By Roberta Ghilardi
In recent years, there has been an increased focus on sustainability by people, legislators and investors, partly as a result of the severe impacts of climate change on our planet and the changing needs and life expectations of people in the postCovid-19 “new normal.” Companies are therefore called upon to take action to contribute to sustainable development, including providing clear and transparent information on their ESG (Environmental, Social and Governance) performance. Performance that depends on strategies, actions and procedures that must necessarily lead to the definition of new models of corporate governance, capable of considering a changed economic and market context, in which sustainability becomes a trump card for the positioning and operational capacity of companies. For the definition of a solid sustainability governance, to be understood as an organic system of policies, procedures and strategies, it is essential to start from the self-analysis of one’s performance “as is,” to identify the areas in which there is room for improvement, the actions to be taken and the tools to be implemented, including the definition of new roles and responsibilities, for the achievement of business objectives.
The evolution in companies of sustainability governance has been stimulated in recent years by obligations arising from the Non-Financial Reporting Directive (NFRD) published by the European Commission in 2014. Indeed, the Directive requires large companies to provide information on environmental impacts, social impacts, human resources, human rights compliance and anti-corruption. It is thus possible to know, in adequate detail, the business model and policies adopted in relation to material (i.e., relevant) sustainability issues, risk management methods and ESG performance, the latter declined through indicators developed according to internationally recognized frameworks. Still a circumscribed approach, but already sufficient to provide a more realistic picture of the ability to generate value over time. In the coming years, these obligations will be extended to a broader range of companies, encouraging the activation of virtuous processes in terms of sustainable development, as discussed in more detail in the following lines.
Indeed, on April 21, 2021, the European Commission published a proposal to update and revise the NFRD, leading to the approval of the new Corporate Sustainability Reporting Directive (CSRD) at the end of 2022. The CSRD is a key element of European policy on sustainable finance and includes several measures aimed at improving the flow of capital into sustainable activities throughout the European Union. The new Directive, in particular, expands the range of entities obligated to sustainability reporting to include all large companies (including non-”public interest entities”) and listed SMEs, paying particular attention to the ESG impacts of the entire business-related value chain. Non-regulated companies, including non-listed SMEs, will therefore also need to activate reporting tools to meet the information needs of customers and other business partners, which instead fall within the scope of CSRD.
Another element of discontinuity with the current regulations is that CSRD introduces the obligation to define and communicate annually sustainability strategies and plans for the future, covering all ESG factors, creating new complexity for companies’ Boards and management.
These obligations result in the use of a structured way of collecting, analyzing, and disclosing ESG performance, which is essential to achieve a rational and efficient use of the resources deployed (technological, natural, professional, financial, relational) and, more so, to reflect on the coherence between one’s business model, market evolutions, and the corporate future. That is: to assess whether the company’s strategic direction, which the balance sheet, income statement, and financial data well represent in the short term, is able to stably generate value in the long term as well. Only through careful analysis of final performance is it possible to define ESG objectives for the future, integrated with the broader business objectives, while providing all stakeholders with an adequate tool to better understand these prospects.
The requirement to publish information and set targets in relation to non-financial aspects, which is part of a broader, increasingly stringent regulatory environment regarding sustainability and combating “green washing,” helps to identify the strong relationships that exist between all ESG factors and companies’ economic and business performance.
This fosters awareness of the need to identify new roles and responsibilities within the company.
In this sense, the effects of reporting requirements are already evident for many Italian companies within the scope of the NFRD, which are becoming increasingly structured to meet the new challenges posed by today’s environment. In fact, many large companies are beginning to define new managerial roles to address risks and seize opportunities related to ESG issues relevant to the specifics of their business, often prioritizing the most pressing sustainability issues, including climate change, evolving technology, dynamically changing global economic conditions, and cybersecurity. Companies therefore need to equip themselves with figures who can understand the changes taking place and identify strategic directions to take to mitigate risks and seize opportunities arising from an international landscape in which increasing attention is being paid to the needs of all key business stakeholders, not just shareholders.
The role of the Head of Sustainability (to be understood in its broad ESG sense), often Sustainability Manager or, for more advanced entities, Chief Sustainability Officer (“CSO”), is growing in terms of relevance and strategic centrality. His task is to interpret changes in the external environment that affect the sustainable development of the company, to consequently define strategies, policies and actions, aimed at ensuring the long-term survival of the organization. Based on a number of studies and observations of market dynamics, there appear to be three “tipping points” in organizations that can precede the appointment of a sustainability manager, either by appointing a figure already in the company or by introducing a new dedicated figure into the fabric of the company. The first tipping point is the speed of external versus internal change: when the world outside an organization changes more rapidly than inside, there needs to be a figure to guide and help the organization keep pace, or at least adapt, to the pace of change. This is followed by stakeholder expectations, which can reshape the boundaries of the company or its market, necessitating the appointment of a figure who can capture input from the different categories of stakeholders with whom the company deals on a day-to-day basis. The final turning point, often also resulting from emerging regulatory obligations related to reporting, occurs when the organization recognizes the strategic nature of ESG risks. As ESG risks drive major market changes and require decisive responses from regulators, organizations must activate adaptive behavior to better be able to respond to external challenges. Thus, for many companies, it is advantageous to have a figure who can influence a range of functional areas in a cross-functional manner, responding to the needs to educate colleagues, orchestrate change, and “unite” different organizational elements. Indeed, the role of a Sustainability Manager helps shape innovative sustainability strategies, relate to stakeholders in new ways, and make product or service portfolios distinctive in relation to current and potential ESG risks and opportunities. This makes the task of the Sustainability Manager heterogeneous and dynamic, able to relate synergistically with the BoD for strategy-related issues and with all business stakeholders, with possible support from a dedicated team.
Also crucial is the role of the Sustainability Manager in times of sudden change, as in the case of the advent of the COVID-19 pandemic or in the outbreak of the Russian-Ukrainian conflict with the resulting energy crisis. Indeed, the development or revision of medium- to long-term strategy at times of great change provides an opportunity to explore the opportunities associated with operational discontinuities and to identify those evolutionary factors on which to build a new model of economic and social development that is more resilient and capable of responding to the new challenges posed by the business environment. In this time of disruption, sustainability must play an enabler role for value creation and corporate business continuity. Failure to manage ESG aspects risks being an additional financial cost in the medium to long term for companies, already strained by the macroeconomic environment. The Sustainability Manager, promoter of change, has the task of systemizing all those initiatives that can help the organization to be more flexible and resilient, to transform, as far as possible, the disruption caused by these events into an opportunity for growth. In this context of changing circumstances, another task of the Sustainability Manager is to update the sustainability strategy by conducting periodic check-ups, which are necessary in order to capture changes in the reference context and their impacts, including with respect to the sustainability goals and targets already set.
The Sustainability Manager must also ensure that communication to all stakeholders is timely, consistent with the corporate purpose, and, most importantly, authentic. In order to achieve greater understanding and increasingly effective communication of the outcomes and externalities generated by the organization, impact measurement and reporting is crucial, as it can provide an authentic and credible storyline about the company’s positioning on issues such as climate change, the protection, health and safety of its employees and collaborators, attention to communities, and corporate social responsibility in general.
Finally, the relationship with the supply chain is crucial: social and climate challenges seriously challenge the traditional model of supplier relationship management, making it necessary to actively collaborate throughout the value chain in order to achieve greater flexibility and not risk losing key partners to crises. The Sustainability Manager must be ready for continuous collaboration with risk management and supply chain management functions, and must seize the opportunity to rethink the supplier relationship by making sustainability the driver for value creation throughout the supply chain.
It is desirable to expect a gradual strengthening of sustainability governance in all companies to ensure consistency and cohesion of action in ESG and to generate transformative resilience through the definition of new strategies and actions, fostering sustainable success in the medium to long term, for the benefit of all stakeholders.
Roberta Ghilardi joined Deloitte & Touche S.p.A. in 2017, where she is now Sustainability manager and Marketing & Eminence manager, in addition to being a member of the Service Line Offering Art & Finance of Deloitte Private.