The role of ESG ratings in investment decisions and corporate sustainability strategies is undeniable…In the coming years, and with the EU setting the tone, we can anticipate further regulation of rating agencies and the standardisation of methodologies. It is also foreseeable that double materiality assessments will inform and complement ESG ratings, which will play a pivotal role in shaping investment strategies and decisionsLauren Hyatt Senior Consultant
The importance of ESG ratings for investment
With huge interest and the growing importance of Environmental, Social, and Governance (ESG) criteria, investors need a way to objectively assess a company’s ESG performance. An ESG criteria is thought to help investors consider the ‘unmeasured’ or ‘unrepresented’ environmental, social and governance topics when making investment decisions. It reveals data that traditional financial analysis doesn’t usually capture, speaking to a company’s sustainability in its broadest sense. This has led to the flourishing of several ESG Rating Agencies, such as Sustainalytics, MSCI and FTSE ESG, which assess companies globally on their ESG performance and make this data available to their clients. These ESG ratings are designed to help investors identify and understand financially material ESG risks to a business. Companies are evaluated based on publicly available information such as media sources and annual reports, with scores given for each material ‘E’, ‘S’ and ‘G’ topic, alongside an overall score. Investors use these unique scores as a proxy of ESG performance. Companies that score well on ESG metrics are believed to anticipate future risks and opportunities better, be more disposed to longer-term strategic thinking, and focus on long-term value creation.
The impact of ESG ratings on investment
With investors using ESG scores in their investment strategies, ESG criteria have turned out to be incredibly valuable, with ESG portfolios continually outperforming traditional portfolios. A study by Frontiers on the impact of ESG on financial performance indicates that companies that integrate ESG principles into their strategies tend to attract a broader range of investors who prioritise sustainability and social responsibility. This can lead to increased capital flow and enhanced financial performance.1 In a similar vein a meta-analysis of over 2000 studies confirmed that the responsible, as well as the economic case for ESG investment is tangible.2 Conversely, the consequences of a poor rating can be significant. If, for instance, your company received a poor rating from one ESG data provider, your stock may be considered an ‘unsustainable asset’ by investors and be excluded from their investment portfolio. If multiple investors follow this reasoning, this can eventually negatively impact your stock price. In Europe, where most assets under management are invested in ESG funds or strategies with some sustainability-related focus, understanding your ESG scores and improving year-on-year is important for your company to continue to attract investment.3
ESG ratings as a tool for internal benchmarking and improvement
It is also essential to recognise that ESG ratings can be a valuable internal benchmarking tool to guide decision-making and improve sustainability performance. An evaluation by an external expert on your company’s ESG performance gives an independent view of performance and how it compares to competitors and peers. This can be a powerful incentive for taking action and steps towards increasing performance. Further, the assessment can provide a valid source of information to help internal advocates promote change and highlight areas of particular weakness and strength.
ESG ratings under scrutiny
Despite their value, ESG ratings have faced criticism for inconsistencies and a lack of standardisation across different providers (i.e Sustainalytics, MSCI and FTSE ESG). This variability has prompted calls for greater methodological rigour and transparency within the ESG rating industry. By standardising ESG assessment criteria, these regulations are expected to foster greater confidence in ESG ratings and support more informed investment decisions. This approach ensures that companies and investors consider how sustainability issues affect financial performance and how corporate actions impact broader societal goals.
In a significant development, on 13 June 2023, the European Commission (EC) presented a proposal to regulate ESG rating providers. The proposed rules concern the following:
- Authorisation and supervision by the European Securities and Markets Authority (ESMA) of third-party providers of ESG ratings and scores
- Separation of business for the prevention and management of conflicts of interests
- Proportionate and principle-based organisational requirements,
- minimum transparency requirements to the public on ratings methodologies and objectives and more granular information to subscribers and rated companies
- Transparency of fees and requirements for fees to be fair, reasonable and non-discriminator
- Possibility for third-country providers to operate on the EU market if equivalence, endorsement or recognition.4
On 05 February 2024, the EC reached a provisional agreement on a proposal. The provisional political agreement is subject to approval by the Council and the Parliament before going through the formal adoption procedure. The regulation will start applying 18 months after its entry into force. The new rules aim to govern the reliability and comparability of ESG ratings, ensuring they provide a more accurate reflection of a company’s sustainability performance. It is rumoured that the double materiality assessment methodologies for financial impact may inform ESG rating methodologies. Introducing double materiality into ESG assessments and ratings brings a more comprehensive and nuanced understanding of a company’s sustainability performance. It will encourage companies to adopt a more holistic view of their role in society and the environment, driving them towards strategies that mitigate risks, enhance financial performance, and contribute positively to societal and environmental outcomes.5
Navigating ESG Ratings in the era of double materiality
In 2024, the concept of double materiality will become increasingly central to understanding the full impact of ESG factors on investment decisions and corporate performance. Double materiality extends beyond traditional financial materiality to encompass both the financial impact of sustainability issues on a company and the company’s impact on society and the environment. This dual perspective on materiality is critical in the context of ESG investment and reporting, as it acknowledges that the significance of certain ESG factors can vary.
From a financial materiality standpoint, investors are concerned with how ESG factors can affect a company’s financial condition and operational performance. For instance, a company’s carbon footprint may have direct financial implications regarding regulatory compliance costs, potential fines, and the shift in consumer preferences towards more sustainable products. Conversely, the broader lens of double materiality also considers how a company’s activities impact the environment and society. This includes the company’s contribution to climate change, engagement with local communities, and governance practices. This aspect of materiality reflects a growing recognition within the investment community that companies play a significant role in addressing global challenges such as climate change, social inequality, and corporate governance.
The future of ESG ratings
The role of ESG ratings in investment decisions and corporate sustainability strategies is undeniable. As the financial landscape continues to evolve, with a growing emphasis on sustainability and ethical practices, ESG ratings will remain a key tool for investors and companies. They facilitate informed investment decisions and drive companies towards more sustainable and responsible business practices, ultimately contributing to a more sustainable and equitable global economy. In the coming years, and with the EU setting the tone, we can anticipate further regulation of rating agencies and the standardisation of methodologies. It is also foreseeable that double materiality assessments will inform and complement ESG ratings, which will play a pivotal role in shaping investment strategies and decisions.
Author: Lauren Hyatt, Senior Consultant, Simply Sustainable
Businesses with a robust social strategy are considered more attractive to investors and customers and more business resilient. In the current landscape, there are increasing pressures from regulators and governments for companies to report on their social impact.Ella Narain Consultant
Addressing the ‘S‘ in ESG
The ‘S’ within an ESG (Environmental, Social and Governance) framework referring to a company’s relationships with its stakeholders, including employees, customers, suppliers, and local communities is not a novel concept. It has developed from the principles of Corporate Social Responsibility (CSR), where the emphasis was traditionally placed on the social aspect. The social pillar is often perceived as complex, broad, and challenging due to its breadth and continuous evolution. The ‘S’ encompasses a wide range of topics, such as diversity and inclusion, health and safety, human rights, and employee wellbeing. This complexity might explain why businesses often focus on addressing the Environmental and Governance pillars within their ESG strategy. However, the ‘S’ has become pivotal for companies in recent years, as well as pressure from new European legislation (The Corporate Sustainability Due Diligence Directive (CSDDD)) currently being negotiated for 2025, which will address business social values.
Why the ‘S‘ has become so important
In the 21st century, significant social movements, a global pandemic, and political movements have increased the importance of companies addressing the ‘S‘ pillar more seriously. In 2017, the #MeTooMovement helped workforces put greater pressure on their companies to address gender inequality and sexual harassment.1 COVID-19 increased customers‘, investors’, and employees’ attention to the inequalities existing in the world and the important role businesses can play. Furthermore, the Black Lives Movement accelerated in support in 2020 after the unjust shooting of African American George Floyd. The movement placed greater emphasis on the historic discrimination existing against Black people and the under-representation prevalent in the workplace.2
The ‘S‘ is a critical driver of stakeholder satisfaction and success
Customers have long since been a significant stakeholder group that has driven the importance of companies addressing the social pillar. In recent years, consumers have become more socially conscious of a company’s social impacts. Customers are requesting more transparency from businesses, particularly around labour practices, employee health and safety, diversity and inclusion, and the company’s external social impact.3
Investors are a further critical stakeholder with increased concern regarding companies addressing their social issues. BNP Paribas surveyed 96 investors and found that 70 percent said social factors are now a focal point for their investment, compared to 50 percent before COVID-19.4 In turn, impact-oriented investors are looking more closely at companies’ published objectives and tracking mechanisms around social impact. Published objectives and tracking mechanisms ensure that they protect their investments by investing in business resilience in this topical area.
The changing regulatory landscape also puts social value factors on the radar for many stakeholders. The increasing awareness and scrutiny of social impact within workplaces have heightened the responsibility of governments and businesses to critically examine and enhance their practices. In Europe, the Women on Boards Directive stands as a key component of the 2020-2025 EU Gender Equality Strategy stating that by 2026, companies will need to have 40% of the underrepresented sex among non-executive directors or 33% among all directors. This Directive not only aims to secure a gender-balanced composition within corporate boards but also strives to narrow the gender pay gap. The initiative seeks to create more equitable and inclusive work environments by implementing such measures, ultimately contributing to a broader societal shift towards gender parity. Europe’s directive is now seen as the gold standard for gender equality within the workplace, with investors now expecting 33% achievement or target for the underrepresented sex.
The social regulatory landscape also extends beyond the business itself. The Corporate Sustainability Due Diligence Directive (CSDDD) is a newly proposed European legislative framework currently being negotiated.5 If the CSDDD is passed, it will likely come into force in 2025. The legislation will require companies to identify their potential and actual environmental and human rights impacts within their operations. Preventive action plans will need to be developed to demonstrate progression has been made by businesses. If CSDDD is enforced, stakeholders will look more closely at how companies plan to scope and address their value chains.
Putting the ‘S‘ into Action
There are numerous ways a company can strengthen its social impact strategy. Below are key approaches to address and improve a company’s social impact.
- Prioritisation of social impact factors
Businesses often find it tricky to know which social impact factors to prioritise due to the broadness of the area. A materiality assessment is a valuable tool used by companies that can support the prioritisation of social topics. Complimentary of this, aligning to the Global Reporting Initiative (GRI) can help to understand data points and reporting on the social aspect. GRI can also make tracking and measuring targets in these areas easier and more specific to your industry. In addition, being selective in a few topic areas to prioritise determined by the importance of stakeholders and any upcoming legislation on a topic area is also considered an efficient approach rather than attempting to set numerous short and long-term targets across all social impact areas.
- Engage with your stakeholders
To understand how to prioritise social impact, you must first understand where the business is currently at with its social impact by gathering existing data. Social impact is a people-orientated topic, making stakeholders your best asset in collecting this data. The Corporate Sustainability Reporting Directive (CSRD) double materiality assessment also advises that stakeholder mapping is necessary for companies to understand how the organisation may impact people.6 Investors, customers, employees, and local communities hold valuable insight into revealing the gaps in a company’s social impact strategy. Furthermore, a company initiating an open dialogue with its stakeholders can also help maintain a positive relationship as the stakeholders feel heard and know their opinions are important. This insight can help shape what a company needs to prioritise and the key issues to address first.
- Having clear social objectives
Businesses with clear social objectives and a strategy can communicate to their stakeholders about how they plan to address and improve their social impact. This can be difficult to implement for most companies due to the complexities associated with the ‘S’ pillar. The objectives can start small and straightforward, such as implementing initiatives and running pilots within an organisation. If the initiatives and pilots appear to be successful, they can help provide a business case to move forward with those social objectives. For example, implementing an employee volunteering programme can allow employees to use their skill set for a positive purpose, such as helping at a charity or a school in the local area. Not only does this help strengthen community relationships, but studies suggest it helps improve employee wellbeing as it gives them a greater sense of purpose than just their day-to-day role.7 This can be trialled on a small cohort of employees. If well-received with positive feedback, it can be rolled out on a much larger scale with a target of volunteering hours or monitoring employee wellbeing.
Addressing the ‘S’ is a blueprint for future success and business resilience
Companies placing equal importance on the ‘S’ pillar within their ESG strategy experience positive brand reputations and higher employee wellbeing and maintain positive stakeholder relationships. Businesses with a robust social strategy are considered more attractive to investors and customers and more business resilient. In the current landscape, there are increasing pressures from regulators and governments for companies to report on their social impact and the risks this poses to their businesses.8 In the future, we can expect greater legislation around this topical issue and companies already analysing, addressing and improving their social impact will continue to have a competitive advantage.
Author: Ella Narain, Consultant, Simply Sustainable
As regulatory pressures, consumer preferences, and environmental challenges intensify, businesses that place the ‘E’ at the heart of their ESG strategy will be better equipped to thrive in a sustainable and responsible future.Lauren Hyatt Senior Consultant
Beyond the Acronym: What is the ‘E’ in an ESG Strategy
The ‘E’ within an ESG (Environmental, Social and Governance) strategy represents the natural environment and is arguably one of the most important pillars. This ‘E’ encompasses all elements of the physical world not created by humans, such as landforms, climate, ecosystems, air, water and soil. Businesses rely on the natural environment and the ecosystem services it provides for their business to operate.1 Ecosystem services can often feel invisible; however, they range from culturally valued landscapes, clean air and filtered water, timber and food. Ecosystem services generate $44 trillion of economic value (over half the world’s GDP).2 In this context, it is vital to both preserve and actively restore the natural environment.
Ecosystems are under threat due to human activity and indirect drivers such as climate change. As nature loses its capacity to provide services and is continually degraded, the impacts on business operations and the global economy will be unfathomable. The World Economic Forum’s Global Risks Report analyses global risks by severity over the short and long term. The 2023 report emphasises environmental risks such as natural disasters and extreme weather, failure to mitigate climate change, biodiversity loss and natural resource crisis.3 The construction, agriculture, food and beverage industries are the three largest industries highly dependent on nature and its services. The impact of excluding the environment from their ESG strategies and decision-making threatens their ability to operate effectively.
The ‘E’ as a critical driver of stakeholder satisfaction and success
By embracing the ‘E’ in business practices, companies can make meaningful contributions towards reducing environmental degradation while safeguarding themselves against financial risks and leveraging opportunities. Its win win. Driving environmental considerations within an ESG strategy also reflects a commitment to shared values and stakeholder expectations. Today’s consumers, investors and governments are increasingly conscious of environmental issues and expect businesses to do their part.
For investors, ESG ratings have also become a crucial aspect of investment decisions. Platforms such as Sustainalytics, MSCI and FTSE ESG assess companies globally on their ESG performance and make this data available to their clients. These ESG ratings are designed to help investors identify and understand financially material ESG risks to a business. Companies are evaluated based on publicly available information such as annual reports and earning results, with scores for each material ‘E’, ‘S’ and ‘G’ topic, alongside an overall score.4 Investors use these unique scores as a proxy of ESG performance and a way to compare like for like.
Companies that score well on ESG metrics anticipate future risks and opportunities better, are more disposed to longer-term strategic thinking, and focus on long-term value creation. In this vein, stakeholders are more inclined to support businesses that demonstrate responsible environmental practices, creating a competitive advantage for eco-conscious companies.
For governments, they all have duties under international law to safeguard the environment for future generations. To this end, governments worldwide are tightening environmental regulations to address the growing environmental challenges we are facing. With this comes a plethora of reporting requirements for businesses, which are used not just by investors but also by consumers. In Europe, a notable development in this regard is the European Union’s Corporate Sustainability Reporting Directive (EU CSRD). The EU CSRD requires businesses to report on their environmental and social impact.5 By focusing on the ‘E’ in an ESG strategy and prioritising environmental responsibility, businesses operating in the EU can position themselves to comply with the EU CSRD’s stringent reporting requirements effectively. The UK is following a similar trajectory and will implement Sustainability Disclosure Standards (SDS) in July 2024.6
Putting the ‘E’ into Action
The initial step in safeguarding the natural environment is to identify the pertinent ‘E’ topics influenced by a business. This entails conducting a materiality assessment to gauge the financial consequences of environmental issues and the extent of a business’s impact on them. Depending on the assessment’s findings, the company can then formulate appropriate action plans. It’s worth emphasising that these ‘E’ topics can serve as the cornerstone for implementing frameworks designed to discern, quantify, and address environmental-related risks. Below are the three most prevalent ‘E’ topics that businesses can incorporate into their ESG strategy and convey progress.
1. Acting on climate change
The urgency of addressing climate change cannot be overstated. The 2023 synthesis report from the Intergovernmental Panel on Climate Change (IPCC) warns of dire consequences if global temperatures continue to rise.7 Businesses that incorporate climate and carbon elements within their ESG strategy can align themselves with international climate targets, contribute to reducing carbon emissions, and mitigate risks. More importantly, focusing efforts on climate change can encourage businesses to understand and report their climate-related risks as well as opportunities. The Task Force on Climate-related Financial Disclosures (TCFD) plays a crucial role in enhancing the sustainability and resilience of businesses in the face of climate change while also encouraging businesses to disclose physical and transition risks related to climate change. These risks can disrupt supply chains, impact operational continuity, and increase costs. Integrating environmental considerations into risk management strategies is crucial for building resilience. Investors want to know that businesses are preparing for the future now.
2. Protecting and restoring biodiversity
Businesses that incorporate biodiversity conservation into their ESG strategy align themselves with the International Biodiversity Framework 30% by 2030 target, support the protection of ecosystems, and mitigate risks associated with biodiversity loss.8 By prioritising biodiversity, businesses can contribute to sustaining ecosystem services and reduce the negative impacts of ecosystem degradation. Moreover, focusing on biodiversity can encourage businesses to understand and report their nature-related dependencies, risks and opportunities, much like climate change reporting through initiatives such as the Task Force on Nature-related Financial Disclosures (TNFD). TNFD provides a framework for businesses to assess and disclose their nature-related risks, offering a standardised approach to understanding the financial implications of biodiversity loss.9
3. Managing water and waste
Half of the world’s population could be living in areas facing water scarcity by as early as 2025; this will place considerable pressure on the stability of the world economy.10 This poses substantial financial risks for businesses, but it also presents notable opportunities. Taking proactive steps to address water-related challenges can lead to developing innovative business models, products, and services with potential for future commercial value. Businesses can begin by conducting a comprehensive assessment of water consumption across operations. This involves tracking usage, identifying inefficiencies, and implementing measures to reduce water consumption. This should be complemented with transparent reporting to showcase a dedication to better water management. This involves not only sharing reduction targets and progress but also revealing the strategies used and their positive outcomes. The Carbon Disclosure Project (CDP) is a prominent platform for water reporting, assisting companies globally in disclosing and addressing water-related risks and opportunities.11
By 2050, worldwide municipal solid waste generation is expected to have increased by roughly 70 per cent to 3.4 billion metric tons up from 2.01 billion tonnes in 2016.12 This is due to several factors, such as population growth and continued urbanisation, as well as consumer shopping habits. Plastic waste is currently of particular concern and governments worldwide are seeking solutions to tackle the crisis. For businesses, waste management should be considered as equally important as water management. Companies can support global reduction targets by conducting comprehensive assessments of waste generation across their operations and like water sharing, better understand and identify targets and report progress.
The ‘E’ is a blueprint for future success
In a world grappling with environmental challenges, businesses cannot afford to overlook the ‘E’ within their ESG strategy. An unwavering commitment to environmental responsibility is not only a moral obligation but also a strategic necessity for long-term success. By addressing the ‘E’ pillar, businesses can reduce their carbon footprint, conserve resources, mitigate risks, and position themselves for growth and innovation. In doing so, they contribute to a more sustainable and resilient future for themselves and the planet. As regulatory pressures, consumer preferences, and environmental challenges intensify, businesses that place the ‘E’ at the heart of their ESG strategy will be better equipped to thrive in a sustainable and responsible future.
Author: Lauren Hyatt, Senior Consultant, Simply Sustainable
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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Reporting for a new era
Simply Sustainable has been providing best practice guidance in ESG and sustainability reporting for over 12 years. We predict that 2023 will be the year that robust and credible nonfinancial reporting becomes the expected norm for global business.
In short, this is down to new Environmental, Social and Governance (ESG) and sustainability reporting requirements in the United Kingdom, the European Union and the United States that are set to fundamentally change the nonfinancial reporting landscape.
The Corporate Sustainability Reporting Directive (CSRD) is a new set of EU rules that will require ESG reporting on a level never seen before, capturing a whole host of companies that previously were not subject to mandatory nonfinancial reporting requirements, including public and private non-EU companies that meet certain EU-presence thresholds.
For US issuers, the new EU rules will result in mandatory reporting on a broader set of ESG topics than those required under current and proposed Securities and Exchange Commission (SEC) rules. It is important that the business community does not ignore the approaching tide of regulation on sustainability reporting that could entail significant financial and reputational damage if overlooked.
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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
At Simply Sustainable, we understand that sustainable growth is the only way to build a prosperous business that has a lasting positive impact on our environment and society.
The past few years have been pivotal for the ESG and sustainability revolution. It continues to be an area of focus for stakeholders at all levels – investors, regulators, businesses and consumers – despite the current backdrop of a turbulent economy and cost of living crisis.
In 2022, we saw a rise in important conversations and the development of global regulation aimed at improving sustainability, particularly across ESG and sustainability reporting and greenwashing.
The key sustainability trends for 2023, across various sectors, will remain focused on the credibility of claims and robust disclosure and reporting.
In addition, there will be greater attention on carbon reduction, a strategic focus on understanding what the transition to a low carbon economy means for business and its stakeholders, as well as moving away from using carbon offsets as a credible means to decarbonise.
Regulators have been exercising greater scrutiny of corporate sustainability efforts, fuelled by concerns that companies and asset managers may be using disclosures and sustainability-related labels on products and services as a marketing tool to appear more proactive on ESG issues than they truly are.
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Since 2010, Simply Sustainable has developed corporate sustainability strategies for some of the biggest brands in the world.
Over the years, we have learned a thing or two about what makes a robust sustainability strategy, and we have created this guide to share our learning with you.
Whether you’re starting with a blank page, refreshing your existing approach, or are just keen to see how your organisation measures up, here you will find what we have come to understand to be the hallmarks of a truly robust sustainability strategy.
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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.
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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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