How European boards can steer sustainability reporting

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.

The CSRD requires limited assurance of sustainability reporting. As a result, audit committees should hold an early and thorough conversation with their assurance provider about the likely format of the company’s sustainability report, as well as the principal disclosures it plans to make. Audit committees should also be careful to document how they reached their judgment about the integrity of the company’s sustainability information. This will enable them to explain their rationale to the board, the assurance provider and any key stakeholder groups.

Ultimately, the preparation of accurate, comprehensive and reliable sustainability reporting is a cross-company project that requires collaboration between numerous functions, including finance, HR, legal, PR and communications, procurement, and the sustainability team. At board level, it’s also vital that there is close collaboration between the board committees that provide relevant oversight, particularly the audit and sustainability committees.

Stakeholder engagement

By itself, sustainability reporting will not accelerate the transition to a more sustainable economy. It can help to bring about that transition, however, by telling the authentic story behind the transformation that is happening in practice.

High-quality information can help boards to build trusted relationships with the key stakeholders that will enable them to execute their strategy, including investors and finance providers. Significantly, 99% of investors who responded to the 2022 EY Global Corporate Reporting and Institutional Investor Survey said they consider companies’ environmental, social and governance reporting as part of their investment decision-making process.

If there is not already one in place, boards should have a robust plan for communicating and explaining the company’s sustainability reporting to stakeholders. Audit committees can play a key role here by interrogating management around how prospective information, such as strategy and target setting, is presented in the company’s sustainability report. They can also clarify which matters are likely to present fraud risks.

Training and competence

Providing oversight around the production of trusted sustainability information is a big and important task for boards. The scale and complexity of the task also mean there’s a lot to learn – even for boards with prior experience in this area.

Boards are acutely conscious that they need to develop new skills and to educate themselves on sustainability matters. So, they are seeking advice from internal and external specialists and having in-depth conversations with their auditors. In addition, they are undertaking skills assessments and bringing in new members with sustainability expertise in the event of a skills gap.

The research recommends that boards develop a training plan to equip their members with the skills and knowledge they need to deliver the company’s sustainability strategy, as well as monitor the associated reporting. Boards should also review whether they have the right people, with the right skill set and mindset, to understand how sustainability issues affect the business in the short, medium and long term.

Summary

By supporting their companies to comply with the CSRD, boards are helping to accelerate the transition to a more sustainable economy. In their critical oversight capacity, they can also ensure that their companies use powerful insights from their sustainability reporting to drive business model transformation and achieve long-term success.