Sustainability: From compliance to value creation

A plethora of new reporting standards are seeking to drive consistent and value-added sustainability reporting. These standards are widespread and include those of the EU (Corporate Sustainability Reporting Directive), the International Sustainability Standards Board, the SEC and state-centric climate regulations in the US, as well as country-specific regulations across the globe. Reporting is now not optional for many businesses.

For boards wanting to play their part in striving towards a sustainable planet and society, as well as a sustainable business model, these new reporting standards are a key enabler. Driving the development of sustainability strategies through reporting obligations and embedding them within the core business strategy is a good first step. This will allow for better awareness, capital allocation, investor attention, and stakeholder scrutiny; but will it drive real strategic and operational change? My feeling is that it absolutely will.

Internalising sustainability-related external risks which corporates have often ignored, or not identified the financial impact of, helps create a level playing field across economies. Winners and losers will be more easily identified, consumers will be able to better select those businesses they want to engage with, and investors will have far more information to assess their portfolio risk profile. This should mobilise change, even by those who don't prioritise sustainability strategies currently.

But where should a board focus? How can the best return on investment be secured? How can those resisting change be brought on board? Part of the answer lies at the start of the reporting process.

What are the benefits of a materiality assessment?

Both the EU standards and the international sustainability standards require businesses to undertake a materiality assessment to identify what they need to report on. Those businesses undertaking this work effectively will ensure an independent perspective is incorporated throughout – eg, it's not just the view of the board or the in-house sustainability team, but incorporates broad stakeholder engagement, within and outside of the business, and across its value chain. The materiality assessment process will surface important risks and opportunities as well as look at the impact the business has on the planet and society. It’s a fantastic starting point for looking at how risk can be mitigated, how impacts can be assessed more thoughtfully, and what opportunities may be available to take advantage of.

To see the materiality assessment as purely a compliance process is flawed. It's an opportunity to drive value, increase stakeholder engagement, and establish a sustainable operating model. But how can a compliance process drive value? I believe, based on my experience, that the value from a materiality assessment can come in a number of ways, including:

• a better understanding of your licence to operate with key sustainability components embedded in the day-to-day decision-making of the business
• having a thoughtful, evidence-backed sustainability strategy built off those issues surfaced by the assessment process, and which is communicated well to stakeholders, will enhance the brand, attract customers and talent, and build trust – all vital enablers of growth and profitability
• a lack of focus on the most important sustainability issues can lead to inefficient resource and budget allocation – having clarity on what matters most is a key strategic decision-making tool.

We recently worked with a large client with a relatively mature sustainability strategy – they expected the materiality assessment process to just tell them what they already knew, but this assumption proved wrong. The insight we provided from our independent analysis and stakeholder engagement led to a fundamental shift in thinking about how the business was positioned in the market, and how its messaging and priorities needed to be reassessed.

We encourage boards to engage with the materiality assessment process, lead from the top and ensure it's designed to add value, not just comply with regulation.

For more insight and guidance, get in touch with Scott Wilson.