If businesses of any scale and ambition want to succeed in today’s world, they must provide tangible evidence of a coherent sustainability strategy, proof that it is being implemented, and metrics to demonstrate progress. This is the core message in the new ESG: Where Are You On The Journey? report from Mazars, which aims to provide insights to help businesses advance their sustainability agendas.
Companies which haven’t embarked on the sustainability journey are likely to flounder in the wake of their more progressive competitors, according to Mazars consulting services partner Liam McKenna.
“Investors, bankers, customers, employees, and society at large are demanding this,” he says. “If you are in the supply chain of a multinational company, the chances are you will no longer get business without a sustainability strategy that includes both a clear understanding of your environmental footprint, including a net zero commitment, as well as your social impact. It is likely that you will be asked about the diversity of your team and the sustainability of your business. If you don’t have the right answers, the investor community may spurn you, customers may turn away, and you could face difficulties recruiting and retaining staff.”
Sustainability reporting has been voluntary up until now, but regulatory changes are afoot, which will change that. McKenna explains that a number of different standards and frameworks for the measurement of corporate ESG performance have emerged over the past number of years.
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These include the Global Reporting Initiative (GRI) standards, which date back 25 years; the Sustainability Accounting Standards Board (SASB) standards, which focus on the sustainability risks and opportunities most likely to affect a company’s financial situation, operating performance or risk profile; and the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), which is based on the four pillars of governance, strategy, risk management and measurements and targets. The TCFD framework is emerging as the key reference for countries seeking to legislate reporting requirements.
Mazars audit and assurance partner Martina Mahon describes these regulatory developments as potential game changers. “These new regulations, which will be challenging for many organisations to implement, mark a decisive change, in that companies will be judged based on their sustainability performance and not only their financial performance,” she explains.
“The EU Corporate Sustainability Reporting Directive (CSRD), which integrates the TCFD recommendations into its guidelines, aims to improve the quality and comparability of published information by imposing the mandatory use of European Sustainability Reporting Standards (ESRS) and the mandatory auditing of sustainability reports,” she adds.
In the UK, regulations now require the largest UK-registered companies and financial institutions to disclose climate-related financial information on a mandatory basis, also using guidelines from the TCFD.
In the US, the SEC has proposed new rules mandating climate-related disclosures for public companies, which are also modelled in part on the TCFD recommendations.
Meanwhile, at a global level, the International Sustainability Standards Board (ISSB), which operates under the oversight of the IFRS Foundation, has commenced work on a suite of disclosure standards to meet investor information needs.
While many of these regulations have yet to come into force, there is evidence that companies are already making significant progress on the ESG journey. In the most recent Mazars C-suite barometer around half of the companies surveyed had already made public commitments on a range of ESG topics while 47 per cent of them had made a net zero commitment.
“If you are in the supply chain of a multinational company, the chances are you will no longer get business without a clear sustainability strategy”
“The Mazars C-suite barometer is based on responses from over 1,000 C-suite executives from 39 countries around the world, including Ireland,” McKenna points out. “A significant majority, 62 per cent, of the executives who participated said a transformation in their sustainability strategy is likely in the next three to five years and three-quarters of them said they planned to increase investment in sustainability initiatives in the short term. More than 90 per cent expressed confidence that they could respond to mounting expectations in relation to governance, ethics, and social responsibility.”
He sees these results as positive signs. “There is real momentum now. When we look at what’s happening in companies and at a regulatory level, there does seem to be a step change. Of course, we are in a very difficult situation when it comes to meeting the 1.5-degree Celsius target, but there are lots of good intentions out there.”
Another aspect of the C-suite barometer worth noting is the most important reasons cited for ESG investment. Brand and reputation, client, and consumer expectations, all ranked ahead of compliance.
“This is cause for measured optimism,” says McKenna. “Compliance frameworks and standards take many years to formulate and introduce, but the key drivers behind ESG investment identified here are much more immediate.”
The biggest challenges to ESG investment identified by respondents to the C-Suite Barometer were funding, 52 per cent, and complexity, 51 per cent, followed by the risk of low return, 49 per cent, and the difficulty of choosing what to prioritise, 47 per cent.
“Those responses are a little bit concerning,” McKenna notes. “They suggest a defensive position on the part of those companies. But if they don’t have a positive story to tell in relation to ESG, that poses a risk to their brand. The worry is that they will focus on managing the brand rather than investing in the difficult and more complex aspects of ESG.”
When it comes to ESG reporting, providing quality data about the ESG impact of operations is seen as among the most challenging issues.
“Data quality is a huge challenge, especially in large organisations,” he points out. “Data coming in from third parties and being produced internally is not well understood. Different divisions in the same organisation can interpret the same data differently. Another difficulty is prioritising what to include. But most organisations have done the materiality assessments by now, and they should be able to deal with that issue. They will also need to find the data specialists with experience and deep knowledge and expertise, and they are in short supply.”
And time is running out for companies to deal with these issues. “Organisations should not fall into the trap of thinking that they’ve got until the end of 2024 or later before they start reporting under CSRD,” he warns. “Companies already subject to the non-financial reporting directive have to report from January 1, 2024, and that means capturing the data from the beginning of that year. “That will require a lot of work to be done this year to put the systems in place to be ready for that.” Compliance can be complicated and costly, of course, but the business case for presenting ESG reports in a form that can add value to the business is compelling.
The journey to becoming a more sustainable company requires not just about reporting, mandatory or otherwise. It also entails a significant change in mindset and culture. “Committed, well-informed leadership and carefully planned execution are needed for sustainability strategy to be embedded into the broader business strategy,” says McKenna.
Significant rewards await companies that succeed in merging the two, McKenna concludes. “They include cost savings from a smaller environmental footprint, for example, from less waste, reduced energy consumption, improved staff motivation leading to better staff retention, and a potentially important competitive advantage from being a leader in the area. As a result, early movers will be able to attract the best talent, reduce business risks and build more resilient supply chains.”
Click here to view the report.
Contact Liam McKenna to learn more about how your organisation can become more sustainable.