Forest aerial view

How European sustainable regulation can create a structure for added value

Authors

Tristan Dhondt

EY Belgium Strategy and Transactions Leader; Infrastructure Advisory lead
Sophie Chirez

EY Belgium Climate Change and Sustainability Executive Director

7 minute read 16 Jan 2023

Related topics

Long term value

Climate-related reporting

Climate change and sustainability services

Strategy and Transactions

Reporting requirements can be a great guide when developing a sustainable and value-adding ESG strategy.

In brief

Companies viewing the European regulations as a checklist, will run the risk of not really integrating sustainability awareness into their business model.
A successful sustainable business strategy can allow a company to reap both ESG and financial benefits.

Europe is developing a series of initiatives to make the economy more sustainable. A lot has to do with decarbonization and other ecological measures, but social and policy pillars are also getting a lot of attention. Take corporate sustainability due diligence for example: a duty for companies to diligently improve transparency on human rights, sustainability requirements and their impact. Or what about the corporate sustainability reporting directive, under which companies are required to report on how their activities affect the environment and society, and conversely on the risks that environmental and social issues have on them?

In the coming years, companies need to prepare for these new regulations and reporting requirements, ‘but above all, they need to develop and implement a thorough, robust, sustainable and value-adding ESG strategy – greenwashing is out!’, say EY Belgium’s Tristan Dhondt and Sophie Chirez.

Is mandatory sustainability a distant concept?

‘Yes and no’, Tristan Dhondt replies. ‘Reporting is mandatory, covering all companies. They need to look at what all the different aspects mean for them, in euros as well. Many are still quite unclear. But that’s not really the point for me. More important is the question of business strategy. What culture, what mindset does the organization have?’

‘Most companies are aware of the timeline, they know what to expect’, agrees Sophie Chirez. ‘Many will have to be ready by 2025, others a bit later, but what exactly the reporting entails is not fully clear to many of them. Some underestimate what they will be up against. What Europe is demanding is completely different. It’s a big step, that’s for sure. The focus of the ESG – environmental, social, governance – criteria is on climate change, CO2 emissions, pollution, etc. The social aspect is also touched upon. But the policy-related side is often sidelined.’

We’ve seen many scandals in the past, with ‘dieselgate’ one of the most famous. Many companies do not realize that they also need to address their governance upfront. In many cases they only take action after something goes wrong. Accountability should fall to the board. That’s why we are working hard to raise awareness there. While it is often already high on the agenda of management, the CEO and the chief financial officer, board support is also needed. Board accountability could be a lot better.’ According to Chirez, the decision makers often lack knowledge of ESG.

You need to have a strategy and know the financial impact before you start making long-term choices and creating value.

Tristan Dhondt

EY Belgium Strategy and Transactions Leader; Infrastructure Advisory lead

Companies need to set priorities. ‘With its many points and requirements, the European standard is very comprehensive. You have to look at where your biggest impact is. And not just the negative side. A positive impact is synonymous with business opportunities. That, too, is important in any new story.’

Dhondt couldn’t agree more, although in his view too little is being measured in real terms, i.e. in euros. ‘Everything starts with measuring. To measure is to know. You need to have a strategy and know the financial impact of different options on people and the environment before you start making long-term choices and creating value. That has a very tangible impact at the operational level. In addition, there are qualitative choices. Here at EY, we’ve created a general framework with six questions, a methodology.’

How can we decarbonize our company?
How can our strategy generate financial and stakeholder value?
How can we be compliant and manage risk at a reasonable cost?
How can we use technology and data to drive our sustainability agenda?
How can we reorganize our product and supply chain to be sustainable?
How can we finance the sustainable transformation?

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Is the reporting more than just ticking off a checklist?

‘The six challenges we developed at EY go much further than just reporting. Of course, compliance is important, but we want to go further. Depending on the person and company level, you need to address topics in greater depth. A wide range of subjects may be involved, and sometimes even some trial and error’, Dhondt says.

‘Once a company has defined its ESG topics, it is required to audit them from the moment the directive applies and disclose the results. And this involves much more than just ticking off a checklist. Are the reported figures correct? Can the data behind those figures be verified and validated? Because that’s how you fight greenwashing’, adds Chirez. ‘But to find the right information, you have to tell a broader story. You need to supplement quantitative data with qualitative data. What is your policy, what are you going to invest in, is your whole corporate culture aligned with it, etc.?’

‘If companies focus too much on just ticking off a checklist, they run the risk of sustainability awareness remaining too narrow, not being widely adopted and not really integrated into the organization’s business model. It’s all about having a comprehensive sustainability strategy, lived at all levels, from the shopfloor to the boardroom and back. A successful sustainable business strategy can allow a company to reap both ESG and financial benefits. Fortunately, that is increasingly the case’, reassures Dhondt.

To find the right information you have to tell a broader story. You need to supplement quantitative data with qualitative data.

Sophie Chirez

EY Belgium Climate Change and Sustainability Executive Director

Act first, think later?

A trap for many organizations is silo thinking, points out Chirez. ‘They have a decarbonization team, a social affairs team ... But these are people with different skills. To achieve a consistent approach, you have to have the right structure in place right up to the very top. As investing sustainably also has an impact on the financial picture, the finance director must be in on the story. If you want to hire new employees for that or give people different positions, HR also has to be on board. Depending on the size of the company, you can create a dedicated silo-transcending team, with at its head a chief sustainability officer, but that is not really self-evident for small family businesses. At some point you have to centralize in order to take the right steps and coordinate.’

Dhondt insists that the CEO and chief financial officer need to be on board. ‘Otherwise, you risk landing in corporate social responsibility (CSR), as in the past. In many cases this was mainly about branding, a few pages in the annual report listing some green initiatives, but without much impact on the business. From my function, I would say that a financial director needs to be paid accordingly.’

To achieve a consistent approach, you have to have the right structure in place right up to the very top.

Sophie Chirez

EY Belgium Climate Change and Sustainability Executive Director

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Does a sustainable strategy lead to value destruction or value creation?

Reporting requirements can be a great guide when developing a sustainable strategy. Companies can devise a scenario for a comprehensive transition plan covering the various steps to reduce CO2 emissions by half by, say, 2035. ‘What are the concrete actions? What are the parameters? Which measures do you want to take to achieve which goals? But obviously, you have to remain realistic’, says Chirez.

‘It is important to monitor the whole company, asking whether we are doing well as a whole, for example in our use of scarce resources or energy? If you don’t develop a good strategy for this, the figures you present won’t be robust. Perhaps your company needs to divest a division or just to look for an acquisition to create value and increase revenue. And which sustainable tools do you have in place to reduce costs and optimize working capital? Ultimately, though, you have to focus on sustainability, value drivers and long-term value creation’, Dhondt believes. Mindsets have changed greatly over time, for example with regard to child labor. Or you might offshore production to reduce costs, but eventually you’ll find yourself losing customers, even in times of crisis.’

It is important to monitor the whole company, asking whether we are doing well as a whole.

Tristan Dhondt

EY Belgium Strategy and Transactions Partner; Strategy and Transactions Leader for EU institutions

Europe versus the rest of the world

‘The strict European regulations are not necessarily a competitive disadvantage. Companies need to see the value of a sustainable strategy, without viewing regulations as a constraint. Companies that don’t toe the line here will lose value in the long run, internationally as well’, Chirez believes. ‘Audits also give you an objective measure for comparing. Companies can no longer just publish what they want. The standard is the same for everyone.’

Dhondt reiterates the importance of measurement and comparison. ‘You can demonstrate in black and white that a strategy is sustainable, and that much more than just being compliant is involved.’ This bears fruit internationally, concludes Chirez. ‘European regulations also have international implications. We are seeing a lot of multinationals based outside Europe adopting the European minimum requirements for their entire organization.’ According to Dhondt, many companies should think more broadly. ‘Sustainability is universal, with the discussion transcending European borders. It’s about adding value on a global scale.’

Summary

The European Green Deal aims at a transition to a sustainable economy. The next few years companies need to prepare for new regulations and reporting requirements, but above all they need to develop and implement a robust, sustainable ESG strategy that will bring them long-term value.

About this article

Authors

Tristan Dhondt

EY Belgium Strategy and Transactions Leader; Infrastructure Advisory lead
Sophie Chirez

EY Belgium Climate Change and Sustainability Executive Director

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.