The new rules follow similar outlines beginning in Europe last year, including the Corporate Sustainability Reporting Directive (CSRD) from January 2023, which then released the European Sustainability Reporting Standards (ESRS) in July 2023. The standards set by the CSRD look to modernize rules concerning the social and environmental information that companies must report, with a broader set of large and SME companies required to share sustainability metrics. It goes as far as to require reports from non-EU companies too, if they generate over €150m in the EU market.
“We’ve moved from a voluntary reporting into a regulatory kind of world, with rules like what’s been proposed by the SEC, what is now approved in terms of CSRD,” says Lakshmanan. “Those are now materially important [and] now have a regulatory aspect to them, more importantly, have a financial impact. A lot of these regulations now have gone beyond the remit of a CSO and are now sitting with the chief financial officer’s office.”
With an ever-increasing and evolving set of regulations in place across regions, it’s safe to say most SAP users are keen to implement comprehensive sustainability drives for their businesses. But immediate challenges come when attempting to measure businesses’ efforts effectively, see good ROI from any investment and ensure any changes can stand the test of time while making a real impact. After all, at a time when regulations are mounting, the last thing you want is to sink funding into an expensive and immobile greenwashing project.
Getting a clearer view into how SAP users can approach sustainability projects, for Lakshmanan, looks like a journey not too dissimilar from any technology implementation, and the challenge – that’s arguably fourfold. It reaches across tackling a project’s change management, being clear on the key initiatives, understanding and articulating ROI and value, and keeping enough flexibility in place to adapt alongside the ongoing regulatory changes.
Making and measuring an impact
On the sustainability starting line, the PwC ESG principal explains that across sectors the biggest question begins with eliminating the siloed approach and addressing what impact will actually look like when trying to mark a successful win on the other side.
“A lot of times people have viewed sustainability as a siloed thing sitting off in the corner somewhere […] The more the companies think about sustainability being [that way], the less benefit you’re really quantifying.
“One challenge I think, is just understanding that transformation and embedding that culture in. I think we get very easily focused on sustainability being a very metric, target-driven approach. Whereas if you take a step back and really think about the outcomes - you’re trying to drive safer products, lower carbon footprint etc. - and not just being like, ‘oh, I need to get this metric out to that report to hit that target.’
“It’s understanding that by being more sustainable, you’re actually helping the business. You’re either becoming more profitable, more efficient, more inclusive.”
Forced somewhat by the rather changeable times we’re experiencing currently, it can be increasingly easy for businesses to take a reactionary approach to new regulations and innovations, rather than putting a steady plan in place.
That’s where Lakshmanan is asking businesses to plan and think broadly, with the benefits and ROI becoming much larger when you think about the bigger picture: “I think the broader that you can make the use case, the more value that it generates - the higher ROI.”
Giving the example of decarbonizing truck fleets, he says:
“If I were to quantify the value of switching my fleet to a much more sustainable truck, whether it’s different fuel [or some other factor], if I looked at that just in that solo vacuum, I may make a different decision. But now when I start to account for tax savings I might get, safety implications, employee happiness, if I start to think about third-party risk - the more I bundle these things together, the more benefits I get for the same investment and that return on investment becomes really, really valuable.”
Placing importance on the broader impact of sustainability can also help further when SAP users consider their supply chain, says Lakshmanan, with the benefits of attempting to meet the commitments of Scope 3 lending itself to many more operational areas.
“When you start to think about that supply chain example, if I just keep it narrowly focused on Scope 3, well, yes, there’s an admission calculation at the end - it’s highly critical. But now, equally, if you think about it, if I’m managing my Scope 3, that means I’ve got a pretty good handle on my supply chain.
“So that means I’m now operationalizing that - I can actually have a more resilient supply chain. Now I can use some of the data that I’m capturing there to do some more advanced analytics to now optimize my supply chain and get the right suppliers, the right business partners, that are going to help me meet my net zero commitment. Or, better yet, they can help me meet my commitments of my customers and actually be seen to be a competitive advantage.”
Roping in IT early for the data game
It’s easy for a technology company to preach about the importance of IT, but a common theme amongst projects that PwC has seen amongst SAP customers is that, even when a cross-functional group gets going, IT departments are often pulled in too late to help steer it with the right foundations.
“You’ve got sustainability teams and finance teams talking together,” says Lakshmanan. “You’re now roping in internal audit, legal counsel, […] investor relations. Ironically, the thing I’ve observed the most is that IT gets left out of the conversation, at least initially. Often they’re brought in late.
“One of the most critical things is that, at the end of the day, this is a data game. It is all about making sure you got the right data at the right level of verifiability, with the right controls and the right level of assurance around that.”
PwC's Lakshmanan is quick to share what happens when IT is left out of the sustainability discussion:
“We had a customer, for example, where they forgot to contact IT for at least the first six months and IT already had their budget plans and their resources and so on, meaning they effectively had to put their plans on hold.
“Another client didn’t think about the architecture until way, way too late. The impact is that their cost of controls around auditing every year around the assurance of that data is probably now a six times or ten times kind of number. Those are the kinds of impacts you can have if you’re not bringing in the right folks early.
“I think that’s a critical step: getting everybody organized, get that plan and getting a good handle on the data.”
Beyond just including IT, Lakshmanan suggests going one step further and consider sustainability across core functions from the start of a technology deployment. Making sure that your data is verifiable and trustworthy comes in as a top requirement for any sustainability project, he says, and should play a part beyond just the linear process of getting data from one place and reporting it in another, but creating a circular strategy and visibility across front and back office operations.
“If you think about sustainability data, it’s so cross-functional. It’s everything from HR, to finance to carbon emissions, to supply chain, etc.” he explains. “And if you think about all of the different business processes that we enable using the SAP technology platform, that’s a lot.”
“Start to embed sustainability into those core functions, those core business processes on day one, rather than waiting till the very, very end and go ‘Oh, wait, hang on, we forgot about that - we have a new regulation now, so let’s go retrofit on what we’ve already implemented and spent lots of time and energy putting in’. Instead, let’s start to think about those now.”
He goes on to explain how, one client, just by adding two more fields into
SAP’s Green Ledger to better track utility consumption from the start, managed to save almost a quarter of a million dollars per year.
“It’s just something as simple as that – ‘let’s just add two more fields’. You’re already tracking from accounts payable in terms of dollars that you’re paying the vendor or the utility provider. Well, let’s capture the consumption, kilowatt hours, and let’s capture whether it’s recyclable, etc.
“There’s just a handful of things I can start to capture once again on day one that enable my more accurate reporting. So it’s really thinking about that sort of integration.”
Cool emerging ecosystems
The best way to master sustainability technology for Lakshmanan? He advises it’s an SAP, Microsoft and PwC team sport: “The enterprise-grade data management and transactional business process management that’s available within the SAP technology stack and all the business processes that are enabled by front office and back office, couple that with the analytic and data governance capability that you have within Microsoft, and then the trust in that ecosystem and that facilitation role that PWC provides along with the expertise from a sustainability perspective - that’s really a winning conversation.”
That data captured and held in these systems additionally stands to play a vital component for utilizing the benefits of emerging technologies like GenAI also, with Lakshmanan stating there are 50-60 different use cases for SAP users in the sustainability space already, especially for regulatory reporting, decarbonization, product traceability and supply chain.
With “the overwhelming number of regulations” to comply with, Lakshmanan states that we’ve entered a world where businesses “can’t do that practically without using some level of artificial intelligence.”
The technology is now set to help with condensing and summarizing complex
sustainability information for messaging, engaging with stakeholders, suppliers and customers, and even understanding businesses’ ESG risks, whether with forever chemicals and microplastics or understanding and analyzing supply chains beyond tier one elements to gain visibility of factors like potential forced labor issues in the tiers two, three and four.
“When you think about sustainability, it’s really an ecosystem value chain play. It’s a team sport. We can’t do it as an individual company. We have to do it together,” the PwC ESG principal concludes.
The takeaway message here? Mastering sustainability reporting for evolving regulations needn’t sink your ship, but it will be a team effort to get a better view of the business challenges ahead. It takes a whole crew - your departments, your technology, your strategy - to achieve that single voice with a single vision. But get it right, and not only will you avoid melting under regulatory pressure, but you can have a positive societal and business impact too.
