Fostering sustainability in financial and economic activity has become one of the key priorities of policymakers and regulators around the world. In this direction, the recently enacted Corporate Sustainability Reporting Directive (CSRD)1 is a cornerstone of the European Union’s policy to achieve a sustainable economy, environment, and society. Through greater disclosure and transparency, the CSRD aims to get corporations to incorporate sustainability risks and impacts in their business decisions and operations. Under this Directive, companies are required to disclose a substantial amount of sustainability-related information, including information on the extent to which sustainability matters—defined in terms of environment, society, human rights and governance factors—affect the company and, in the other direction, how the company’s activity impacts sustainability matters.2 Nevertheless, the practical implementation of these sustainability-related disclosure obligations will encounter significant obstacles, among them, problems related to data and to the wide scope of reporting.
The double materiality approach to sustainability reporting adopted by 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, draughts, 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.3 First introduced by the NFRD4 and more recently consolidated by the CSRD, this impact-related reporting is an innovation that has added to the already significantly broad universe of sustainability-related risks to be reported. This innovation will pose new, difficult challenges for reporting companies, as will the fact that the scope of reporting includes not only the material information on the reporting company but also the material information on activities associated with the company’s value chain.5
Value chains, running upstream and downstream the reporting company, can be extensive. Consider, for example, Siemens, the German multinational technology conglomerate, who has roughly 65,000 suppliers in about 145 countries (Siemens website). Or Unilever, the British multinational consumer packaged goods company, who works with nearly 52,000 suppliers in 155 countries (Unilever website). According to Nestlé, the Swiss multinational food and drink processing conglomerate, it relies on ‘over 5 million farmers in rural areas to supply the raw materials we need for our global portfolio of products’ (Nestlé website). Therefore, the information load and logistics necessary for reporting will become significantly greater under the CSRD when accounting for risks, opportunities, and impacts taking place at the level of the reporting company’s value chain. In this context, it is likely that many metrics will remain outside the reporting company’s direct control, such as the reporting of Scope 3 GHG emissions, which is a metric involving the disclosure of emissions made by the suppliers and by the customers using the company’s product, among other actors operating in the value chain.6
Our article offers insights into these challenges and sheds light on the role that blockchain technology may play in improving data quality and management in businesses that operate global, multilayer supply chains. The article seeks to analyse the current regulatory initiatives in the field of sustainability reporting and highlight the role that blockchain can play in improving sustainability reporting, especially around value chain information reporting. The article also recognises the relevance of future research looking at the intersection of blockchain and data processes in corporate sustainability reporting, realising both potential and downsides.
Blockchain technology, 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. The technology uses peer-to-peer networking and distributed data storage, thereby allowing for the sharing of a single ledger across participants in the network, with participants having a shared history of transactions. Furthermore, extensive use of cryptography guarantees the secure transmission and storing of data, and the valid initiation of a transaction. Moreover, consensus algorithms are utilized for the confirmation and addition of transactions to the ledger.
The technology can significantly improve sustainability reporting and help firms implement the sustainability reporting requirements introduced by the CSRD. The systems currently used by corporations to track transactions and aggregate data are not always able to grapple with global and multi-layered supply chains. Furthermore, the current verification and auditing systems rely on human intervention and judgement, making them susceptible to fraud and waste. The features of blockchain have the potential to revolutionize sustainability reporting. The technology allows for the creation of a distributed record which is continually updated, making sustainability data automatically and widely available. Moreover, the tamper-resistant nature of the database makes fraud and tampering with data extremely difficult. Blockchain technology makes retroactive editing of the ledger extremely difficult, improving a transaction record’s permanence and immutability. Indeed, blockchain can contribute to the creation of sustainable supply chains by verifying the sustainable attributes of products.
Nevertheless, blockchain technology has its own limitations. In particular, the technology has been criticized for its substantial energy consumption, which has detrimental consequences for the environment. For instance, the operation of the proof of work consensus mechanism needs significant computational power consuming vast amounts of energy. Indeed, in recent years the industry is trying to give a solution to this problem by creating environmentally friendly blockchain networks. Another significant challenge facing the technology is scalability with public blockchains, such as the Bitcoin blockchain, being able to process only a limited number of transactions per second.
Alexandros Seretakis is an Assistant Professor at the School of Law of Trinity College and a Fellow (elected 2023) of Trinity College Dublin.
Felix Mezzanotte is an Assistant Professor at the School of Law of Trinity College Dublin, and the Director of the MSc Programme in Law and Finance at Trinity Business School and School of Law.
This post was adapted from their paper, “Corporate Sustainability Reporting and Blockchain,” available on SSRN.
