The Chicken or the Egg?

Which came first: the company's sustainability strategy or its report?

The phased implementation of the Corporate Sustainability Reporting Directive (CSRD) has stirred activity especially among large companies with fewer than 500 employees, which will become subject to the reporting requirements next year. Many medium-sized companies with up to 250 employees—where the thresholds for reporting obligations are beginning to draw near—are also starting to consider the practical measures required to comply with the directive.

The ESRS (European Sustainability Reporting Standards) defined under the directive outline in broad and detailed terms the information companies must report regarding the environmental, social, and governance-related sustainability impacts, risks, and opportunities they deem material. In practice, the two already published cross-cutting standards—applicable to all companies covered by the directive—and ten topical standards specify what and how sustainability work must be reported going forward. The complexity will increase further when the European Commission publishes the sector-specific sustainability reporting standards in summer 2024.

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Reporting is part of communication.

I’ve now encountered several cases where a company is struggling with the CSRD directive and its bureaucratic ESRS standards, unsure of where to start or what steps are needed to actually get a grip on sustainability reporting. In all of these situations, the company has become aware of the need to report on sustainability only due to the CSRD. There has been no systematic sustainability work based on a clear plan, and the company lacks a sustainability strategy altogether.

In this context, it is important to clarify the roles of different components within a company's sustainability efforts. A company’s sustainability report is a form of communication based on its sustainability strategy—it makes the company's sustainability work visible and exposes its actions and results to the critical scrutiny of stakeholders. The report is part of an ongoing dialogue between the company and its stakeholders, enhancing mutual understanding of the goals and significance of the company's sustainability work.

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The strategy lays the foundation and sets the direction for the company’s sustainability work.

A sustainability strategy enables impactful and resource-efficient sustainability work within a company. In other words, without a strategy, there is nothing meaningful to report. In its sustainability strategy, the company assesses the current state of its sustainability work and its operating environment, identifies and prioritizes its key stakeholders, and involves them in the materiality assessment of its sustainability efforts. Through the double materiality assessment, the company evaluates the impacts of its sustainability topics on people and the environment, as well as their financial implications—both inside-out and outside-in. This materiality analysis allows the company to focus effectively and efficiently on the sustainability issues most relevant to its core business, while also helping to identify risks and opportunities from a sustainability perspective.

In its sustainability strategy, the company defines goals, metrics, governance practices, and internal responsibilities for the sustainability themes identified through the materiality assessment. The company also establishes a reliable reporting system and clear communication for its sustainability work. Once the strategy is implemented, progress is made toward the main goals through interim targets and continuous improvement. In other words, a company’s sustainability work is a comprehensive whole—and reporting is just one part of that whole.

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Note to self:

• Sustainability work is integrated into the company’s business strategy in a way that supports its core operations and objectives from a sustainability perspective.
• The sustainability strategy provides a clear understanding of the role and significance of sustainability work within the company.
• Before reporting, a company must have a sustainability strategy along with clear goals and methods for its sustainability work.
• A sustainability strategy is a prerequisite for impactful and resource-efficient sustainability work.
• The fewer resources a company has, the more important it is to plan its operations—and sustainability work—in a structured and strategic way.
• A company doesn't produce a sustainability report because it is obligated to—it does so for itself and its stakeholders.
• The structured measurement, monitoring, and reporting of sustainability work enable continuous improvement.
• A sustainability report is not an end in itself, but a tool for verifying the company’s sustainability efforts and a part of its sustainability communication that enhances the value of its work.
• Without structured sustainability work, reporting provides no real value to the company or its stakeholders.
• It’s worth involving external expertise in developing a sustainability strategy—it saves time, money, and nerves.
• You shouldn’t try to climb the sustainability tree backwards either.