, what is the company's vision, what is the company's mission and so on. So, there are quite a lot of metrics to be tackled. What companies need to first understand is which metrics are materially relevant for them, to collect and report on, and what is it that the market requires them to do. So, there can also be misalignments in that. But in order to have high quality data, you cannot start with 500 metrics and that is absolutely not to be expected from companies but take this first step of understanding what is materially relevant to your stakeholders. So, start ranging from employees, to company management, to outside stakeholders, such as local communities, shareholders, maybe NGOs that are active in the sector, and then understand what the impact that your company has on the outside and what the outside factors are that impact your company. And that's this concept of double materiality that the European Union is actually trying to push hard on. And I think that is a great first step and as a second step, act upon it. Find your metrics, find a way to collect the data on your metrics, because that seems like it's such a simple thing to do, but as anyone who has ever done CO2 emission calculations understands, finding data and getting people to put in data or finding a way to collect data, is probably the most painful thing ever. So, that is I think a great second step because once you started, you will have so many iterations on the way and so many things to adapt and that's what our product is actually trying to solve for the companies but it's really a complex topic that needs to be started off right now. 

Sašo Papp: The legislators have set quite a challenge for the companies when it comes to gathering, sharing and organizing ESG related data if we bear in mind that the majority of companies have no tracking system in place at this point. Where do you foresee the most significant challenges Saša? 

Saša Sodja: With the ESG there is no one size fits all solution for every company. So, you know, just like their products and services differentiate them, the ESG parameters and strategy will need to be tailored specifically to each company. This is good news for consultants of course. And yes, the costs are also significant. And every company will need to prioritize different ESG elements. Because they also have different sustainability challenges, but still, you know, there is one challenge I think that is common to all the companies and that is to make a move from integrating the ESG policy as a reaction to the regulations to integrating ESG by way of a long-term strategy. And that's something that really requires a certain level of leadership commitment. And I think this is common for all the companies because only the leadership is in a position to make the necessary trade-off between short term profits and what should be the conduct for the company for a long-term prosperity, let's say. I think that's the key. I think that once that happens and once the investors and you know, the management, other stakeholders show their appreciation then this is the first step that has to be made so that everything else—all the processes, all that data collecting, all the reporting—is successful. 

Sašo Papp: Thank you. Given that no company has unlimited resources to invest in tracking every possible metric of their ESG Impact. How specific to the sector or industry can we expect parameters and risks set by legislators to be? How often will these risks and parameters be updated to reflect the contemporary challenges of a particular industry, Sonja? 

Sonja Radovic: So, how the standards are working now is that there are a multitude of standards ranging from GRI to SASB to very national standards on data collection. And with that also expectations of what companies should collect. The European Union has issued the first draft of European sustainability reporting standards, so in abbreviation ESRS, just a few weeks ago. So, our talk is very timely and they are expected to be finalized towards the end of the year. How they are set, is that there are certain sector-agnostic standards, there are certain sector-specific standards and here's a third layer to that, which is company-specific disclosures and that means that a company should report on this general information on more sector-specific information, which would mean depending on which industry and in which area or territory you operate, you will have specific disclosure requests and there are some intrinsic issues or perceived issues with this with this specific industry. So, what the EU is saying, okay, we have seen these issues before on the ESG chain for these companies and these industries, so you also have to report these and then on the company level, that is something that every company should decide on themselves in a way. So is there anything that is so specific for this company that you need to in addition report on that. So these three layers of disclosures are being requested under the CSRD, and as I said before, the first thing you need to understand is what do you need to report? What is it that is relevant for you and your company to report because what we had in the past is that companies could choose these parameters without any type of sanctions in the background, what the EU is now saying is this data and how you decided on what is relevant will be audited, so be sure to choose what you want to report in alignment with what you should report. So it's not just an option for you to do that. So that is, I think approximately what is happening and what we're seeing at the moment. 

Sašo Papp: A question for both of you now. What benefits will accrue to companies who comply with these new rules sooner rather than later? And what will be the disadvantages for those that are left behind in this process? Besides being excluded from portfolios and possibly being barred from participating in public tenders due to the existing directives, can compliant companies expect some incentives such as access to green financing or better-quality loans? Sonja?

Sonja Radovic: So, I personally believe, and that is why I'm building a company around it, is that there are so many benefits to companies who disclose their data ranging from what you just mentioned, sustainable finance. There is, and we are currently in the time period where interests are just increasing. So getting to the point to get a cheaper loan alone or alone with a cheaper interest because you are achieving certain sustainability performance targets is a great incentive and impacts directly the company's financials, not only non-financial performance. In addition to that and what we've seen actually quite often is attracting talent. So, talent retention. Especially, we have to think about companies which are not only based in large cities where you actually get a pool of new and fresh candidates coming from universities but companies which are based somewhere on the countryside, they need quite a lot to attract the talent. And one of the latest questions in interviews is what are you doing on sustainability? How are you impacting your environment? So, that has become increasingly a huge pain for companies. And in addition to that, being subject to different types of penalties is one thing, so this regulatory push, but I think also Saša mentioned in the beginning, it's not only the push from the regulators directly, but it's also the spillover effect, which means that if you're not reporting to your customers, you are also not being able to have customers. So, what we've seen throughout our work is there were at least 2-3 companies that said we weren't able to answer supply chain audit on time and therefore we lost a customer because someone else has the data on their very, very close and very collected and very streamlined […] and they have managed to do that. So, we've lost a customer. So it's really, really important to take into account all these different parameters from customer to employee market to regulation and that's why the time really, really is now. 

Sašo Papp: Saša?

Saša Sodja: I agree with Sonja. I mean, you know, the reward is there for all the stakeholders. So, we often talk, especially in relation to legal regulations about reacting to what regulators want rather than to see the new legislation as a tool for progress. I mean, of course there will be costs and it will not be easy for the companies to comply, but isn't such compliance actually, what we should all be striving for, we all feel better when the companies are making these great promises being greener, being diverse, being kind and, in general being ethical, we feel great, you know, like finally a step into the right direction; but how can we follow up if there are no rules like that? And I know now that there are rules or rather there will be rules, um, in relation to the due diligence, we're afraid that that's going to cause problems. So, it's difficult to get to the fairer world without some expense, you know. There's a Slovenian proverb saying: “Brez muje se še čevelj ne obuje.” which ‘translates to: ‘Without effort, you cannot even put on a shoe’. If companies want a sustainable society, we need to work for it, the new directives highlighted the act of considering the consequences for sustainability matters is also part of the director's duty to act in the best interests of the company. So, the responsibility for integrating the due diligence processes is now assigned or will be assigned to the company's directors. So, they will be made responsible for putting that in place and overseeing the due diligence actions and reporting, and I think that's a marvelous strategy actually by the EU and a big motivator for the companies to be compliant. Before I spoke about leadership commitment, and this is a way to get leadership more committed to sustainability. In addition to the sanctions that are based on the company's turnover, which may be significant if they're the companies is not compliant. 

Sonja Radovic: Maybe one thing, sorry, to add to this. And what Sasha says actually makes a lot of sense because what EU also says is, that this needs to be goal oriented. We don't expect you to do it overnight because it will be really hard to do ESG overnight. But the transition and especially goals reflected in management, so what do you want to achieve, in what period of time you want to achieve it, are really, really favourable, looked up favorably from the regulators and the auditors. 

Sašo Papp: Okay. Yeah. But I guess companies would want to know what happens next? Say you have made your initial assessment, set the metrics most appropriate to your business and started tracking the data. What comes now? I guess having a sustainable data collection system in place is a baseline for further actions companies need to take. What are the steps that follow once your first readings are made? How should the company act?

Saša Sodja: I mean this is an ongoing process. It's not, you know, one step … it's not something … it's not the product, it's not one report. It's continuously building on that report, and also I think continuously getting better because Sonja, I guess at the beginning you can have like 10 or 15 ESG parameters but you are supposed to build on that. I mean, so this is what Sonia does for a living. So, she's better able to answer that question than I am. 

Sonja Radovic: Yeah, I mean it is, I really treat this topic as something that needs to be partnership driven because we have two parts of it. One is this data collection and generally these more scalable solutions which are able to support companies to actually know where they are. So, and in real time. Um, and then there is second part, which is this more tailor-made approach, where companies like CMS come in or consultancies or tax advisors who are actually able to tell them … okay, based on this data that you have, this is where you can optimize or this is where your strategy should be or this is how the transition towards the green economy should look like. And I would say to your question, first step, decide what is materially relevant in a metric and measure it. The second step … yes, use a solution because what we've seen honestly is tons and tons of Excel sheets at best, sometimes even written notes and it's … I am not the biggest digital native in this world, I mean we all come from legal so it's you know words are our tool, but Excel has this amazing ability to collect a lot of data if it's inputted properly. But no one formats that. So there is a ton of issues that we've seen from just turning kilograms to tons or in a mission calculation turning, I don't know, kilowatt-hours to whatever, like there are so many factors that impact that and that's why Excel is just, at the moment, not the right tool because you will have significant discrepancies with what you report. Therefore there should be a streamlined way to do that. And yes, I think that is your next step: find the solution that suits what you want to achieve and then also find strong partners or help us get you to the strong partners because this is not a winner takes it all type of market. I really strongly believe that this is something very similar to financial reporting and there is no winner takes it all on the financial recording side. So there are so many things that you can do with great and clear and structured data but there are so many things that you should do with a tailor made advice, especially if you need help. And just one more point to add to this, how the companies have done reporting in the past is you start in June, I don't know 2022 and then you issue a report which is at the moment effectively already outdated. So that is a problem. If you want to have advice, if you want to optimize, if you want to do something better, you need to have real-time data or at least as real-time as it gets, so that you can actually change the course of your report during the year of reporting. So, there is something to be done when you see the trends, when you see the anomalies, when you see the benchmarks. That is actually really, really important. So, do it real time or as real as it can get, don't do it now for 18 months before. 

Saša Sodja: And I if I can just add something, don't just make this a one-person job, you know don't just add this ESG task to one person in your company and say okay this is your additional work because, you know, you have to implement processes as well. I know that lawyers get boring with corporate governance, but you know at one stage the data that you have to collect may be collected by one person, but this gets more and more if you want to have like real life data, this is a big task. So, you either have this as a responsibility of more people that collect and kind of gather information, or you have to have one person that will gather the information from all of this other accountable person. So, it's really a big task. It's not just like collecting data. It's I think even more comprehensive than doing financial reporting where you already have tools and apps that make your life easier. But this is just the start, and you know Sonja’s app is one thing that could also make the processes in the company easier. 

Sašo Papp: Sonja and Saša, it was a pleasure. Big thanks for your time. A special thanks also goes to you. Yes, to all of you who took the time to join us today for yet another episode of At Center Stage. All episodes can be found on the CMS website, or you can revisit them through LinkedIn profile. Until next time, stay safe and enjoy life and start reporting.