A confluence of powerful forces is making sustainability a priority agenda item for boards. Investors and asset managers are pushing organisations to improve their sustainability performance and reporting standards, extreme weather events around the world are highlighting the operational risks posed by climate change, while political and regulatory momentum is building behind the transition to a net zero economy.
Organisations are being pushed to become more sustainable, faster. And many of them have already made commitments to become net zero within a specific timeframe.
Several policy initiatives are in the works that are preparing countries and organisations for a concerted response to global warming and widening the scope of the sustainability lens. The plan – as defined by the European Green Deal - has set 2050 as the deadline for the European Union (EU) to achieve climate neutrality. The Paris Agreement provides the framework and the obligation to get there. As part of the goal, organisations will be required to take meaningful sustainability and carbon reduction actions. The European Commission is seeking to align the EU capital market and financial services sector with sustainability objectives through several initiatives such as the EU Taxonomy Climate Delegated Act, the Sustainable Finance Disclosure Regulation (SFDR), and the Corporate Sustainability Reporting Directive (CSRD).
The CSRD will require organisations to disclose a wide range of information about their business models, strategy, and supply chains. Its aim is to align sustainability reporting with financial reporting to give stakeholders access to comparable and reliable sustainability information.
On the other hand, the EU sustainable corporate governance directive is proposing to clarify directors’ duties so that they are required to act in the best interests of the organisation by pursuing long-term value creation and managing sustainability risks. These duties include setting up and overseeing the implementation of the due diligence processes and integrating due diligence into the corporate strategy¹. This will have the effect of embedding sustainability into the governance framework.
Meanwhile in November 2021, the IFRS Foundation launched the International Sustainability Standards Board (ISSB), which is responsible for the creation of a set of global sustainability disclosure and reporting standards. This was followed by the launch of the UK Transition Plan Taskforce (TPT) in April 2022 to develop the gold standard for private sector climate transition plans in the UK.
The US, on the other hand, has announced an initiative that requires all major government suppliers and contractors to set science-based emissions reduction targets aligned to the Paris Agreement and also requires contractors to disclose their greenhouse gas emissions and climate risks. Following a UN report at COP27, the United Nations and standard setter the International Organization for Standardization released guidelines to help organisations construct plans for net-zero emissions.
These new initiatives are likely to significantly expand the roles and responsibilities of boards so that they can support their organisations to better manage their environmental, social and governance (ESG) risk exposure.