The days of aspirational, marketing-driven corporate sustainability reporting are over. In their place, consumers, investors and regulators now expect companies to have serious, verifiable substance behind their sustainability claims. The problem is this: a lot of companies go bankrupt.
The EU Corporate Sustainability Reporting Directive has been a game-changer for businesses. … [+]
According to a recent study from IBM, although 95% of companies have environmental, social and corporate governance (ESG) goals in place, only 10% have made significant progress towards achieving them. Additionally, only two in ten consumers say they trust companies’ claims about environmental sustainability.
This distrust exists for good reasons. Business leaders say the practice of “greenwashing” is widespread in their respective industries. Actually, nearly three-quarters of leaders said Most organizations in their industry would be caught greenwashing if they were fully investigated, according to a January survey of nearly 1,500 executives across 17 countries and seven industries by Harris Poll for the Google Cloud account.
These general concerns place direct emphasis not only on the companies’ final reports themselves, but also on the materiality assessments that underpin them.
This is the litmus test for companies to understand what is important to their respective businesses and which ESG goals they prioritize with real, substantial efforts versus those who simply get airtime because they look good .
Materiality Assessments
As a term, materiality comes directly from the financial world. The most commonly used definition comes from International Financial Reporting Standards (IFRS). Essentially, it is information that can influence and ultimately inform an entity’s financial decision-making.
Simply put, materiality assessments define the sustainability and ESG issues that matter most to companies and their stakeholders and guide how they will report and integrate them into their overall business strategy and investments. They are intended to cut through the hype and impose quantitative measures and accountability criteria behind the company’s sustainability and ESG strategy and ultimately guide the reporting process.
Importantly, they also form a fundamental aspect of independent assurance by third party assessors, which is now being mandated under the Corporate Sustainability Reporting Directive (CSRD) and associated European Sustainable Development Reporting Standards (ESRS) in Europe. Although some European Union (EU) lawmakers have recently pushed back Regarding some of the information required by the CSRD, it is clear that materiality will play a major role in the future of regulatory reporting, whatever form the final regulations ultimately take.
Until recently, there has been a lack of guidance on standardized methodologies and agreed best practices for carrying out materiality assessments for sustainability and ESG reporting purposes. As a result, many companies didn’t know where to start, what to include, or how to report their findings when it came to developing an overall strategy. Recent guidance The European Financial Reporting Advisory Group (EFRAG), the body charged by the EU with developing ESRS, has helped define best practices, but businesses still face challenges.
Potential limitations of materiality assessments
Basically, a materiality assessment is carried out to identify and prioritize a company’s significant impacts, risks and opportunities related to sustainability and ESG reporting. The assessment results will also help ensure that their values and goals are aligned with their strategic objectives – whether it is an effort to reduce energy consumption to combat climate change, encourage diversity, ensuring human rights or addressing a host of other sustainability issues. and ESG issues. While this may be the intention, in many cases assessments of ESG and corporate sustainability materiality have suffered from an ad hoc approach or even been non-existent in historical reporting scenarios. voluntary.
The most common breakdown? Bad data. Sustainability reporting based on insufficient or inaccurate data that does not specifically define corporate sustainability and ESG priorities is intended to lead companies down the wrong path. And more importantly, the results of materiality assessments often lack clear benchmarks and concrete data for companies to track their progress against their own stated goals. Without this, some companies’ materiality assessments have historically been reduced to a simple press release, as opposed to a clear action plan.
With the implementation of the CSRD and ESRS, the EU will become a force for change in the way businesses approach materiality assessments. The legislation, which includes some of the strictest sustainability reporting requirements ever imposed on companies, requires companies to adopt a dual-material approach, which includes disclosures about climate change risks in their operations, as well as potential impacts that their activities cause. operations may have in terms of risks to society and the climate. Importantly, to meet this standard, companies falling within the scope of the CSRD and ESRS will also need to ensure that effective materiality assessments are carried out and that these assessments reflect an understanding and a clear analysis of impacts, risks and opportunities throughout their value chains. .
Compliance review
Materiality assessments carried out using the new guidance set out in the ESRS will help businesses understand their priorities from a reporting perspective. However, the danger is that decades-old processes for understanding and meeting environmental, health and safety (EHS) compliance obligations may be lost in the shine of this shiny new thing. Businesses need to know the reporting and compliance requirements – not just those required by the CSRD, but also those required by the CSRD. all EHS, Sustainability and ESG-related legislation in each jurisdiction in which they operate – which are applicable to their business.
It is counterintuitive to focus on climate change targets, without first ensuring that a company is meeting its core legal obligations around air emissions compliance. Once they understand what regulators want and, in some cases, more importantly, what their stakeholders demand, they need to find a way to gather honest feedback from their customers about regulatory initiatives. sustainable development and ESG that really interest them, in addition to the issues that interest them themselves. and their strategic business objectives.
Additionally, materiality assessments should be dynamic. Companies should ask themselves how often they should be reviewed and updated, whether annually or when major changes occur in the business (mergers, acquisitions, divestitures, new regions, products, processes, etc.).
From there, companies need to start asking tough questions about their sustainability and ESG goals. What is really achievable? Can we pursue and ensure a certain sustainability goal throughout the life cycle of our product/business? What goals do we and our clients prioritize over others? And most importantly, how can we track progress against these goals with data that will meet the burden of proof and, ultimately, independent assurance for compliance requirements?
The road ahead
Without defining clear, measurable goals, and the plans companies have in place to achieve those goals, they run a huge risk of exposure by simply making sustainability and ESG-related claims for their own sake. It may have been the norm before, but CSRD is likely the latest in a series of upcoming laws that should force companies to deliver on their big promises. At a time when investors, customers and regulators are increasingly aware and informed about greenwashing, a robust and independent assessment of materiality should be the starting point for a saving grace in regulation and reputation of a company. Otherwise, this could prove to be his greatest handicap.
Now it’s time to take care of the details to stay on the right side of this equation.
