Sustainability in the boardroom

Read this article if you want to know:

• What sustainability means for the boardroom
• What regulations are heading our way

Sustainability means a great deal in the boardroom, as it turns out. After all, the future of business lies in sustainability. The European Union has the ambition to be climate neutral by 2050. To achieve this, it is developing policies and financial incentives, with or without national and local links, to achieve these sustainability goals. Some measures are grouped by industry, such as the Emissions Trading System (ETS), the Energy Efficiency Directive or the Carbon Border Adjustment Mechanism. Others are applied transversally: an example is the legislation on sustainable reporting and transparency, which we find in the Corporate Sustainability Reporting Directive (CSRD), EU Taxonomy and Sustainable Finance Disclosure Regulation (SFDR). Still others are only proposals for the time being, such as the Corporate Due Diligence and Accountability Act or the Social Taxonomy. There is a huge amount of work to be done. The goal is clear: a more sustainable Europe. And companies need to do their bit, by embracing sustainability and fully integrating it into the DNA of their organisation.
 

CSRD: A thorny issue

What exactly do the new regulations require from our companies? They all have a similar message: step up the sustainability reporting game. Here, the CSRD can be seen as a more advanced development of the NFRD, the current directive for reporting sustainability information. Under the CSRD, companies will be obliged to report both qualitative and quantitative information. This includes both forward-looking and historical information, reported according to a set of mandatory reporting standards. These standards are currently being prepared by the European Financial Reporting Advisory Group (EFRAG). EFRAG has already published a first prototype of these standards for the climate aspect, which sound quite ambitious. For instance, this protocol would impose the obligation to report on scope 3 emissions. Identifying these scope 3 emissions requires the involvement of the entire value chain, which is no mean feat. Companies need information for this that they do not always check or possess at present. Moreover, the CSRD will also oblige companies to report on the role of the board and management with regard to sustainability factors, the agility of business models, strategy for sustainability risks, opportunities related to sustainability, and so on. And not just that: the CSRD requires at least a degree of certainty surrounding this information. It has the authority to impose financial penalties on companies that do not comply with these reporting requirements.
 

Green turnover, CAPEX AND OPEX

We might think of the EU Taxonomy as a ‘green dictionary’. It is a revolutionary segment of legislation that is the first to scan a large proportion of companies’ economic activities and define where they contribute substantially to society. Thus companies are obliged to analyse their activities to see whether or not they fit into the list of the EU Taxonomy. If so, a four-step process follows to check whether they effectively contribute to the climate objectives or not. This focuses on compliance with performance thresholds, limiting carbon intensity, possible impact on other sustainability objectives, and minimum social standards. At the end of this process, the company will report three KPIs: the ‘green’ turnover, CAPEX and OPEX. That enables a company to signal how ‘green’ it is. The other proposals are for the Social Taxonomy, a standardised framework to identify substantial contributions/harm to aspects of society or to promote goods and services that improve the wellbeing of people and vulnerable communities, and for the Corporate Due Diligence and Accountability Act, an initiative to review the commitment to mandatory human rights and the environmental supply chain. This includes the obligation for companies to implement value chain due diligence to identify and prevent possible negative consequences.
 

The role of the boardroom, sustainability teams and Finance

The role of board members is evolving toward creating a sustainable company and sustainable corporate governance. They have two roles to play here. The board of directors is responsible for defining (or redefining) strategy, maintaining an overview and exercising control. Strategically, the company’s goal must be clear, there must be long-term sustainable value creation, and sustainability must be integrated into the organisation’s strategic goals and decision-making framework. This requires the development of an ESG strategy, consideration of the composition of the board, and self-evaluation. Overview and control are intended to ensure that the sustainability risks are identified and opportunities are constantly monitored. Obligations include non-financial disclosure and sustainability performance management. In addition, the company must look at green financing and make the right choices regarding leadership.
 

Goof governance

Good governance is aimed at accelerating the pace of change and sustainability. There are five guidelines: rely on the corporate governance code to promote value creation, transparency, and efficiency in the long term; promote the expertise, independence and diversity of the board and executive team; ensure there is a goal-focused collaboration between the board and the executive team; focus continuously on ESG as a strategic and competitive advantage for value creation by means of long-term sustainability, and invite all relevant stakeholders to contribute to this debate.
 

The challenges we face today

Some companies have not yet done any ESG reporting, or need to start again from scratch due to the new reporting rules. The European standards are also still being developed as well. Whether companies can afford to wait until these standards are finalised to start reporting remains to be seen. However, the European standards will incorporate many elements of the current Task Force on Climate-Related Financial Disclosures (TCFD) and Global Reporting Initiative (GRI). We advise companies to start with the elements common to both. But this does raise the question of how companies will ensure that non-financial information will have the same transparent quality as traditional financial information. For the EU Taxonomy, companies will need a certain granularity to capture this information, which is often spread out all over the business. Considerable resources will go into linking and processing that information. Companies will have to be prepared for ongoing adaptations to these changes. In fact, the possibility exists to review the EU Taxonomy every three years on the basis of new scientific developments. Furthermore, as a new and complex legislation, the EU Taxonomy can be interpreted quite broadly. It is important to develop solid arguments and standpoints based on a detailed analysis. The new information to be developed will not be compatible with every current IT system either.
 

Opportunities

These rules and regulations challenge companies to focus on non-financial as well as financial data. For companies taking their first steps in this sustainable adventure, these tools may offer a structure and advantage in the intention to integrate sustainability into their business models.

After all, sustainability is a way to survive. For companies that have already gained maturity in sustainability, reporting under these models may mean economies of scale in attracting new investors. Bloomberg predicts that ESG assets will reach around €45 trillion by 2025. Although the EU Taxonomy will generate costs, including those of implementation and the need for new data, it also allows us to develop a visibility that offers sizeable benefits. Examples include the development of new business models, optimising the benefits that the implementation of a sustainability strategy brings, strengthening weak spots, etc. Last but not least, the EU Taxonomy also connects Finance with related fields through a conscious taxonomy governance. And don’t forget: you will be doing the right thing for our planet, society, and future generations. Having the right skills both to meet the challenges and explore the opportunities is vital. This is why you need to build up in-depth knowledge of all the ESG issues in the company and manage these issues, integrate ESG risk management into the existing procedures, and see the bigger picture by taking a system-thinking approach.