There is a palpable air of uncertainty among many multinational corporate sustainability, ESG and risk management teams these days as everyone tries to anticipate the future of sustainability regulation. I’ve written quite a bit about the mixed messages companies are receiving from regulators in Europe as the EU Member States continue to debate the details of the Omnibus Simplification Package, and in the U.S., where it’s still unclear exactly how this historic period of environmental deregulation will affect companies.
The fact is that many businesses have invested significant time and resources into sustainability compliance and reporting initiatives while operating under the impression that major reforms like the Corporate Sustainability Reporting Directive (CSRD) would be hitting their stride right now. Instead, they’re living through a period of regulatory limbo in which it’s not clear what exactly their future sustainability compliance obligations entail.
So, what should they be doing in the meantime?
Focus on Materiality Assessments
The short answer is: now is the time to be reviewing the steps they have made so far, and the most obvious place to start is with is their materiality assessments. In the world of financial reporting, materiality is defined as information that can influence and ultimately inform the financial decision making of an entity. When applied to sustainability reporting, a materiality assessment is a company’s foundational definition of the core sustainability issues that matter most to their businesses and their stakeholders. These guide the way they will report and integrate them into overall business strategy and investment. In short, these materiality assessments shine a light on the foundational truths that define a company’s values and goals and determine whether or not they are aligned with their strategic objectives.
The identification of these material matters is also the starting point to determine the information that should be disclosed in the sustainability statement, which identifies the impacts, risks and opportunities confronting a company and its upstream and downstream value chain.
At a time when the rules of the game keep changing and where corporate positions on sustainability can easily become politicized, a well-thought-out and delivered materiality assessment is an important way for a company to assert the business case for its sustainability strategy. Importantly, it is a way for companies to take the emotion out of sustainability and instead focus on the facts and the financial rationale behind their actions, while ensuring their sustainability strategy is dynamic and meets the changing needs of their businesses.
Look to Industry Best Practices
Even during this period of regulatory flux, the market drivers behind sustainability have not changed , and in some cases they have even increased in significance. Now is the time for businesses to really look at what other companies in their space are doing when it comes to sustainability reporting. This peer comparison will soon become a key benchmark against which other companies will measure themselves and will also be measured.
While sustainability disclosure reporting regulators have been debating the best path forward, many leading companies have already started reporting in compliance with the CSRD. In fact, some 500 companies have already published sustainability reports under the CSRD. The full library of reports can be found here, courtesy of ESG data management software company KEY ESG, which has been cataloging them all.
One of the first things that stands out when reviewing these reports is that many of them come from companies in jurisdictions where the CSRD has yet to be fully implemented. In fact, according to a detailed PwC analysis of 100 CSRD reports, about 90% of them came from five European countries, three of which (Germany, Spain and the Netherlands) have not yet transposed the CSRD into national law. Another key finding of the analysis was that these reports are not very standardized. Some are 30 pages; others are 300 and they each focus on different aspects of sustainability-related risks.
However, the important takeaway for business leaders who are still refining their approaches to sustainability reporting is that hundreds of manufacturers, technology companies, financial services firms, retailers, utilities and others are already out there walking the walk on sustainability reporting. These early standard bearers will not only have a jump on the intricacies of the reporting process once the mandate is finalized; they will also help establish industry best practices and position themselves as leaders to investors, customers and other stakeholders who increasingly want to know about business risks linked to sustainability.
Focus on the Bottom Line
It’s easy for business leaders to become distracted in a news cycle like the one we find ourselves in today that seems to be consumed with the idea of delayed implementation and political infighting. The big picture is that, delayed or not, sustainability reporting mandates of some type are coming, whether directly from regulators, or as is currently the case, from other stakeholders such as investors and customers. The sooner companies get themselves aligned with those standards, the better off they will be when the time comes to comply with the law. Moreover, with so many companies already reporting in line with the CSRD, and the informed view is that more and more will do so voluntarily, the prevailing market forces are creating some pressure on businesses that have not yet shared their sustainability reports.
Now is not the time to delay. It is the time to refine and hone sustainability practices to focus on what matters most to the business and its stakeholders.
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