ESG and sustainability strategy
Environmental, Social and Governance (ESG) and sustainability strategies in businesses have changed radically in the last 5 years. With the increase in stakeholder expectations, companies are now finding their strategies are not meeting current requirements and are needing an update.
In the past, sustainability and Corporate Social Responsibility (CSR) strategies were considered an addition, a bolt-on to a business’s commercial strategy. In recent years, there has been a significant acknowledgement by stakeholders, regulators and the financial sector of the direct and indirect financial impact of ESG and sustainability and issues. This has been set out in the recent European Corporate Sustainability Reporting Directive (CSRD) and Task Force on Climate-related Financial Disclosures (TCFD).
Businesses are now looking to ensure their ESG and sustainability strategies are entirely intertwined with their commercial strategies and to maximise commercial opportunities and minimise financial and stakeholder risk. This often means using the old-fashioned approach of focus areas being people, planet, community – a box-ticking exercise – is now too simplistic. Rather companies are now developing strategies which are more sophisticated, tailored and refined to their specific needs, with a focus on the financial opportunities and alignment to the commercial strategy.
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The European Commission is influencing business behaviour through the Sustainable Finance Agenda. UK and US companies will be affected by the ESG reporting regulations if they have subsidiaries in Europe.
US companies not only need to prepare themselves for the proposed Securities and Exchange Commission1 (SEC) Environmental, Social and Governance (ESG) reporting disclosures but should also ensure they are readying themselves for the impact of the international ESG reporting requirements such as the Corporate Sustainability Reporting Directive2 (CSRD).
Within the EU, CSRD is expected to impact nearly 50,000 entities. This is far more than are affected under the current EU reporting requirements. CSRD, which entered into force on 5 January 2023, requires all large companies and all listed companies (except listed micro-enterprises) to disclose information on their risks and opportunities arising from social and environmental issues and on the impacts of their activities on people and the environment.
EU subsidiaries of UK and US companies will be expected to provide substantial ESG disclosures, demonstrating the robustness of their ESG strategy, targets, KPIs and progress, as well as the ESG performance of their products/services and value chain.
One of the requirements of CSRD is to complete a double materiality assessment to determine the priority topics for a company’s ESG strategy and reporting. This type of assessment involves stakeholder mapping and engagement, determining the impact of ESG on the organisation and the impact the company has on the ESG topic. In addition, the financial impact of ESG is also considered.
Climate change is a good example of this inside-out approach, where the impact of climate change on the company is assessed, for example flooding and supply chain disruption. The company would also need to consider their contribution to climate change e.g. use of fossil fuels, production of single-use plastic, use of their products and advice provided to clients.
CSRD also imposes mandatory assurance for reported sustainability information. This is likely to be conducted by a company’s financial auditors if they have the correct skills and experience.
The first set of companies under the scope will have to apply the standards in the fiscal year 2024, with reports published in 2025.
Next steps
Given the short timescales, we would recommend conducting a double materiality assessment urgently and, in the meantime, reviewing current ESG strategy, targets and KPIs against CSRD requirements and wider international reporting requirements. We would also recommend reviewing the current system in place to track ESG data and ensure data is being tracked robustly at a subsidiary level.
Author: Nicola Stopps, CEO, Simply Sustainable
Simply Sustainable’s Amsterdam office kicked off 2023 with our first sustainability leaders’ roundtable meeting. The lively discussion addressed the sustainability issues that will affect businesses in Europe in 2023. We saw extensive exchange of views and experiences between peers, looking forward to a year of empowerment and change.
Sustainability Manager is a 360-degree role
The enormous momentum behind sustainability is only expected to build further in 2023. There is an increasing demand on sustainability managers to provide practical solutions. Participants told us that many colleagues – especially those from the younger generation – come to the sustainability manager proactively with ideas (big or small) and then wish to be part of the transition, as well as board members fighting to have a piece of sustainability in their remit.
This is great news. However, in many organisations, the interest and urgency of sustainability surpasses maturity and capacity.
This imbalance is most acutely felt by sustainability managers. Theirs is becoming a 360-degree role, in which they are expected to communicate and manage to colleagues upwards, sideways and downwards, and manage stakeholders all around the business. They must work strategically as well as operationally to realise their agenda. All while the scope of their work is broadening, beyond the traditional focus on environmental issues to include social and governance topics.
Why the CSRD is sexy
The EU Corporate Sustainability Reporting Directive (CSRD) has made it much easier for sustainability managers to engage people in the organisation on sustainability. Timelines for compliance are short, and the bar is high, so many in the company recognise that preparation must start today.
Participants see that colleagues are looking to them, as the sustainability manager, to translate the complexity of the CSRD into a clear, step-by-step plan for the business.
We talked about the challenges of involving and empowering internal stakeholders in the short time span for CSRD compliance. Companies run the risk of going down a narrow route to compliance, missing the value that CSRD preparation can have for future-proofing the sustainability strategy. If full focus is on gathering the data for reporting, opportunities to engage in dialogue about the strategic implications of sustainability topics and how they are best addressed may fall by the wayside.
Sustainability data is management information
Preparation for CSRD accelerates the need for comprehensive and robust measurement. While new regulatory guidelines clarify what should be measured – previously companies had to find this out for themselves – it does not make data collection and validation any easier.
Many companies have been looking for the best system for capturing and managing sustainability data. Should they choose a new Environmental, Social and Governance (ESG) tool – of which there are increasingly many available? Can the financial reporting system be extended to include sustainability data? Or are there tried and tested Environment, Health and Safety (EHS) systems that are expanding into this space? There are many solutions out there, but companies find it very hard to judge which are robust and trustworthy.
As a widely experienced sustainability consultancy, it is our view that sustainability data should be management information and not only be used for reporting. This points to an integrated solution, that brings together financial and non-financial data for informed and balanced decision making. There is a huge need, and we are actively watching this fast-moving space to best advise our clients.
Author: Sytze Dijkstra, Netherlands Country Manager, Simply Sustainable
Download Simply Sustainable’s 2023 ESG & Sustainability Trend report for an in-depth analysis of how sustainability will shape the corporate agenda this year.
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The Importance of Solidarity and Collaboration in the Face of Adversity
The World Economic Forum (WEF) hosted its 53rd Annual Meeting last week from the 16-20 January 2023 in Davos, Switzerland. Cultural, business, political and other leaders of society convened at the conference to discuss actions needed to resolve current global crises, from the cost-of-living crisis to climate change, but also how to prevent the reoccurrence of these issues.
The World Economic Forum Annual Meeting 2023
Founded in 1971 and headquartered in Geneva, the WEF is committed to promoting sustainable development worldwide1. Given the many environmental, social and economic emergencies the world currently faces, this year’s meeting sought to reaffirm the importance of public-private cooperation to address these problems, as well as facilitate positive, long-term systemic change. Consequently, at the heart of the meeting, there was a desire to find ways to reinstitute a collective sense of agency and to turn defensive measures into proactive, vision-driven policies and business strategies. Key heads of state and government, as well as different geopolitical and geoeconomic groups (e.g. the Country Strategy Dialogues), contributed to discussions over the course of the four-day meeting; the WEF’s foremost business communities, such as the International Business Council and the Community of Chairpersons, also gathered to engage in discussion with their peers2.
The backdrop to the 53rd Annual Meeting: the WEF Global Risks Report 2023
The WEF Global Risks Report 2023 was published in January 2023 and highlights the different areas where the world is at a critical inflection point. In its 18th edition, the results of a Global Risks Perception Survey (GRPS) are presented, which collected responses from over 1,200 experts across academia, business, civil society, government and the international community on the evolving global risks landscape in the short-term (two years) and long-term (10 years). Complementing GRPS data on global risks, the report also draws on the WEF’s Executive Opinion Survey (EOS) to identify risks that pose the most severe threat to each country over the next two years, as revealed by over 12,000 business leaders in 121 economies3.
The report revealed that energy, food, inflation and the cost-of-living crisis are considered to be the most significant global risks. The cost-of-living crisis has been ranked as the most severe global risk over the next two years, followed by natural disasters and trade and technology wars. However, failure to mitigate and adapt to climate change were ranked as the two most pressing risks over the next 10 years, with biodiversity loss and ecosystem collapse regarded as one of the most rapidly escalating global risks in the long-term. Geoeconomic confrontation, cyber insecurity, widespread cybercrime, large-scale involuntary migration and the erosion of social cohesion and societal polarisation are global risks that all feature in the top 10 over the next decade3.
A call for urgent and collective action
Despite the range of risks that are occurring simultaneously worldwide, a shift away from a focus on short-term results (i.e. “short-termism”), crises-driven mindsets and solo approaches is a strong step to effectively manage and limit their consequences. The WEF has identified four key principles that are crucial to prevent a worsening of the risks outlook3,4:
- Although risks may have short- and long-term impacts, leaders must revaluate their perception of risk and act in the shortest timeframe possible (i.e. today) to address them. In today’s risk landscape, this means leaders must collaborate now to address climate and socioeconomic issues.
- There is a need for business and governments to invest in multi-domain, cross-sector risk preparedness by building societal resilience through financial inclusion, health, care, education, and climate-resilient infrastructure.
- The abundance of crises affecting humanity and the environment has caused nations to operate in a more insular manner. Despite the importance of national preparedness, there is a fundamental need for international coordination, data sharing and knowledge exchange to deal with several global risks, such as technology governance and climate change.
- Accurate predictions of risk in terms of timescale and impact must be bolstered at a global, national and institutional level. To strengthen the ability of leaders to better understand global risks, scenario analyses, scanning multistakeholder perceptions, appointing a risks officer function, and finding data on weak signals are all valuable ways to aid leaders in this process.
What does this mean for our future?
The world is facing several sustainability challenges that present an immediate threat to humanity and nature3. Given the scale, complexity and urgency with which they need to be addressed, pessimism and a feeling of futility abounds. Nevertheless, it was clear from the WEF’s 53rd Annual Meeting that international cooperation, holistic approaches and solidarity are key to tackling and preventing sustainability crises.
Bold leadership and cohesion across country borders is needed to improve the state of the world. If we all work together now, there is good reason to feel hopeful and optimistic about the future.
Author: James Beiny, Consultant at Simply Sustainable
1. https://www.weforum.org/about/world-economic-forum
2. https://www.weforum.org/events/world-economic-forum-annual-meeting-2023/about/meeting-overview
3. https://www3.weforum.org/docs/WEF_Global_Risks_Report_2023.pdf
4. https://www.weforum.org/agenda/2023/01/davos-2023-global-risks-report-how-to-solve-the-world-s-biggest-crises/
Beyond reporting: How companies can use the CSRD as an accelerator of their sustainability agenda
The future of corporate sustainability reporting is taking shape. At the end of November 2022, the European Union Council gave its final approval to the Corporate Sustainability Reporting Directive (CSRD)1 and the European Financial Reporting Advisory Group delivered the first set of draft European Sustainability Reporting Standards (ESRS) to the European Commission.2 With these measures, the EU aims to accelerate the transition to a sustainable economy.
Under the new CSRD regulation, companies will soon be required to publish detailed information on sustainability matters. This will increase a company’s accountability for its impacts on the environment and society, and provide financial institutions with comparable, verified information on sustainability performance that should facilitate allocation of finance to sustainable activities.
The measures should also equip companies for implementing their own sustainability agenda. They can only make progress if they know where they stand – relative to their ambitions as well as their peers – and where they can improve.
What does CSRD compliance entail?
CSRD extends the scope and detail of the current Non-Financial Reporting Directive (NFRD). It will apply to all large EU and non-EU companies (listed and non-listed) operating within the EU market.3 Companies subject to CSRD will need to:
- Disclose principal actual or potential impacts related to the company’s own operations and the implementation and outcome of the due diligence process of the company’s value chain
- Describe the role of management boards and supervisory boards regarding sustainability matters
- Disclose set time-bound targets on sustainability matters and report on the progress of achieving such targets (KPIs)
- Assess and report both impacts of the company’s activities on sustainability matters and on sustainability matters affecting the company (the double-materiality principle)
- Obtain limited assurance opinion by a statutory auditor of reported sustainability information.
However, CSRD is about much more than just reporting
Preparing for CSRD compliance will force companies to revisit their strategic focus and bring a greater systematic approach to corporate sustainability, using common standards and frameworks. The required double-materiality assessment, for instance, can identify important topics that have previously been overlooked in corporate strategy and risk management. Target setting, as prescribed by the regulation, often kicks-off a process of redesigning performance management, defining new KPIs and setting up new systems and processes for measuring and monitoring progress.
CSRD compliance is a multi-year journey
Companies need to start planning their journey to becoming fully compliant by the time the Directive is mandatory to them, ranging from between 2024 to 2026. That may appear like a lot of time, however getting all the required elements in place will be a significant exercise for many companies.
Fortunately, many elements of the CSRD build on existing standards, including the GRI framework and the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, and there is an increasing body of experience of how to apply these robustly.
Even with existing guidance, much of the detail is still to be defined. Experience suggests that general, cross-industry standards need industry-specific guidance to account for sectoral differences.
Assessing the impacts of business activity will be very different in sectors where assets are mostly intangible, in comparison to in an industry that has substantial tangible assets. Appropriate governance structures in highly competitive industries may not be suitable for regulated industries. There is also a steep learning curve in creating standards for linking sustainability performance metrics to accounting metrics like CAPEX, OPEX and turnover, as prescribed by the EU Taxonomy.
Figuring all of this out will take time and close collaboration between companies and regulators, value-chain partners and industry bodies. It will get easier as practice builds, with companies benefiting from the learning experience of early adopters.
An historic opportunity
CSRD will be challenging to implement at pace within corporations and across value chains. It is also an historic opportunity to lean-in and tool-up for a more sustainable future.
Importantly, companies should look beyond regulatory compliance when preparing for CSRD. Next to gathering information for providing accountability externally, companies must create decision-ready data that guides a shift in corporate practices, and in turn delivers real-world impact.
What does this mean in practice?
- The assessment of material sustainability issues, risks and opportunities is fully integrated into business strategy and risk management processes, and is not a paper exercise for reporting purposes only
- Targets come with execution plans that lay out the journey of meeting them, in realistic, practical steps
- Communication internally to employees is as important as communication to external stakeholders. Employees are the primary agents that will deliver sustainable business in practice, and many are eager to do so.
Approached with this mindset, preparation for CSRD can be an accelerator for delivering corporate sustainability goals, rather than a time-consuming distraction. Done correctly, it will help large companies secure the long-term resilience of their business and of the environment that it depends on.
How Simply Sustainable can help
Our growing team of expert sustainability and ESG consultants are here to enable your company to adapt at pace to the changing landscape of sustainability legislation and transformational plans towards our shared goal of net-zero.
Book a call back to discuss your strategy here
1. www.consilium.europa.eu/council-gives-final-green-light-to-corporate-sustainability-reporting-directive
2. www.onetrust.com/efrag-eu-sustainability-reporting-standards
3. A company is considered ‘large’ and subject to the CSRD if it meets two out of three criteria: (1) revenue over EUR 40 million; (2) total assets over EUR 20 million; (3) more than 250 employees.
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