As a result, forward-looking boards are evaluating how sustainability reporting can be used to align corporate strategy with sustainability goals, enabling their company to transform its business model. They do not see sustainability reporting simply as an end in itself. Instead, they view it as the outcome of a powerful business framework that can, and should, help companies to set sustainability targets, take appropriate action, measure their performance, identify and manage risks and opportunities, and build enduring relationships with their stakeholders.
Accordingly, the research recommends that boards work with their management teams to develop a corporate strategy that integrates the company’s social and environmental impacts into long-term value creation without damaging short-term profitability. Sustainability reporting is critical to this endeavor since it enables the company to understand its value drivers and communicate its progress against its objectives.
Strategy alignment and risk management
Reporting under the CSRD is potentially a game-changer from a strategic perspective. This is because high-quality sustainability reporting gives companies the trusted information they need to transform their business models and seize new sustainability-related opportunities. At the same time, however, the high levels of transparency required by the directive are also presenting new risks for boards to manage.
Companies face significant risks in relation to how they set and communicate strategic goals – including their plans to evolve their business models in line with limiting global warming to 1.5°C. In particular, they risk accusations of greenwashing if they set ambitious targets without substantiating their plans to achieve those targets. They also need to manage the significant financial, operational and people-related risks associated with sustainability.
Management of sustainability-related risks is not yet a mature discipline. Nevertheless, the research revealed that boards are starting to use sustainability reporting to inform their ongoing assessment of the sustainability-related risks facing their company. They are also relying on reporting to understand the impacts of those risks on their company’s risk management and internal control systems.
Reporting
To comply with the CSRD, companies are having to overcome a host of complex reporting-related challenges. These challenges range from a shortage of available data through to metrics, standards interpretation and gap analysis. The board does not need to be familiar with the technical detail of these challenges. Nevertheless, it should have a thorough understanding of any issues that might prevent the company from meeting its obligations under the directive so that it can manage the expectations of external stakeholders, including investors.
The double materiality assessment (via ey.com Belgium) is widely regarded as one of the most testing aspects of CSRD compliance because of the workload involved and the various pitfalls it presents. Most boards of in-scope companies will have already overseen a double materiality assessment that assesses the impact of different sustainability matters on the business, considering both the “outside-in” and the “inside-out” views. Companies now face the challenge of using the outcomes of these assessments to inform the content of their sustainability reports, being mindful not to bombard their stakeholders with large volumes of immaterial information.
For boards, the double materiality assessment has proved to be an important strategic opportunity. As a result of the assessment, they have been able to access data that can be used to refine strategy and rationalize investment decision-making, enabling the company to drive value from its sustainability agenda. With the benefit of this data, boards can ensure that capital flows to impactful projects that deliver financial results while enabling the company to hit its sustainability targets.
Due to the challenges involved with reporting, a priority for boards is monitoring whether the company has sufficient human and IT resources to support an effective and efficient reporting process. It’s also key that audit committees assess the company’s current capabilities around collecting and analyzing data for sustainability reporting, including the associated internal controls, and identify areas for improvement. Audit committees should explore how the company plans to fill its data gaps and how it is verifying that its value chain information is reliable and robust.