Impending sustainability regulation presents an opportunity for private businesses
New regulation and frameworks can be used to manage emerging risks and create competitive advantage
Sustainability continues to be a key area of focus for businesses across Ireland but holds particular relevance for privately-owned companies.
Environment, social and governance (ESG) concerns are top of mind for a range of internal and external stakeholders for private companies, including employees, investors, customers, suppliers, and the communities in which they operate.
In recent years, more businesses are voluntarily participating in ESG programmes, reducing their own emissions and using clean energy from renewable sources. It is becoming common practice for companies who wish to work with another business to enquire about that business’s set of sustainability goals, ensuring that their goals are meeting their own objectives and reporting needs.
Finding the opportunity
Over the past six months, the rising number of extreme weather events across Europe has clearly demonstrated the risk posed to business by climate change. Regulatory developments can provide a clear framework for businesses to assess vulnerabilities related to climate across areas including operational and IT risk due to power outages, financial risk due to changes in consumer behaviour, and strategic risk such as loss of market share due to perceived sustainability credentials.
However, it’s not all about risk. While many businesses may consider sustainability regulation purely from a compliance and risk perspective, these new frameworks create a much larger opportunity for private companies to consider such as sustainable product/service offerings, new markets, and innovation. Companies who embrace this transition will ultimately differentiate themselves in in the market but also position themselves to attract, engage, and retain top talent.
Embedding sustainability initiatives within a company’s operations and governance programmes can create clear business value, including positive market reputation, strategic relationships with value chain participants, and capital market attractiveness.
It is also a crucial factor to consider for private companies who are aiming to raise capital. Many investors are incorporating ESG data requests into their investment diligence procedures and those able to provide information on ESG factors will be better positioned to respond to investor requests.
A recent Deloitte survey of more than 2,000 C-level business leaders found that the majority expected a range of benefits from enhanced ESG reporting including talent attraction and retention (52%), increased efficiencies and RoI (52%), enhanced trust with stakeholders (51%), brand/reputation enhancements (49%), premium pricing of products (49%) and reduced risk (48%).
The evolving regulatory landscape
Over the past number of years, the European Commission has been developing a definitive mandatory reporting mechanism for sustainability in the corporate sector.
The Corporate Sustainability Reporting Directive (CSRD) is a wide-ranging directive that will come into effect on a phased basis from January 2024 and while the first year is focused on EU publicly listed companies, its scope will then extend to EU privately-owned businesses as well.
Under CSRD, businesses will be required to report on a ‘double materiality’ basis - outlining both the impact of the company’s activities on the environment and society, as well as the financial impact of sustainability factors on the company’s value.
Large private companies with over €40 million in net turnover, €20 million in assets and over 250 employees, will be the first to be affected by CSRD, but even small and medium enterprises can be impacted if they are part of the supply chain of a larger firm. It is also expected that the CSRD will extend to Small and Medium Enterprises (SMEs) over time.
The requirements are extensive and include up to 84 key performance indicators (KPI) and approximately 1,100 ESG metrics, with mandatory limited assurance over all sustainability information required from the start.
We would encourage businesses to approach CSRD as an opportunity to transform your sustainability strategy, rather than a compliance or box ticking exercise. There is a great opportunity to use this regulation to put a solid foundation in place that will drive your sustainability strategy and protect your business into the future.
Focus on green claims
Another area that has been particularly challenging to private companies is how to communicate their sustainability efforts and avoid the issue of greenwashing. This has also been a central focus for regulators, with the EU Directive on Green Claims aiming to make green claims reliable, comparable, and verifiable across the EU.
The implementation of the directive is due to begin from next year and represents good news for businesses and consumers, as it will help to establish a level playing field when it comes to environmental performance and provide companies with clear direction on how to communicate these benefits.
At the moment, a lot of companies are making great strides around sustainability but do not have the confidence to communicate around them, choosing instead to engage in ‘green hushing’ to avoid scrutiny. This directive will introduce a common approach across the EU, increasing consumer trust in green claims and allowing businesses to speak with authority about what they are doing in this area.
Preparing your business
As the potential data required to respond to evolving EU regulation can be significant, businesses need to introduce robust data governance models that will produce the investor-quality data required.
Taking an integrated approach across the business is also important to achieve successful implementation, requiring cross-functional teams bringing together individuals directly charged with sustainability and ESG, finance, compliance, audit, controllership, legal, tax, and strategy.
There are three steps that organisations should take to use impending regulation as a platform to enhance their sustainability journey:
First of all, set accountability — tone at the top is critical. What we have observed in the market is that those organisations that are embracing sustainability at C-suite level are advancing compared to their competitors. Next, you need to understand the risks and regulation that are applicable to you — perform a regulatory gap assessment to find out where you stand in terms of future regulation and a double materiality assessment to evaluate not only potential risks, but also opportunities for your business.
Finally, think about your transformation plan — this will involve changes to your approach to governance, people, processes, technology, and your engagement in the market. The most important thing is to start.
Marc Aboud is Deloitte Ireland’s ESG Risk and Regulatory Lead