Sustainability and ESG (Environmental, Social and Governance) has been high up on the corporate agenda since a number of years. It has become top of mind for business leaders, employees, and investors in all industries and in all four continents. Improving sustainability and ESG scores have become crucial for short-term and long-term corporate success.
In 2023, this trend is bound to accelerate. In the European Union sustainability reporting will be a matter of compliance by 2024. By 2029 over 50.000 companies of all sizes except for micro-enterprises will be subject to sustainable finance regulations.
Here are 5 reasons why now is a good time to develop a solid ESG reporting process.
Number 1. The EU Green Deal: a legislative tsunami, backed with 1 trillion Euro.
Through the EU Green Deal of 2020, the European Union is taking the global lead in the “net-zero transition”. To achieve its ambitions, the European Commission is spending 1 trillion EUR between 2021 and 2027, and a “legislative tsunami” is well under way to further accelerate decarbonisation in the European Union. For example, the EU taxonomy is gradually being rolled out, and the Corporate Sustainability Reporting Directive (CSRD) will enter into force in 2025.
More recent announcements by the European Commission show that Brussels is dead serious about reaching its 2030 and 2050 climate goals: The Emissions Trading System (ETS) is being broadened to more industries, and the Carbon Border Adjustment Mechanism (CBAM) is being concretized to ensure Europe's competitiveness in a decarbonizing global economy. Moreover, EU innovation budgets are being spent to deliver the digital product passports legislation by the end of this decade.
These EU initiatives demonstrate that sustainable business practices and diligent carbon reporting will soon be a matter of compliance, and for companies that want to avoid a "GDPR-like fiasco", the time to start preparing is now.
Number 2. Customers and employees are demanding it.
Customers and employees have become increasingly demanding: they want sustainable products, sustainable companies, and sustainable brands. Backed by the press and empowered by social media, consumers are quick to accuse companies of greenwashing. As a consequence, traditional CSR activities carried out by corporate enterprises are no longer sufficient: accurate, transparent, and data backed information has come the new standard for sustainability reporting.
This also plays in the war for talent: Gen Z and the Millennials choose their future employees based on sustainability as a first criterium.
Number 3. Investors have raised the stakes.
It has already been demonstrated that listed companies with high ESG scores have a better financial performance than companies with a low score, so boards are increasingly being challenged by their investors to provide decarbonisation plans and shift to sustainable business models. Pension funds that typically do very long investments have stated that “climate risk is investment risk”: they worry about the economic damage from extreme weather events, and they are already experiencing losses due to “stranded assets” linked to an accelerating phase-out of the fossil industry.
Number 4. Green (public) procurement and scope 3 emissions
Companies that are slow in implementing sustainable business practices are already losing out on business because public procurement standards are increasingly embedding sustainability requirements in bids and tenders. Also private enterprises are shifting their procurement tactics: thousands of companies have signed up for the Science-Based Targets Initiative (SBTI), and consequently they are requiring their suppliers and contractors to provide emissions information, as part of a quest to get insights into their scope 3 emissions. Governments are also requesting emissions information and climate commitments in bids, tenders and subsidy requests. Some towns and cities are even setting sustainability standards that are even more stringent than those at the national and EU level. Due to these new procurement trends, sustainable business practices and transparent carbon reporting are becoming a mere necessity to stay relevant as a business.
Number 5. Sustainable business models have become more profitable
There have been a number of supply chain disruptions since the beginning of the COVID-19 pandemic that have demonstrated the need for more resilient business models. Booming raw material, energy, and transportation prices are making an accelerated transition to sustainable business practices more profitable. In practice this translates into the introduction of the circular economy in the entire value chain of the enterprise: reducing dependency on virgin raw materials, reducing energy-needs, and keeping products within the value chain through re-use, refurbish, recycling, and "product-as-a-service" concepts have become common tactics. This demonstrates that sustainable business practices are better for both long-term and short-term profitability.
The good news is dat many companies have already done parts of their due diligence to improve sustainability and ESG criteria throughout the value chain of their enterprise. For example, great efforts have been done to improve energy efficiency, to reduce waste, to guarantee employee well-being and to provide products that provide life-improving benefits to customers and society.
But a key challenge lies in the measurement of progress made:
- How can you make data-informed decisions that help you focus on what is most important?
- How to track progress and demonstrate the impact of your ESG efforts?
- How to respond to increasing scrutiny on your activities by customers, investors, the press or government officials?
- How do you deal with continuously evolving standards and regulations that require detailed, fact-based reporting?
It is evident that supporting an enterprises' ESG-related efforts with a sound data & analytics strategy will soon become a strategic necessity. It will become a key factor for a company’s business and customer success. Now is the time to embark on the ESG analytics journey. It is time to think big, beyond compliance.