From compliance to competitive advantage from sustainability reporting
2024 is the year that businesses will start to feel the demands of an intensified regime for international sustainability reporting.
As those impacted by the EU’s Corporate Sustainability Reporting Directive prepare to make their first disclosures by the deadline of January 2025, organisations must also ready themselves for new mandatory standards such as the UK’s sustainability reporting regime and understand how new areas for reporting, such as the currently voluntary disclosure framework aimed at preserving biodiversity from the Taskforce on Nature-related Financial Disclosures, fit into future reporting plans.
Faced with this wave of sustainability reporting, some organisations are tempted to prepare as they would for any other exercise in regulatory compliance: data requirements and deadlines are established, information is gathered and checked, reports are then published.
But simply adding more reporting requirements onto an ever-growing list may soon prove unmanageable. Organisations must stay abreast of their regulatory requirements, of course, but the reality for those who treat sustainability reporting as a box-ticking exercise is they are putting their organisations at commercial disadvantage and greater risk in the longer term by not looking at the bigger picture of why organisations are being asked to report in this way and take a strategic approach from the outset.
From obligation to opportunity
A strategic approach to sustainability reporting starts with an understanding that it provides a lens through which organisations and their stakeholders can understand future competitiveness, operational risk and commercial viability.
As such, the reporting process must be treated less as a laundry list of obligations and more as an opportunity to thoroughly assess where the organisation stands today on material sustainability impacts, where it needs to improve and how a proactive approach can open up new sources of value creation.
Implicit in this is an understanding that sustainability risks equate to strategic business threats that can threaten access to capital, reduce operational resilience, erode market share and compromise an organisation’s licence to operate.
So, what can organisations to do embed this approach? In our work with clients around sustainability reporting, we adopt four guiding principles to take the focus away from reporting to value creation.
1. Look at the big picture
For sustainability reporting to deliver a strategic benefit, it is critical that organisations first move their focus away from short term mandatory deadlines and consider the broader ESG landscape.
By understanding the motivation behind existing and new reporting frameworks, where they overlap, the future direction of travel in the territory and sector you operate in and the role voluntary sustainability standards can play in understanding risk, organisations can not only avoid regulatory surprises but anticipate and fulfil expectations efficiently. They can also benefit by understanding how sustainability reporting will contribute to future business resilience.
And perhaps it’s an obvious point, but it’s essential to start with a robust materiality assessment, which reflects the sustainability subject matter most relevant to what you do as a business, the impacts associated with your activities, and the requirements of investors, regulators, employees and customers alike.
2. Mind your language
To many within an organisation the words “sustainability reporting” will mean nothing – or worse, will be off-putting, sounding neither commercially relevant, strategically valuable, nor, frankly, their job.
Organisations need to be aware of this disconnect and go out of their way to draw a clear line between their performance on environmental, sustainability and governance issues and commercial opportunity.
This requires the positioning of reporting as a core business capability which harnesses new data to identify inefficiencies, allows the organisation to find new ways of optimising operations, fostering innovation and building competitive advantage.
By talking about sustainability reporting as a tool for identifying environmental and social risks and turning them into commercial opportunity, people will be much likelier to engage with the transformational potential of the process and the value it can bring to the way the organisation operates in the future.
3. Out of the silo
The transformational potential of sustainability reporting only works if the process itself is conducted in a way that can catalyse change.
One of the benefits of the double materiality approach, which is at the heart of CSRD, is that it requires organisations to break down traditional silos between finance, risk and sustainability teams. This discipline enables better understanding of both sustainability impacts and financial materiality of sustainability issues, and consequently associated risks and opportunities for the business.
A strategic approach to sustainability reporting recognises the interconnectivity of sustainability issues and ensures teams work together across departments, from senior management to operational and functional leads to maximise the value derived from the reporting process and enable valuable insights which will inform future strategy.
Furthermore, using the reporting process as an exercise in prioritisation and action planning will ease the path of implementation of any future plans by getting early buy-in from teams who will understand their roles and why sustainable action needs to be taken.
This means that ownership for sustainability reporting doesn’t sit with the sustainability lead but that there are owners spread right across the business who must confer and collaborate as part of the reporting process.
4. Data for insight and action
For sustainability data to fulfil its potential for performance optimisation and informing business evolution, organisations need to ensure that data collection isn’t designed as a process which simply fulfils reporting requirements.
For that reason, think less about what minimum data is needed for a disclosure requirement. Think instead about the sustainability insight and information which is relevant to your business goals and operations.
Also important is to build in ways to collect qualitative insight which gives context to data and can explain anomalies and gaps. This should extend beyond internal teams to suppliers, investors, customers and other external partners on whom your business relies. They will provide new perspectives which will help prioritise future changes as well as lay the foundations for potential future joint initiatives or partnerships.
Incorporating feedback on the usefulness and relevance of sustainability data will allow data collection methods to be refined and focus on the areas which matter most.
The overall goal should be to create robust processes and outputs built to meet the unique needs of the business as it goes forward.
In summary, the step-change in accountability and transparency on ESG impacts in 2024 goes way beyond an exercise in compliance. Leaders who see that sustainability reporting and the insights it generates as springboard for better business success through improved sustainability performance will be better placed to integrate sustainability into strategy, decision making, innovation and culture. This will strengthen their competitive position, operational resilience, access to capital, stakeholder trust and the potential for future growth.