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The Future is Sustainability Reporting

The world is changing, and sustainability is becoming a top priority for many organizations. According to sustainability consultant, Paul Endres, investing in sustainability is the greatest business opportunity of our time and provides the chance for both top-line growth and bottom-line savings. 

Consumers not only demand more and more sustainable products, but according to numerous studies, they are also willing to pay more for them.

At the same time, talent is also attracted to companies that put sustainability at the core of their operations. 75% of all Millennials want a job where they feel there is a sense of purpose towards people and the planet, according to Deloitte's annual survey. 

Sustainability engagement offers an opportunity to differentiate from competitors, it makes the operations more efficient, saves costs, enables better access to capital markets, and is more resistant in times of crisis.  This was demonstrated in 2020 as several studies show that companies committed to sustainability came through the crisis much better than the average. 

So, we sat down with Paul to better understand why sustainability is such a hot-button topic for companies and the major regulatory changes that they can expect in the near future. 

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Why is sustainability reporting so important?

Actually, for the same reason why financial reporting is important. The way a company deals with global challenges and how it integrates stakeholder interests are indicators of the company’s capacity to generate value in the future. 

A well-founded sustainability strategy is no longer a nice to have that interests NGOs or a small group of consumers, but a crucial value driver that determines the future competitiveness of companies.

In its sustainability report, the company can, in the best case, demonstrate in a credible way that it not only minimizes negative impacts on the environment and society and thus its own risks, but that it has anchored sustainability as an investment opportunity and differentiator for future value development in its core business. 

On the one hand, this creates trust and incentives for stakeholders such as investors or consumers, who increasingly make their investment and purchasing decisions dependent on sustainability criteria. In the near future, however, sustainability indicators will also have a very direct impact on financial indicators, e.g. in the case of ESG-linked loans. 

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What is the EU Taxonomy and what does it hope to achieve?

The Taxonomy Regulation is part of the EU Green Deal and it establishes an EU-wide framework that will help investors and businesses to assess whether certain economic activities are “sustainable”. The framework primarily addresses the financial markets. Not only does the EU want to encourage investment in more sustainable technologies and industries to meet the Green Deal targets, but it is also responding to growing demand from investors for more transparency on sustainability. 

Until now, sustainability reporting has mainly taken place in glossy brochures in which companies could present selective successes at their own discretion. This makes it difficult for investors who are under increasing pressure to shift their portfolios into more sustainable assets, to find suitable indicators for their investment decisions. 

The EU Taxonomy Regulation now requires capital market-oriented companies to classify their revenues, capital, and operating expenses according to very clear criteria and thus creates objective transparency about how sustainably a company actually operates. 

What is the Corporate Sustainability Reporting Directive?

While the Taxonomy Regulation focuses on the classification of selected financial indicators, the Corporate Sustainability Reporting Directive (CSRD) aims to make sustainability reporting as a whole more meaningful, comparable, and reliable. 

In the future, sustainability reporting will essentially be placed on an equal footing with financial reporting. This means, for example, that the management will have to take active responsibility for the published data because the balance sheet oath will then also be extended to the sustainability report. 

The report must then also be audited in the same way as financial reports and the relevant information must be published according to uniform criteria. Work is currently underway to harmonize existing standards and other regulatory requirements and to integrate them into the framework. 

What kind of companies will be affected by the new regulations?

The EU Taxonomy will affect large companies that are public interest entities and meet the criterion of having more than 500 employees on average during the financial year.

CSRD will impact all large companies (>250 employees), publicly traded companies (except microenterprises), and large public-interest companies (i.e. banks and insurance companies).

What can organizations do now to prepare for these upcoming regulations?

With regard to the EU Taxonomy Regulation, all companies concerned should already be in the middle of preparations, as reporting on some of the indicators is already required for the current fiscal year. In most cases, the first step will be to create responsibilities, structures, and processes that make it possible to collect and aggregate the required data throughout the company. 

Since the criteria that classify an economic activity as taxonomy-relevant or taxonomy-compliant are defined in great detail and also have to take into account interactions and side effects, sufficient capacity and expertise should be planned for this. 

Reporting requirements will continue to expand in the coming years, so it will pay to have a sound, flexible system for data collection. 

With regard to the CSRD, companies still have a little more time to prepare. For the fiscal year 2023, reporting must be done according to the new guidelines for the first time. Especially for companies that have not yet collected and reported on company-wide sustainability indicators, it is advisable to set up the necessary structures now. In doing so, they can orient themselves on the GRI Guidelines, which already offer a generally recognized objective reporting framework and will most likely also be taken into account in the CSRD. 

Where should the responsibility for preparing for these regulations be organizationally located?

In many companies, sustainability controlling and reporting is still a separate process that runs parallel to financial data collection and monitoring. Since the key figures will not only be published in the same report in the future but the requirements for data quality and validity will also be equalized, it is advisable to integrate sustainability KPIs into company-wide controlling and accounting. 

This not only ensures more efficient processes in company-wide data collection but also creates visibility and relevance for achieving sustainability goals.

Will companies in the future survive without putting sustainability at the core of their operations?

I don't think so. This can be illustrated by the example of climate protection. The IPCC report published last week, which uniformly expresses the scientific understanding of 195 countries, makes it unmistakably clear that radical decarbonization of the economy must take place in the coming years to preserve the chance of achieving the 1.5 or 2-degree target. The 26th UN Climate Summit in Glasgow in early November will be the last chance to set the course for this. 

If the global community is able to reach an agreement, almost all business sectors will be affected by the new rules of the game in the future: incentives, regulations, capital flows, and the structure of purchasing and sales markets will be adapted to a climate-neutral economy.  

Companies that ignore this will either become obsolete or be left out of the game.