Most business transformation journeys start with an appreciation that the competitive landscape of tomorrow will be different to how it looks today. This is no different for sustainability, which requires a deeper understanding of how key stakeholder groups will view sustainability—and how that affects business philosophies, strategies, and everyday operations.

Investors should be conscious of how physical climate change affects valuations and longer-term resilience. Governments could target regulatory changes to improve societal and economic outcomes toward sustainable activities. Customers may discriminate against the use of virgin materials and high carbon usage, toward products and services with a better circularity story. Talent markets will likely lean more toward businesses that strive to improve their sustainability practices and forego those that do not.

Although these views will vary considerably between markets, one thing already ties them together. There is potential risk of inaction, with respect to the sustainability improvements that will be needed throughout the length and breadth of value chains.

That risk of inaction equally applies to the reporting, such as the Corporate Sustainability Reporting Directive (CSRD) that will increasingly tell the story of how businesses embrace sustainable leading practices within their operating models. Future markets will assume that these sustainable business practices are a given.

Businesses that begin to adopt some of these leading practices in the short term, then develop across each stage of the journey, are more likely to thrive. The risk of inaction includes loss of competitive edge, diminished attractiveness to investors, reduced appeal to potential recruits, and criticism from other stakeholders.

The scale of immediate compliance responsibilities can obscure long-term thinking

New reporting obligations can subject companies to a new level of visibility and scrutiny. The market will now have access to a more comprehensive view of each business’s environmental and social impact and risk. Business leaders should be prepared not only for the immediate critique, but also the longer-term expectations that will be set. In this context, having a clear view of how sustainability fits with the organization’s purpose and mission becomes more important, because any potential misalignment between what’s reported, and the stated overall direction of the business could be obvious for all to see.

The first reporting cycle is and should be used as a learning curve. CSRD sets criteria on what it wants to see but doesn’t set the process, so business leaders are challenged to find ways to build consistency in their approaches and outcomes.  Firstly, leaders should determine how to respond to the demands of robust data collection of over 1,100 data points, some of which needs to be located from previously unreported areas of their value chain.  Secondly, they should determine which are the most material impacts necessary to report on. While some may be more apparent, the widening universe opens business leaders to new considerations on how external sustainability challenges can impact the organization, and how the organization's operations can affect the environment and society.

To help tackle this, business leaders should evaluate their performance across various environmental, social and governance (ESG) areas along critical value chain functions. Next, they should prioritize areas of greatest importance to a broad range of stakeholders, now and in the future. Achieving this level of transparency and strategic insight requires holistic consideration of the role that technology and analytics can play in cutting through the complexity of multiple regulatory developments, bringing together data from across the organization and value chain.  It is recommended that leaders address these steps pragmatically as explored in subsequent articles in this series.

Looking beyond compliance can reveal hidden value

Forward-thinking companies are using this process to consider how CSRD can unlock new avenues for performance and growth. The transparency required by CSRD, and the insights provided from it, are also a wealth of untapped business intelligence that can be used to redefine any company’s strategy and vision, not to mention market perception.

Opportunities may take different forms according to the business environment and specific situation of each organization. This begins with a change of perspective: first, viewing sustainability as a driver of new business value in addition to being a compliance concern; and second, appreciating the broader measurements, beyond financials, that can be used to define success—particularly those tracking engagement with stakeholders.

Close tracking could help to recognize new commercial avenues to be pursued. It means aligning strategic decision-making and value creation with sustainability by bringing together all teams, functions and partners along the value chain—rather than leaving it to a handful of people in a sustainability unit or finance team.

Compliance as well as transformation requires ecosystem-wide participation

The next two years are expected to be a pivotal period. We anticipate business approaches to change: on one side externally driven, by increased awareness and critique of different stakeholders; and the other side driven by realization of untapped market potential. One could expect that today’s leading companies are going to be those leading sustainable transformations, but we also need the critical mass to move to enable the necessary supply chain integration and collaboration required to drive the new levels of performance and transformation possible. Ultimately, in the longer term, we envision organizations that view CSRD compliance as a catalyst for stronger business performance are more likely to arrive at solutions that fit with evolving market and stakeholder demands, than those that regard CSRD as simply another disclosure burden.

Discover how the insights gained from CSRD can be pragmatically navigated to drive business value.