The Corporate Sustainability Reporting Directive – CSRD1 requires adopting transparency in the preparation of the sustainability report. This step is crucial, as it allows all stakeholders immediate accessibility to impactful information, enabling an understanding of the strategy and management plan of the reporting company.
An advantage for the market and business stakeholders, an extra step of difficulty for the companies that have to draft it, in an increasingly demanding regulatory environment.
Uniformity and comparability: what information and where to find it in reporting
In the sustainability report proposed in the EU directive, companies are required to report information in accordance with European reporting standards ESRS2 to avoid adopting their own criteria, as has been the case to date.
The new paradigm, which is to be implemented by member states by July 2024, emphasizes corporate performance, no longer only as a result of prudent and modulated economic conduct in managing financial risks, but also in sustainability risks, expanding the scope to significant impacts and opportunities for the value chain to which the company belongs.
It allows, therefore, a homogenization of the different reports, ensuring a more immediate reading and highlighting congruencies and discontinuities in both internal management and the supply chain. This will ensure shared transparency, with the aim of strengthening obligations and limiting the phenomenon of “X-washing,” well recounted by Rossella Sobrero3 and involving non-transparent and often untruthful reporting.
Reporting is included within a specific section of the Management Report that accompanies the financial statements and requires an attestation of compliance, effectively giving it the same dignity and importance as financial information.
Accuracy and accessibility: meeting stakeholder needs without ostentation or concealment
Transparency should not only concern the agent, but also the service or product offered to the market. This makes it possible to achieve enough accuracy of ESG information to improve both the sustainability of the supply chain and access to external markets and sector economic policies.
Certainly, thoroughness in tracking required information and the ability to listen to stakeholder needs will be essential to develop in the corporate governance system and among the managers involved.
If until now companies have in fact often taken refuge in “green-hushing” to protect inconsistencies or operational difficulties, thus not sharing information essential to the assessment of corporate performance on sustainability issues, from now on the key word will be transparency. This is an increasingly sought-after feature not only because it is required by regulations, but also because new generations want to be certain of consistency between what is stated and what is acted upon, showing a broad critical awareness of all three ESG pillars.
Accessibility to information is facilitated precisely by the uniformity of reporting. Logically organized data make it easy to understand even for laypeople who want to take a look inside an organization to understand its direction.
Leadership is afraid to risk penalties for untimely disclosures, rather than face consumer criticism, which is increasingly easily amplified by social4. The paradox is that today all stakeholders are called upon to participate in the preparation of financial statements so that they report linear and relevant information, with a sense of shared responsibility.
The benefits of transparency in sustainability reporting
So what makes a credible sustainability report? Transparency, indeed. Adopting a transparent budget offers several benefits, including:
- Improved corporate reputation, as open communication always shows appreciative engagement.
- Investment attraction: investors can make informed choices consistent with their internal ESG rating systems.
- Access to new markets and diversified customer groups through sustainable practices.
- Risk management and mitigation: the process leading to transparency leads to sharper evidence of financial and sustainability risks, declined on the three ESG pillars.
- Improving operational efficiency and promoting innovation: sustainable initiatives often lead to an overhaul of processes, bringing efficiency and innovation (i.e., energy costs).
- Increased employee and stakeholder engagement: it is easier to identify with a sustainable company. This creates a sense of belonging to a shared value system, increasing attractiveness and business performance.
Challenges to adopting transparency
If we do not want to talk about real “drawbacks,” however, we must consider some challenges in adopting transparent sustainability budgets, including:
- Initial costs: implementing a new management system, monitoring processes and policies that involve impact actions always commits significant initial budgets.
- Difficulties in assessing impacts: understanding linkage, consequentiality and causal relationships is not always straightforward.
- Stakeholder engagement: engaging a significant number of resources is extremely complex, requiring the ability to use different and appropriate languages and resources to invest.
- X-washing risks: we have moved beyond the initial literacy phase on the topic and now many are applying a critical reading to financial statements, identifying inconsistencies and possible misalignments.
- Listening to and properly understanding the needs and expectations of stakeholders.
- Continuous monitoring of regulations: a sensitive issue that the European Union is trying to remedy, but there are many regulations and they are all being implemented. Will companies be able to keep up?
The Transparent Sustainability Report: a strategic action for the company of the future
Drawing up a sustainability report, although it is not yet mandatory, is no longer just an ethical choice, but an integral part of the strategic plan to govern a dynamic, adaptable company capable of moving in an ever-changing environment, ready to participate in building a sustainable future by creating shared value over the long term.
Transparency allows for the instilling of trust in the supply chain and among stakeholders, enabling them to make informed decisions by assessing the accountability and commitment of the organization and management.
There are still many challenges, and this journey to sustainability is likely to bring more; our job is to raise awareness of transparency and help companies not to show off or hide.
