Sustainability beyond compliance: 10 lessons learned on the implementation journey

1. Sustainability reporting is more than compliance

It is difficult to create value for shareholders, employees, communities, and the planet, when so many stakeholders are at the table. A journey of this magnitude is unprecedented and will alter business strategies, products, services, and, most importantly, communication.

I consider it to be the most fundamental shift in the way businesses will operate in the (near) future. Sustainability reporting is not an end in itself, but it will prove to be a critical driver of transformation.

Management holds a huge responsibility in this process and must act accordingly. Sustainability needs a seat at the Board's table. Whether you start with sustainability reporting or move from a fragmented voluntary framework to authoritative standards, change management at all levels will be critical to meeting sustainability goals.

Investors will look at you and will increasingly direct their investments toward companies that can clearly demonstrate their ESG credentials.

2. Strong support for a ‘global baseline’

The EU has ratified the CSRD. The majority of the ESRS drafts have been published. The International Sustainability Standards Board (ISSB) has released IFRS S1 and IFRS S2 proposals. Other frameworks, such as GRI, SASB, and others, are also in use.

Companies show strong support for a 'global baseline' of sustainability-related information. A global baseline will be achieved if all types of companies, not just the big pies, can apply.

It will be fascinating to see how all standard setters can achieve that global baseline, i.e. a single global set of sustainability standards. Will this become a reality, or will it stay a distant dream?

3. Resource constraints

Sustainability or Integrated reporting tends to be more critical than well-established financial reporting.

The range of indicators that companies need to report on, the depth of information required, the complexity of data collection, and the need for transparency across the entire value chain will necessitate significant improvements in how companies gather, process, and report data on ESG topics. While the CSRD reporting clock is ticking, market resources remain scarce.

Leaders must urgently invest more resources in the sustainability scene. They are still a long way from meeting the sustainability requirements imposed by regulators around the world.

ESG reporting, however, allows people to become acquainted with this broad-scoped reporting as well as get trained and skilled in these topics. With an increased focus and awareness efforts on a company level, we however expect this gap to be closed in the near future.

4. Materiality matters

As ESG reporting is evolving from voluntary to mandatory, we anticipate a greater awareness of the use of materiality assessments.

We are all familiar with the concept of materiality from financial reporting, where it is standard practice to report on items that have a significant impact on a company's performance. According to ESG guidelines, companies must report not only on items with a material financial impact but also on the risks and impacts of material social and environmental issues.

The breadth of the sustainability reporting requirements presents a significant challenge. With so many stakeholders involved, it can be particularly demanding to only report what is critical.

The double materiality concept as originally envisioned in the EU CSRD framework is, therefore, a crucial step in this respect and should, by all means, be regarded as a fundamental and strategic exercise.

5. New skills are required

New professionals are entering companies, from sustainability managers and controllers to reporters. Complete sustainability departments are being created. New functions require new skills, and companies should address any skills gaps urgently.

Board members must also catch up. To lead their company properly, executives need a clear understanding of ESG requirements. An untrained board or leadership team might be a sustainability risk in itself.

Strengthening the ESG skills to better inform and manage the delivery of all ESG and related objectives requires investment, but it is a must in today's ESG reporting climate. Training programs must be launched.

6. A shift from financial reporting resources to sustainability reporting resources

Driven by resource constraints, the shift from financial reporting resources to sustainability reporting resources has already started. Companies are redeploying staff from the Finance department to their sustainability teams, and this trend is not surprising. Financial professionals have a natural synergy with sustainability reporting, as they are accustomed to meeting tight reporting deadlines and following structured reporting processes.

Due to the broad range of subjects it encompasses, the role of an ESG controller has become increasingly attractive. Sustainability functions are drawing talent toward this role, as there is definitely a positive vibe surrounding the subject.

7. Data governance is key

Many firms need to invest significantly in their data governance models to effectively handle the growing number of ESG-related data requests.

Current systems struggle with complex data from various operational units that use different measurement units. Even controllers and reporters that are used to a strict financial close and who are familiar with reporting deadlines are struggling. Non-financial departments don't see or feel the need yet for monthly data flows, requiring a mindset change that can be a painful exercise.

Software vendors offer tools for easier data collection and reporting, but the real challenge is in operational departments. Collecting data is crucial, but acting on it to achieve sustainability targets is even more critical. ESG is about adopting a culture that goes beyond data collection and reporting. It fundamentally determines a company’s DNA.

8. Impact on processes and internal controls

To identify impacts, risks, and opportunities, businesses must develop new processes, update existing processes, and implement internal controls. They must cover their operations as well as their upstream and downstream value chains. Furthermore, data validation processes must emerge as part of internal controls to ensure completeness and accuracy.

The internal control/audit function needs to embrace the new reality by incorporating ESG reporting into its risk approach and assessment.

9. Communication matters. Reputation is key

Companies need clear and firm strategies for external messaging on ESG. Greenwashing, over-claiming, or omitting sustainability information will face strict scrutiny. Assurance will be required and will become increasingly stringent, moving from limited to reasonable assurance.

We see many companies setting high sustainability targets and making bold statements to demonstrate their ambitions. Failing to meet these targets can damage their reputation. Companies setting ambitious net-zero emission targets must create realistic plans and understand the long-term implications. To avoid overpromising and underdelivering on sustainability goals, companies must develop clear and achievable strategies

Investors increasingly prioritize companies that actually deliver on their ESG credentials. Companies that cannot provide the required level of transparency risk being excluded from traditional markets. Existing products and services must undergo a sustainability check and update to stay competitive. Failing to do so risks being outperformed by more sustainable alternatives. Your reputation is on the line.

10. Do not delay your implementation

Due to a lack of up-to-date knowledge of the disclosure requirements, ongoing implementation projects often demonstrate a lack of understanding of ESG reporting and underestimate the workload. As reporting requirements become clearer, people start to realize how much work is involved. Take a closer look at the carbon emissions disclosure requirements: they serve as a good example of the difficulties involved in ESG reporting. Reporting sustainability KPIs alongside financial statements can be particularly challenging.

A strong cross-functional governance structure led by the board is indispensable to assure that strategic sustainability decisions and commitments get the full support of all stakeholders and do not cause a delay at the start-up already.

Do not delay the start of your implementation project. Familiarize yourself with the current proposals, perform a fit-gap analysis between your current reporting and the proposals and start your implementation plan. Use 2023 to prepare not only your data but also to install a cost-effective and streamlined process.

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